Residential Investment Remains Leading Focus for QOFs Tracked by Novogradac

Published by John Sciarretti on Thursday, February 2, 2023 - 12:00AM

Residential development continues to be the leading focus for investment by qualified opportunity funds (QOFs) tracked by Novogradac.

Blog Graphic: Residential, Commercial Dominant Areas of QOF Investment

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Among the 1,274 QOFs that Novogradac tracks and that reported a specific amount of equity raised as of Dec. 31, 2022, 374 focus exclusively on residential investment and another 345 have at least some focus on that sector. The residential-only QOFs reported $6.67 billion in equity raised at the end of 2022, an increase of 35% over the amount a year earlier. The 719 QOFs with at least some focus on residential development report a cumulative $27.80 billion in equity raised.

Those figures are part of the $34.09 billion raised through the end of 2022 by QOFs tracked by Novogradac. QOFs are the investment vehicle through which taxpayers can qualify for a deferral election and other tax benefits by investing in opportunity zones (OZs). Novogradac collects data from QOFs on a rolling basis. Some QOFs voluntarily provide data and other data comes from public sources such as Security and Exchange Commission filings and press releases. Novogradac’s figures don’t include proprietary or private funds that are owned and operated by their principal investors, so actual OZ investment is most likely three or four times Novogradac’s numbers.

Blog Graphic: Single-focus QOFs Emphasize Residential

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Since Novogradac began tracking the data in 2019, residential real estate has been the leading area of targeted investment and QOFs focused exclusively on residential have generally raised between three and four times as much as commercial-only QOFs, the second-leading focused area among QOFs. At the end of 2022, QOFs focused strictly on commercial real estate investment had raised $2.13 billion, while QOFs that include commercial real estate among various foci raised $23.17 billion. (These QOFs are accounted for under both categories in the chart, making the combined total appear more than the actual capital raised.)

Hospitality-only QOFs reported $676.8 million in equity raised ($3.94 billion for all QOFs with some interest in hospitality) at the end of 2022, renewable energy-focused QOFs reported $179.6 million ($1.87 billion for QOFs with some interest in renewables) and operating businesses reported $274.9 million ($991.4 million for QOFS with some interest).

Blog Graphic: Residential, Commercial, Hospitality Had Strong Growth in 2022

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While residential-only QOFs saw a 35% increase in equity in 2022, commercial-only QOFs saw a 29.8% equity jump and renewables-only QOFs saw a 20.1% increase. The other two areas–hospitality-only and operating-businesses-only–saw increases of 6.8% and 5.0%, respectfully.

Leading Types of Residential, Commercial Investment

Residential investment is the target for most QOF investment and multifamily housing is the most popular specific investment type. QOFs with at least some focus on residential investment that identify multifamily housing as their target have raised $23.97 billion in equity, nearly four times any other type of housing. Second is mixed-use at $6.21 billion through the end of 2022 and third is income-restricted housing at $5.85 billion.

Novogradac also tracks where the QOF-funded housing is being built. Thirty-nine cities are reported to benefit from at least 1,000 housing units being built with funding that includes QOF investment. Three cities–Washington, D.C.; Nashville, Tennessee; and Austin, Texas–are targeted for at least 5,000 housing units financed with QOF investment.

Among the specific types of commercial investment, retail has the most interest among QOFs, with those QOFs who identify their areas of investment interest as retail raising $13.21 billion through 2022 and QOFs that identify office space development raising $12.39 billion. Mixed-use and industrial both are well behind those figures.

Single-City QOFs Most Plentiful, Multi-City QOFs Raise Most Equity

Novogradac also tracks QOFs by geographic focus. Of the 1,274 QOFs that report a specific equity raise amount, information is known about the geographic focus for 1,074. Of those, 829–77.2% of QOFs for which the geographic focus is known–are focused on a single city, often on a single investment (93.4% of single-city QOFs are also single-asset QOFs, meaning they are raising funds for a single project). While single-city QOFs make up the vast majority of funds, the 22.8% of QOFs with a known targeted geographic area that indicated they raise funds for multiple cities (245 QOFs) have raised far more equity: $22.66 billion, or 71.2% of the equity from funds for which geographic targets are known.

Blog Graphic: More Single-City Focuses QOFs, but Multiple-City QOFs Raise Most Equity

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That reflects the fact that most single-city QOFs invest in a single project, requiring less overall funding. QOFs focused on multiple cities tend to have a larger plan that includes significantly more investment.

Unsurprisingly, the average amount of equity raised by QOFs with a single-city focus is far lower than those with a multiple-city focus, by a factor of more than eight. Single-city-focused QOFs have raised an average of $11.0 million, while those with a broader focus have raised an average of $92.5 million.

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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