RCA Insights

US Opportunity Zone Legislation Is Moving Capital

By on June 4th, 2019

The buzz surrounding U.S. opportunity zones keeps growing as the list of investors piling into these vehicles lengthens. Is it all buzz though, or is the program having a palpable impact on capital flows to low-income areas?

Looking at variation in sales activity between opportunity zones and areas that were not selected, there are signs that the program is making a difference.

In business and economics there are few experiments available to show us that a policy goal is having an impact. Measuring capital flows based on tax changes is difficult because there are so many other variables which are not always observable.

The U.S. opportunity zone program, however, provides a natural experiment to gauge the impact of new policy. For every low-income census tract that was selected for the opportunity zone designation, another three or so were left behind. These tracts that were not given the designation we are terming “Also Rans”.

1906 OppZone AlsoRans-01

The Designated Opportunity Zones and the Also Rans are areas that were ripe for redevelopment. Both types of areas should see more activity as cities grow and populations expand. Still, after the program was implemented, was capital moving into one classification of area more so than others?

To determine the efficacy of the program we looked at the sale of development sites and properties scheduled for redevelopment in the three types of census tracts that are out there. If sale activity grew in both Designated Opportunity Zones and the Also Rans, it would suggest that the program was not needed.

The chart shows that in 2018 the sale activity for these development-oriented type projects was falling in the Also Ran areas even as it grew in the Designated Opportunity Zones.

Again, we cannot control every variable here. Some of the turnaround in the decline for development-related sales starting in 2017 likely came from the revamp of bank lending standards for construction loans. The pullback of those so-called high volatility commercial real estate loans had crimped capital availability across census tracts of all types starting in 2015.

Total development-related sales volume in the Also Ran zones is significant: $8.4 billion over the 12 months through Q1 2019, or 32% of the U.S. total. The growth rate for such sales in the Designated Opportunity Zones is higher, in part, because the base of sale activity is smaller: $3.7 billion, or 15% of the U.S. total.

Nonetheless, the fact that development-related sales are growing in Designated Opportunity Zones as such activity is shrinking in the Also Rans is evidence that this program is not just a buzz item.


Matthew Benz provided data analysis for this article.


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Opportunity Zone Lending? Capital Is Already Active

US Opportunity Zones: A Baseline

Jim Costello

Jim Costello

Executive Director, MSCI Research

Jim is chief economist on the MSCI real estate research team and is based in New York. He previously led the U.S. research team at Real Capital Analytics, which MSCI acquired in 2021, and spent two decades at Torto Wheaton Research, working in urban economics. He is the lead author of the US Capital Trends publication and a frequent speaker at commercial real estate conferences. Jim holds a master’s degree in economics and is a member of the Commercial Board of Governors of the Mortgage Bankers Association.