A TWO-TIER APARTMENT MARKET
As rent control measures continue to make their way onto city
and state legislature, a two-tier apartment market will develop,
according to Joseph J. Ori, executive managing director of
Paramount Capital Corp.
The top or A tier will be states with no rent control and mar-ket-oriented rent and business policies, he explains. The bottom or B tier will be the states that have implemented rent
control policies. “During the next five to seven years, institutional debt and equity capital for apartment acquisitions and
developments from banks, REITs, insurance companies, pension funds and private equity firms will begin to flow primarily
to the tier A states,” Ori predicts.
The gap between these two tiers will inevitably widen as tier
B states will see a lack of capital and investment demand for
new and existing apartments. “Apartments less than 15 years
old, that are currently exempt from the above rent control laws,
will fall in value as the end of the exemption period approaches,”
he says. Apartment values, rent levels and new construction in
the Tier A states will rise and be vibrant, Ori says, while the tier
B rent control states will see higher cap rates and less
demand for investment and development. “Look for many of
the large public REITs and other institutional investors to begin
shifting their portfolios to these market rent states during the
next few years,” he forecasts. +
INVESTORS GET REALISTIC ABOUT OPPORTUNITY ZONES
When Opportunity Zones first debuted in 2018, CRE interest
was undeniably high. Since then interest has moderated as
investors gain a more realistic view of their pros and cons.
Overall, according to CBRE statistics, investment volumes in
Opportunity Zones appear to be primarily influenced by cyclical
factors, and not so much their tax advantages. The transactions in Opportunity Zones since the first quarter of 2018 have
accounted for 10.5% of overall US volume. This
remains largely unchanged compared with the
transactions in the 18 months prior to the
program, which clocked in at 10.7%.
Furthermore, CBRE notes that annual
volume growth in Opportunity Zones
has been reflective of the broader market throughout the entire cycle, even
during the past 18 months ( 6.7% vs
7.2%) when compared with the preceding 18 months.
Heading into 2020, it’s become
clearer that while Opportunity Zones
are sweetening some deals, they do not
work for all—including for multifamily
buildings, says Jon Morgan, co-founder and
managing principal of Chicago-based Interra
Realty. With most of these buildings, you can’t
invest a renovation amount equal to the pur-
chase price—which is a requirement for
Opportunity Zones—and have them pencil out, he
says. The only buildings that may make sense are the
very cheapest, vacant buildings, he says. For instance,
That said, many projects are penciling—and in fact, would
not have at all without the tax benefits afforded Opportunity
Zones.
Ogden Commons is a $200 million 10-acre mixed-use proj-
ect in Chicago’s North Lawndale neighborhood that
Habitat Affordable Group is developing in part-
nership with the Chicago Housing Authority,
Sinai Health System, Cinespace Chicago
Film Studios and the city of Chicago.
“It has been to the utmost benefit
of Ogden Commons for it to be located
in an Opportunity Zone—particularly
with our first phase of commercial/
retail,” says Charlton Hamer, senior
vice president of Habitat Affordable
Group. Previously Habitat sought out
New Market Tax Credits to provide
needed equity, he explains.
Unfortunately, the process, competitive-
ness, complexity and timing for acquiring
NMTCs became very burdensome. “Finding
investors for this project has had significantly
fewer difficulties and hurdles to place the capital
to the project than using NMTC,” Hamer says. “If it
were not for Ogden Common’s location in an
Opportunity Zone our timing to initiate construction
would be much longer.” +
