OZ Development: Do Benefits Outweigh Current Challenges?

March 18, 2024

Executive Insights Development Southeast

There has been tremendous growth and resilience in the markets where PTM Partners has developed, Co-Founder Scott Meyer tells MHN.

Created by the federal Tax Cuts and Jobs Act of 2017 to encourage investment in economically distressed communities, the Opportunity Zone program had a relatively slow take off. Nevertheless, the initiative showcased how investment can function as a remedy for inequality and act as a catalyst for new community development ecosystems across the country.

The Qualified Opportunity Zone program ignited more development in economically challenged regions than any other federal initiative of similar nature since its establishment 5 years ago. Developers and investors in certain regions appeared to be more attracted to the program than in others. In Florida, for example, a total of 427 Qualified Opportunity Zones were designated in 2018 and multiple projects were delivered since then.

PTM Partners has been a major player in the OZ space, with many successful projects across both Florida and other states.

Today, the economic uncertainty is prompting developers and investors to take a more cautious approach toward these projects. So, what does this mean for the program’s future? Multi-Housing News sat down with Scott Meyer, co-founder & chief financial officer of PTM Partners, and talked about the company’s experience with OZ investment and his expectations.

Do you think the OZ program is reaching its goal? How has it evolved since its launch?

Meyer: PTM has seen tremendous growth and resilience in the Opportunity Zones where we have developed, including Overtown in Miami, Fla., and Buzzard Point in Washington, D.C. In Florida specifically, developers and investors were keen on the program when the Opportunity Zone areas were established in 2018, but there was also hesitancy to be an early adopter in a tax-incentivized program where the legislation was not yet finalized. The final Qualified Opportunity Zone regulations did not come out until late 2019.

Now, 5 years in, the Qualified Opportunity Zone program has proven to be an attractive means for incentivizing development in historically lower-income neighborhoods to create both social impact and attractive risk-adjusted returns. With that said, as with all real estate development, you must consider each project individually.

Would you say the program is still profitable for development companies like yours in the current economic conditions?

Meyer: The Qualified Opportunity Zones legislation as applied to real estate, by and large, necessitates ground-up construction. This is hard to execute as it is, let alone in the current economic environment. Today’s high interest rates and the difficulty of obtaining construction financing, coupled with relatively high land prices and construction costs—when compared to pre-pandemic levels—are having a real impact on construction start times. Forecasted supply pipelines are scarce for the 2026–2028 period. This lack of expected deliveries starting in 2026 creates upside for projects that are moving forward, particularly those built with quality, resilience, and a long-term mindset.

PTM’s investment thesis is identifying neighborhoods where the population is growing and housing is in short supply. We then strive to build accessible rental housing that is attainable for at least 65 percent of the population living within a 1-mile radius. This is a strategy that transcends OZs and makes investing in the current economic landscape a prudent opportunity.

What are the most common challenges you’ve encountered with this program over the years and how have you addressed them?

Meyer: Initially, there was a lot of uncertainty about the Qualified Opportunity Zones legislation itself, including its mechanics and long-term impact. Over time, these concerns have been addressed by the IRS and Treasury, which has enabled the program to achieve its goal: incentivizing development in historically low-income communities as designated by HUD.

In our experience, we have seen the challenges of Opportunity Zone development tied to the broader macroeconomic environment. This includes broken or disrupted supply chains, a tightening of construction lending and price inflation for materials, which has made real estate development more challenging in recent years. To combat this, developers must implement a long-term strategy and mindset. It is important to focus on the potential evolution of a community, which makes the benefits of OZ development outweigh the challenges.

How did you identify potential residential development opportunities in Florida’s Opportunity Zones? Are there any specific criteria or factors that influence your decision-making process?

Meyer: PTM takes a top-down and bottom-up approach to identifying potential OZs for development in Florida. We are bullish on the long-term prospects for the state of Florida due to its strong economic potential, rapid population growth and job opportunities.

When determining which areas of Florida to develop in, we look at the job and population growth projections of specific counties and neighborhoods. From there, we use a data-driven approach to narrow our search down to specific communities and streets overlaid with the Opportunity Zone map to see a path of growth in that specific neighborhood. The locations of our current projects in Downtown Miami, Sarasota and St. Petersburg are emblematic of our selection criteria.

Tell us more about how your Edgewater Collective project in Miami is progressing. What will be its impact on the area’s economic development?

Meyer: The Edgewater Collective is a campus comprising 1,300 units and over 15,000 square feet of retail. The first phase of this community is 2000 Biscayne, which will be a 420-unit multifamily project that we expect to deliver and welcome our first residents to in spring 2024.

The Edgewater Collective is in a prime area of Miami and provides accessibility to neighboring communities such as Brickell, Wynwood and the Design District. 2000 Biscayne will provide high quality housing with the best in-class amenities at an accessible price point. This project is emblematic of the broader development and evolution of the Edgewater neighborhood and how OZs have contributed to this transformation.

Over the past few years, what other multifamily projects that you developed in an OZ area left their mark on the communities in which they were built? In what way have they improved the lives of those living there?

Meyer: In 2020, PTM repurposed a 600,000-square-foot former U.S. Coast Guard office building in Buzzard Point into The Watermark, a 453-unit rental and mixed-use building. Located in an OZ, the transformation provided much needed housing for close to 1,000 residents of the community in the D.C. metro. This repurpose was also an environmental win because we reused thousands of tons of concrete in the process, significantly decreasing our carbon footprint.

In this project, we were also able to secure The Eagle Academy Charter School as a tenant, an organization being displaced from its previous home. This commercial lease allowed the charter school to remain a Pre-K to 3rd grade school in the Buzzard Point Neighborhood, geared toward serving underprivileged families. Overall, The Watermark development resulted in many positive changes for the surrounding community, providing housing, schooling, entertainment and outdoor space.

What do you think is key for the success of an OZ project? What role do specific collaborations or partnerships with local governments or other types of entities play?

Meyer: The key to success for an OZ project is patient capital, a commitment to invest in the long-term community—i.e. more than 10 years—as a partner to the local stakeholders/residents, and a vision of how the neighborhood can and will evolve. Looking at every element as an integral piece of the puzzle to an evolving community is the best way to be forward-thinking with OZs.

The Opportunity Zone legislation was enacted at the Federal level and then was adopted by many states as an economic tool to prompt development and growth of historically low-income communities. It is not mutually exclusive with any local tax incentives or programs to spur development of affordable housing, which means they can all work together.

How do you expect this program to evolve? Is it an efficient way to address residential development needs?

Meyer: The Opportunity Zone legislation is one tool for each county and/or municipality to encourage development, make a project fit within its community and, overall, add more housing… The OZ program can expand if Congress updates the existing legislation to allow for new tax incentives and for each state to create a new OZ map based on the 2020 Census.