Residential Construction Continues as Top Target for QOFs Tracked by Novogradac

Residential construction continues to be the leading area of investment by qualified opportunity funds (QOFs) tracked by Novogradac, just as it has been for every period since the dawn of the opportunity zones (OZ) incentive.

As of June 30, QOFs tracked by Novogradac reported $36.10 billion in equity investment. Of that, $29.51 billion was invested in QOFs with at least some focus on residential development–with $7.40 billion reported by QOFs focused exclusively on residential.

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Novogradac is tracking 1,731 QOFs, of which 1,330 report a specific amount raised. The second quarter showed a $1.33 billion increase over the amount raised as of March 31, bringing the total since Dec. 31, 2022, to $2.01 billion. The first half of 2023 was the lowest amount of equity raised in a half-year since Novogradac began tracking QOF equity data.

QOFs are the investment vehicle through which taxpayers invest capital gains to qualify for deferral and other tax benefits. Novogradac collects data on a rolling basis from QOFs that voluntarily provide information. Novogradac also collects information from public sources such as Security and Exchange Commission filings and press releases. Since Novogradac’s figures don’t include proprietary or private funds owned and operated by their principal investors, actual OZ investment is likely greater than the Novogradac total by a factor of three or four times.

In the data compiled through June 30, residential development continued to lead the way, as it has in every reporting period since Novogradac first began reporting on QOF equity raises in May 2019. QOFs focused exclusively on residential development report raising $7.40 billion in equity and QOFs with at least some focus on residential have raised $29.51 billion.

Commercial investment continued to be a strong second target among QOFs, with $24.14 billion raised by funds focused at least partially on commercial development. QOFs with some focus on hospitality raised $4.05 billion, QOFs with some focus on renewable energy raised $1.99 billion and those with some focus on operating businesses raised $1.06 billion.

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The dominance of residential development has been consistent through time. During the past seven half-year reports (dating back to June 30, 2020), QOFs focused solely on residential development have constituted between 18.2% and 21.2% of all equity raised and QOFs that have at least some focus on residential development have raised from 73.5% to 81.7% of all equity.

While those overall figures reflect what QOFs say is the focus of their fund, Novogradac is now also reporting on investments that QOFs say they’ve made. Put simply, Novogradac can now report on the types of actual investments by QOFs, rather than the goal of the QOF.

For that data, Novogradac has information on $31.01 billion in investment, although that figure includes some overlap of different investments.

The leading area of reported investment is residential, which accounts for $12.36 billion in investment (a combination of QOFs that are residential-only in focus and the equity invested specifically in residential development by QOFs that have a broader focus). QOFs that have made investments that include residential have raised $22.37 billion for investment.

Commercial investment is again second in investment, although the amount invested strictly in commercial properties is significantly less than residential, at $3.54 billion. However, the $8.34 billion invested in properties that combine commercial and residential investments (often a housing property with commercial space on lower floors) boosts the overall commercial investment figures: QOFs that report investment in properties that include some element of commercial have raised $13.87 billion.

The other areas of actual investment are significantly less: QOFs report $948.0 million in investment in hospitality-only properties, while strictly renewable energy properties have received $683.2 million in investment and solely operating businesses have received $289.9 million in investment.

The amount that QOFs report investing in developments that include those areas are higher, but pale in comparison to residential and commercial. Those figures are $2.77 billion for properties that include hospitality, $808.0 million for renewables and $740.5 million for operating businesses. In many of those combined QOF investments, residential or commercial developments make up most of the investment, with the hospitality, renewable energy or operating business being a smaller portion of the equity amount needed.

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For those identified QOF investments, Novogradac further breaks down the types of funded housing and commercial developments–although many include multiple subcategories.

Multifamily housing is by far the single largest area of identified investment, with $20.05 billion reported invested in that category. Many of the other types of residential housing are subcategories of multifamily housing: QOFs report investing $2.92 in income-restricted housing, $2.09 billion in mixed-use housing, $2.01 billion in affordable housing (which likely has an overlap with income-restricted housing, since QOFs choose their category) and $1.08 billion in workforce housing. Other categories of housing received less than $1 billion of identified investment from QOFs in Novogradac’s survey, including single-family housing, which has $349.0 million in investment.

QOFs tracked by Novogradac report the construction of 162,312 housing units through their investment, with Washington, D.C., the leader with 8,708 housing units. The remainder of the top 10 cities for housing units with QOF investment are Nashville, Tennessee; Phoenix; Austin, Texas; Los Angeles; New York; Atlanta; Cleveland; Charlotte, North Carolina; and Sacramento. There are 40 cities with more than 1,000 housing units financed at least in part by QOFs and 156 cities with at least 100 units financed using QOF money.

Among identified commercial investment, retail is the runaway leader, with $7.92 billion in reported investment by QOFs on Novogradac’s list, followed by office ($5.11 billion), industrial ($2.46 billion) and mixed-use ($2.09 billion).

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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