Opportunity Zones—created by the Tax Cuts and Jobs Act of 2017 (TCJA)—are designed to bring capital to low-income communities, many of which have been starved of capital investment for many years. The zones—a collection of low-income or high-poverty census tracts scattered across all 50 states and Washington, D.C.—offer potentially large tax savings for investors who fund projects in these communities. However, some of the incentives within the policy may direct investment toward areas that already have demonstrated growth potential and return on investment.
One criticism of Opportunity Zones is that some of the selected areas don’t need tax incentives to inspire investments that would have occurred anyway. Because the eligibility requirements for Opportunity Zones relied on sometimes lagged data and incomplete measures of economic distress, those familiar with the neighborhoods may be surprised to learn that certain tracts were eligible—and selected—as Opportunity Zones. Proponents of the policy argue selected communities like the Pearl District in Portland, Ore., or Long Island City in New York are limited exceptions and shouldn’t be used to judge the entire program. Instead, supporters contend that the vast majority of Opportunity Zones are well-targeted designations that can usher in sorely needed capital to fuel revitalization and economic growth for communities that have been left behind by recent prosperity.
Even if only a small number of zones are “exceptions,” there are no rules that investment must be spread evenly, and some speculate that a lion’s share of the capital will find its way into these exceptions.
Developers are likely already well aware of which areas best suit their investment plans and where Opportunity Zone funds might ultimately cluster. (Sale prices surged last year in neighborhoods now eligible for these tax breaks.) However, because it’s a federal tax break that may not require advance paperwork with the city or county, some local officials may be less aware of what’s coming. At the same time, these local leaders have additional policy options they can layer atop Opportunity Zone investments to achieve their desirable policy outcomes from developments–such as maintaining affordable housing, creating jobs for residents, supporting green building, and so on. By using market indicators to find neighborhoods that might be on the edge of an influx of capital, local policy makers can think strategically about deploying additional local policy tools to achieve their goals.
Areas likely to receive investments
Below are the top 51 Opportunity Zones where recent market dynamics indicate a relatively strong likelihood of investment. Despite all of these areas qualifying for the tax break (albeit based upon somewhat lagged data) and being selected by the Governor of each state from a much larger pool of eligible tracts, many of these neighborhoods have experienced robust housing markets or significant economic transformations.
Where possible, we assigned neighborhood names to census tracts in order to discuss these zones in terms that people are more familiar with. (Note that the text in bold are areas not in Zillow’s neighborhood database and required a best guess by eyeballing tract boundaries).
Ranking these areas on a variety of housing market characteristics—including market trends in recent years and well as early changes to housing trends after the designation of Opportunity Zones—shines a bright light on Brooklyn. Many of the New York borough’s neighborhoods have experienced large gains in the median value of homes in recent years and are among the tracts with the highest home values in their respective county. Miami, Nashville and Philadelphia are also home to several Opportunity Zones with relatively hot housing markets.
While several New York City metro neighborhoods earn a space in the top 10 ranking according to these measures, when considering the full range of Opportunity Zones, the region most disproportionately poised for Opportunity Zone investment is Boston.
Using this ranking scheme, the top 10 metros with the highest average ranks among their Opportunity Zones included in this analysis are (among places with at least 10 OZs ranked):
The top 10 states using the same parameters:
| State | Average Rank of State’s Opportunity Zones | Number of OZs |
|---|---|---|
| Massachusetts | 700.7 | 81 |
| Rhode Island | 946.3 | 18 |
| District of Columbia | 971.7 | 19 |
| Nevada | 1108.5 | 41 |
| Colorado | 1114.9 | 49 |
| Florida | 1180.5 | 318 |
| Washington | 1238.1 | 70 |
| Oregon | 1337.4 | 38 |
| New Hampshire | 1402.2 | 13 |
| Utah | 1444.3 | 29 |
Methodology: What went into the index?
We created an index of seven factors to rank among Opportunity Zones where investment designed to maximize return on investment in residential real estate is likely to cluster. We created an index to best highlight these zones, because to some degree there is a zero-sum nature to these Opportunity Zones—capital invested in one location isn’t being invested in another. So, while the individual growth rates and other characteristics for each tract matter, it’s also important and actionable to understand how the tracts compare relatively to each other.
We included mix of a few early indicators (changes post-selection) and some characteristics of the tracts near the time of the selections. We constructed all the measures so that a higher value corresponds with a higher ranking.
Obviously different investors prioritize different market indicators, and likely have their own criteria for evaluating development sites to meet their specific needs. For example, this list will look significantly different if you put more weight on median home value percentage growth or decide to care less about and the change in transaction volume. Below are the factors and the relative weights we used to create this ranking.
Things we cared most about (weight 1) – The early indicators of investment:
- The percentage point difference in the Zillow Home Value Index (ZHVI) growth in each tract during the period 7 months following selection of all zones (June-December 2018) compared to the 7 months before any zones were selected (September 2017-March 2018)
- The increase in sales volume during the 6-month time period after all zones were selected (June-November 2018) compared to that same period (June-November 2017) the year prior.
Things we cared next most about (weight .75) – Characteristics of the tract’s recent past:
- ZHVI percent growth during the three years prior to any selection of opportunity zones.
- The real dollar level increase in ZHVI during the three years prior to being selected an opportunity zone.
- Tract ZHVI relative to county ZHVI the month prior to any zone designation. Indicator that home prices in the zone are relatively sturdy today without any Opportunity Zone fund investment.
Other things we cared about (weight .5) – Other potential signals:
- The share of the properties in the census tract that are not single-family homes. Proxy for zoning that allows multifamily development/investment potential.
- The increase in the share of the purchases where the buyer was a Trust in the 6-month time period after being selected (May – October) relative to that same period the year prior.
We were limited to the about 7,100 of the 8,700 total Opportunity Zones that we produce a ZHVI for. We don’t produce ZHVI in tracts with a very low number of residential prosperities. We further limited the analysis to tracts in the top 200 largest metros and removed tracts with fewer than 250 residential properties in our database; tracts with fewer than 10 sales during the time frame we measured; tracts where we don’t produce county-level ZHVI due to data issues; and tracts where the ZHVI is lower than $20,000.
After these quality filters, we are left with 3,474 Opportunity Zones. It’s also important to note that this is based on likely investments for residential real estate development. Due to our property count requirements, we are not really considering tracts comprised of mostly industrial zones, factories, hospitals, warehouses, farmland, or other areas with very few residential properties. We would certainly expect different types of Opportunity Zone investment to cluster in those types of areas, but we are unlikely to capture signals of that demand in residential property values.
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