Could Opportunity Zones Impact Residential Condo Developments?

One Nashville real estate investor and developer said the unintended consequence of Opportunity Zones in the rapidly growing city could mean a further constraint on the condo market, particularly in the downtown core.
Stephen Epstein, Managing Director, Réaliste Fund. Image courtesy of Réaliste Fund

The head of a private equity fund that invests in Nashville, Tenn., real estate development projects, said residential condominium development in the city could be constrained by the number of areas designated as Qualified Opportunity Zones.

Calling it an unintended consequence of Opportunity Zones, Stephen Epstein, managing director of the Réaliste Fund, said there is already a shortage of residential condos, office condos and flex office space available for purchase in Nashville and the problem could get worse.

“This puts an additional squeeze on available property for development,” Epstein said in a prepared statement. “Land prices are already skyrocketing in downtown Nashville, so once Opportunity Zone investing becomes mainstream, prices will continue to rise as buy and hold investors seeking to place Qualified Opportunity Fund cash drive up land costs and squeeze out the land available for condominium development. The bottom line is that Opportunity Zone capital will continue to cause land prices to escalate and apartment buildings to be more and more overbuilt.”

He said 18 areas in downtown Nashville have been designated as QOZs and much of the development that will stem from those funds will be more apartment buildings. The strong population growth is keeping demand high for apartments – and developers are doing their best to feed supply. The Yardi Matrix Multifamily Report Winter 2019 notes developers added 7,412 units in 33 properties across Nashville last year and 7,264 units came online in 2017. Nearly 6,000 units are expected to be added this year, according to Yardi Matrix. While the goals of the OZ program are good, Epstein said it likely means a further reduction of sites and properties available for condo development.

Epstein cited a recent report from the Nashville Downtown Partnership that noted the inventory supply of all residential condominiums in downtown Nashville has remained at three months or less since 2012. A balanced market should have a six-month supply of units, he explained.

Effect on Millennial Buyers

That could be a problem for the region’s Millennials, who make up 22 percent of the area’s population and are the most active generation of homebuyers, according to the National Association of Realtors. The NAR noted both younger and older Millennials made up 37 percent of all buyers, making the generation the most active home buyers for the sixth consecutive year. Epstein said the low production rate of new condos in Nashville means there are few affordable options for buyers.

Meanwhile, the demand for residential condos in the urban core continues to accelerate as more people move to Nashville from places like New York City, Chicago, Los Angeles and San Francisco. He expects that condo shortage to continue.

“I relocated from San Francisco in 2012 and it is not any easier to find a beautiful condo in Nashville today than it was six years ago,” Epstein said. “That’s tough to believe given how much the city has grown but true.”