The pandemic has impacted every segment of the commercial real estate market, and opportunity zones are no exception. At the start of the pandemic, opportunity zone investments froze along with the rest of the industry, bringing a halt to fundraising activity and transactions. While the industry is starting to recover and there is still tremendous interest, the process could look a little different than it did pre-pandemic.
“COVID-19 has impacted everything, everywhere. In the early stages of the COVID-19 outbreak in the US, many opportunity zones funds halted their fundraising efforts,” Braden Crockett, VP and director of opportunity zones at Matthews Real Estate Investment Services, tells GlobeSt.com.. “Transactions came to a screeching halt on all projects.”
This was a national trend, but Crockett adds that there wasn’t a specific market impacted. “I would not say COVID has impacted opportunity zones in Los Angeles, specifically,” he says. Still, opportunity zone deals were more impacted than other asset classes or investment structures and vehicles. “If I had to pick a couple of reasons why opportunity zone projects or transactions would be more affected than the average transactions, it would likely be due to the uncertainty of viable tenants, the immediate reduction/systemic shift in demand for corporate office space, and the delay in construction timelines,” says Crockett. “These three elements likely caused all active developers to pause, re-evaluate their strategies, and exercise more caution with respect to the projects they pursue.”
Opportunity zones also come with more regulatory constraints than other asset classes. “The only element specific to opportunity zone projects is the substantial improvements element that must be made in a certain period of time, but that timeline has since been extended,” says Crockett. “Developers are not quite out of the woods yet, especially if those development projects rely on scheduled evictions through a change of use redevelopment laws such as the Ellis Act.”
Those eviction moratoriums are also changing exit strategies for existing investments. “With the eviction moratoriums put in place, many developers’ budgets are being stretched,” says Crockett. “They are forced to hold assets for longer than anticipated on top of the additional negative aspects of many tenants struggling to pay rents.”