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Novogradac-Tracked QOFs Show Sharp Decline in Investment in First Quarter

Published by John Sciarretti on Thursday, April 13, 2023 - 12:00AM

Qualified opportunity funds (QOFs) tracked by Novogradac raised less than $700 million in new equity during the first quarter of 2023, the lowest such total since Novogradac began releasing quarterly updates for investment in 2021 and the smallest amount for any multi-month period since the beginning of Novogradac QOF reports in 2019.

Blog Graphic: Overview of QOF Investment

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The increase of $681.9 million compares to $3.97 billion raised in the first quarter of 2022 and $1.40 billion raised in the final quarter of 2022. It marked the third consecutive quarter with declines over the previous quarter in investment among QOFs tracked by Novogradac.

The 1,692 QOFs tracked by Novogradac (1,298 of which reported a specific equity amount raised) have raised $34.77 billion in the five-plus years since the dawn of the opportunity zones (OZ) incentive. The median amount raised by QOFs on Novogradac’s list that reported an equity amount as of March 31 was $4.6 million.

The latest report includes 31 more QOFs than were included in the report at the end of 2022. There are 24 more QOFs that reported a specific amount of equity raised.

Blog Graphic: Investment Amount Flattens

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QOFs are an investment vehicle through which taxpayers defer a portion of their capital gains and receive other benefits through the OZ incentive. QOF managers who agreed to speak to Novogradac without attribution said the main cause of the decrease in QOF investment in early 2023 is the general state of the economy, citing the lack of capital gains from the stock market and real estate sales, as well as increased interest rates and possible recessionary headwinds.

As evidence, the Dow Jones Industrial Average for the New York Stock Exchange was 4.0% lower on March 31, 2023, than a year earlier, despite an inflation rate of 5.0% over the same 12 months. Additionally, higher interest rates have dampened enthusiasm for construction investment, which is a significant target of QOFs.

Novogradac collects data on a rolling basis from QOFs that voluntarily provide information and also includes information from public sources such as Security and Exchange Commission filings and press releases. Because Novogradac’s figures don’t include proprietary or private funds that are owned and operated by their principal investors, actual OZ investment is probably three- or four-times Novogradac’s numbers.

Blog Graphic: Residential, Commercial Still Leading Areas

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Among the five categories into which Novogradac divides QOF investment emphasis, residential and commercial continue to dominate. QOFs that focus exclusively on residential investment raised $6.81 billion by the end of March and those that focus exclusively on commercial investment raised $2.17 billion. QOFs with at least a partial focus on either residential or commercial have raised more than $23 billion each–a combined figure that exceeds the overall investment total due to the large number of QOFs that focus on both residential and commercial investment and are therefore included in both totals.

One bright spot in the data was that QOFs with some focus on operating businesses saw an increase of $26.4 million in investment, putting investment in QOFs with at least some focus on operating businesses past $1 billion for the first time.

Among the QOFs tracked by Novogradac that report a specific amount of equity raised, 836 (64.4%) are focused on a single city. Those QOFs have raised just 26.5% of the equity, due to the number of Super QOFs that have raised $100 million or more and are focused on multiple geographic areas. Super QOFs have raised 60.6% of all reported equity, despite making up just 5.2% of all QOFs.

While the overall investment was down from previous quarters, some states continue to see significant focus from QOFs. Novogradac won’t release state rankings until midyear, but Arizona, Florida and Tennessee–states that ranked among the top 11 for planned investment at the end of 2022–saw nearly $350 million in new planned investment in the first quarter of 2023, making up 51.1% of the new national investment total.

The information contained in this blog post is for informational purposes only and does not constitute an offer to sell or solicitation of an offer to buy securities. Novogradac does not provide investment advice and the information in this report is not to be construed as a recommendation to engage in any specific transaction. Readers are urged to consult with their own professional advisors if they are considering investing in a QOF.

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