Will the Pandemic Trigger Additional OZ Investments?
- Jun 25, 2020
The Los Angeles multifamily rental market began to show the first signs of softening at the end of March, as California was among the first states to impose shelter-in-place orders to slow the spread of the novel coronavirus. However, according to a recent Yardi Matrix report, Los Angeles’ diverse employment base has helped the metro remain relatively well positioned in the longer run.
Mountain Pacific Opportunity Partners’ Joan Kramer is convinced the metro’s historically strong fundamentals will support its rebound. With more than three decades of real estate investment and structured finance experience across all asset types, the company’s co-founder and partner expects the COVID-19 situation to generate drops in construction costs. Mountain Pacific has been active in the Opportunity Zone space, providing equity for real estate development and value-add transactions. In the interview below, Kramer provided her insights on how the pandemic is likely to impact Los Angeles Opportunity Zone projects.
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How is the Los Angeles multifamily market navigating the COVID-19 outbreak?
The good news about the Los Angeles multifamily market is that it has been historically undersupplied. While we have seen flattening of rents in the Los Angeles basin, we are seeing heavier use of concessions, which should allow a quicker return to previous revenue levels as the impacts of COVID-19 abate.
How has the pandemic impacted your projects?
Our projects are all in pre-development and development. The pre-development deals will hopefully benefit from easing construction costs. As it relates to our deals in development, as construction on our deals was considered to be essential services, they have continued to progress at a positive rate.
Tell us a few details about your most important Opportunity Zone projects in the Los Angeles area.
One project we are working on right now is a multifamily project in San Pedro, Calif. This is a well-located project in a market that has seen steady growth and redevelopment over the past few years, and we expect that trend to continue.
Why did you decide to focus on Opportunity Zone projects?
When we look at any project, we make sure the deal works on its own merits and then we look at the Opportunity Zone benefits as an add-on. If this is your baseline, Opportunity Zone investments do the following: They allow you to place just the gain portion of your proceeds in a new investment vs. all proceeds in a 1031, and they create a vehicle to get off the 1031 train as you are able to defer or decrease taxes on current gains and have no taxable gains on the Opportunity Zone investment.
With many real estate players severely impacted by the pandemic, do you think more developers will want to take advantage of this economic stimulus program?
Opportunity Zone development deals have a longer runway, and that means more time for the market to recover. If the current pandemic does not ease in the near term, difficulty in finding 1031 exchanges should drive additional Opportunity Zone investment.
Do you expect the COVID-19 situation to trigger some relief from high construction costs?
We do, particularly in the areas of labor and framing. We are looking at all of our projects, working to reduce pricing and rebidding those that do not have signed guaranteed maximum price contracts.
How do you expect unemployment to impact the Los Angeles multifamily market going forward?
Unemployment has been very high in Los Angeles, as in other cities, and while it has started to improve with reopening, there is a long road ahead. In particular, service industry jobs have been lost, and will take some time to regain. It goes back to the fundamentals—if you are building the right product in a market that has been historically undersupplied, the development should be successful in the long term.