By Jim Costello on April 2nd, 2019
Patterns of lending within the Qualified Opportunity Zone geographies (QOZs) of the U.S. suggest that many of these areas are not as starved for capital as some may think. An analysis of the loans originated in 2018 for assets within QOZs shows that lenders with a broader social mandate do not dominate these areas.
The opportunity zone program has been all the buzz at commercial real estate conferences so far in 2019. The popular perception is that these areas are risky, economic depressed areas needing capital. This perception is misguided though, with many of these areas already undergoing transformation.
In our US Capital Trends released last week, we dug into the composition of lending in 2018 inside and outside of QOZs. We further broke down lending by different lender groups according to the investment style of the borrower. The composition of commercial real estate lending within the QOZs exhibits some differences from the rest of the market.
Banks are the largest lenders both inside and outside of QOZs and are active across all elements of property risk. This said, banks generally represented a smaller share of lending inside of QOZs in 2018 than outside.
Agency lenders are relatively underexposed to the QOZ geographies with a smaller share of the market for both core and value-add deals versus their activity elsewhere. This said, their lending on construction projects represents a larger share of activity within the QOZ geographies.
Through state and federal charters, the bank and agency lenders often have broader social mandates to help foster growth in impoverished areas. Other lenders without such mandates exhibited lending activity which was slightly overweighted to QOZ geographies in 2018.
CMBS originators captured a larger share of the lending market inside of QOZs than they did outside of these areas. If we exclude the NYC Boroughs from this analysis – a market with a heavy concentration QOZ geographies – the overweighting of CMBS originators to QOZ geographies is more pronounced.
Financial company lenders have been gaining ground for construction lending nationally, but these lenders are relatively underexposed to the QOZ geographies for construction loans. This said, these lenders have been the largest source of debt capital for value-add deals.
Lenders are generally more cautious than are equity investors. If lenders are already active in these QOZ geographies without a broader social mandate to be there, it suggests that these areas are not as risky as the buzz at conferences this spring would suggest.
Clients can log in to the RCA website to download the latest copy of US Capital Trends. As well as a comprehensive analysis of lender trends in 2018, this edition also examines deal activity and pricing data for February 2019.
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