The tax advantages available for Qualified Opportunity Zone (QOZ) real estate projects are compelling for investors looking to defer taxes on capital gains. Since QOZ legislation was enacted in 2018, capital has poured into the space. A recent report released by the Council of Economic Advisors estimates that $75 billion in private capital was deployed into QOZs by the end of 2019, and the U.S. Treasury estimates over $100 billion in annual new investment could move to opportunity zones over the next decade.
However, there are a limited number of qualified opportunity zones within the 8,760 designated census tracts that possess fundamentals to support new development. With an abundance of capital chasing QOZ projects in these highly sought-after neighborhoods, land pricing within desirable opportunity zones has risen sharply in recent years. According to CoStar, land prices in opportunity zones grew by 59% and 79% in 2018 and 2019, respectively. Construction costs have also risen as a result of the COVID-19 pandemic which makes deals within competitive submarkets that more challenging.
At Origin, we are poised to achieve outsized returns in the QOZ space because we were already positioned in well-located submarkets, understood the QOZ tailwinds, and acted quickly in launching the Origin QOZ Fund as a first mover. Three key factors that will contribute to the Origin QOZ Fund’s success include buying quality assets at the right price, developing projects on time and on budget and managing the investment post construction. These factors are critically important in the highly competitive QOZ space, so let’s discuss some examples of Origin’s expertise in each area.
The first rule in real estate is location, but not overpaying for land is equally important. Our acquisition of NoDa Greenway in Charlotte, NC is a great example of execution on both location and price. This was the Origin QOZ Fund’s first asset and remains the largest project in our portfolio. The site is located directly along the newly opened Lynx light rail train station and the city is also developing a 26-mile pedestrian trail that extends through our site which will serve as another catalyst for future growth. We purchased 18.4 acres of land for approximately $835,000 per acre in January 2019 and plan to build a three-phase multifamily development. For comparison, there are two land parcels that were recently put under contract at substantial premiums to Origin’s cost basis. One site is being purchased by a national homebuilder for over $1 million per acre. Another project currently under contract a few blocks from our site has an allocated land basis of roughly $35,000 per unit while, in comparison, our phase one allocation is approximately $20,000 per unit.
Origin’s NoDa Greenway Project
Buying well-located land at a fair price is critical to success but executing on the vertical construction component has its fair share of obstacles that can ultimately determine a project’s performance. When executed correctly, on time, and on budget, development can generate returns that are tough to achieve utilizing other real estate investment strategies. Our acquisitions team’s relationships with experienced development partners have played an important role in our ability to quickly execute on both the acquisition and construction components of our current QOZ Fund projects.
Our Pilsen Gateway project in Chicago and Fourth @ Navigation project in Houston are both under construction, remain on budget, and expect to be delivered in the second quarter of 2021. Developing during the COVID-19 pandemic has forced us to reconsider our original design and modify certain aspects for a post-COVID world. These revisions include co-working space, outdoor fitness areas, and in-unit fixtures that allow residents to work from home. We believe these modifications will be points of emphasis for prospective tenants and set our projects apart from other assets within each project’s submarket.
Origin’s Pilsen Gateway and Forth @ Navigation Projects
Managing the Investment
Assuming the acquisition and development portions of a QOZ project have been executed accordingly, the investment must be managed for at least five to seven years thereafter to meet the minimum 10-year hold period per QOZ law. This requires an experienced investment management team who can execute the business plan and grow net operating income. This was recently demonstrated by our investment management team at our Union @ Roosevelt project in Phoenix.
When Origin acquired Union @ Roosevelt last November, the deal included a newly built apartment building with an adjacent land parcel. The first phase of this project consists of 80 apartment units that were already stabilized. The second phase includes the development of 105 additional apartments and a host of new amenity spaces. Stay Alfred, a short-term rental operator which occupied 20% of the building, vacated their block of units in April due to corporate financial hardship resulting from COVID-19. As a result, occupancy fell to 73.5% as of June 30, 2020. Since then, we’ve successfully backfilled all StayAlfred’s vacant units. Occupancy averaged 91% over the third quarter of 2020 and improved to 95% by quarter end. We closed out the third quarter of 2020 at the building with strong resident retention, as 65% of residents with expiring leases chose to renew.
Origin’s Union @ Roosevelt Project
As capital continues flowing into QOZs and demand for high-quality QOZ sites continues to grow, Origin will remain an active player in the space throughout 2021. In addition to being a first mover in QOZ investing, our ability to buy right, successfully execute on development efforts and manage our stabilized portfolio should generate strong returns for our QOZ Fund investors in the years ahead.