CREs: Are you focusing on the wrong Opportunity Zones?

CREs: Are you focusing on the wrong Opportunity Zones?

Introduction

You are an analyst who recently joined a Real Estate Investment Firm and was tasked to evaluate whether opportunity zones in Miami were a good investment. Finding the right zone(s) is crucial to your success and the company’s success. Knowing that COVID-19 has changed the landscape fundamentally you can no longer only rely on static and often delayed data sources like census data. You need always updated and reliable info - but what is out there that can help you succeed?

Opportunity Zones (OZs) are defined as “economically-distressed communities where new investments, under certain conditions, may be eligible for preferential tax treatment.” First conceived in April of 2018, OZ plans are now in place for communities in all 50 states this year. How it works is that each state nominates blocks of low-income areas by census tract, which are then certified by the Secretary of the U.S.

Real estate is the most likely project for OZs, in particular grocery-anchored retail, warehouses and other industrial real estate, skilled nursing and medical offices, and affordable housing. Despite the lucrative tax breaks, many investors and developers have opted against taking part in the program because of high land prices. Others aren’t willing to take a chance on neighborhoods that could take years to see results.

Your firm wants you to evaluate a set of zones in Miami and make recommendations as to which ones the firms should invest in. A good investment is one that yields high returns and the lower the initial rates, the higher the returns. Therefore, you want to identify areas that have not yet matured but are showing strong signs of growth (aka Emerging Areas).

Datasets Used

It is always best to see what information you can get for free and, luckily, there are many datasets related to Real Estate and neighborhoods.

Public Datasets

Housing Value Index (Reactive Dataset)

The Zillow Home Value Index (ZHVI) provides a smoothed, seasonally adjusted measure of the typical home value and market changes across a given region and housing type. We used the Housing Value Index to look at areas where housing prices have risen the most from January 2020 to November 2020*

*We understand that this is a COVID year with lots of uncertainty but the assumption is that if housing values have gone up in a tough environment, then that area is a strong contender.

  • Pro: While there is a lag, Housing Value Index is more reactive in describing changes than traditional datasets such as census data and tax returns
  • Con: There is still a lag and we are not sure how long this lag is. Housing Value Index might identify areas that are already mature

Building Permits (Predictive Dataset)

Building Permits are a type of authorization that must be secured from a local jurisdiction before construction of a new or existing building can legally proceed. We looked at all the Building Permits issued in 2020

  • Pro: Building permits is a good public indicator because it is a reliable indicator of future development
  • Cons: While it indicates future development, it is unclear when construction will commence. Additionally, this can also refer to “greenfield development” (land that has not been used before for human activity). Also, not really emerging if there was previously no human activity

Census Forecasted Population Growth 2020 -2025

This dataset uses the historical growth trends and extrapolate it to future years.

  • Pro: It is forward looking and provides a guess to future population sizes
  • Con: It is based only on the existing population of that area (composition of the people living there) and nothing else

Unacast Datasets

Migration Patterns Flow

Our Migration Patterns dataset will identify how many people have moved there (inflow), how many people have moved out (outflow), and what is the net flow.

  • Pro: Uses actual population moves
  • Con: There might be a lag of 4-6 weeks in capturing a move

Emerging Areas Classifications

Our Emerging Areas classifications describes whether a given area is growing in population & income for both long term (last 12 months) and recent (last 3 months) time periods.

  • Pros: Uses actual population growth. Takes into account whether population growth is from people coming from richer areas
  • Con: There might be a lag of 4-6 weeks in capturing a move

Neighborhood Traffic Trends

Our Neighborhood Traffic Trends will describe how many people are seen (and therefore active) in the area on a daily basis

  • Pro: Indicator of the area’s vitality and provides insight beyond residents
  • Con: Descriptive metric describing current state and does not take into account historical trends

Return Rate

Our return rate describes the proportion of people seen in the previous month that are also seen in the current month.

  • Pro: Indicator of area’s “stickiness”; provides further context to neighborhood traffic trends
  • Con: Descriptive metric describing current state and does not take into account historical trends

Methodology

Using Public datasets

For each public dataset, we identified the areas that rank highest.

Using Data Feeds — Unacast

First we applied strict filters to find the best; however, we did not find any tracts for the following filters:

  • Net Flow > 0
  • Income > 0
  • Short Term > Growing Income & Growing Population
  • Long Term > Growing Income & Growing Population

We then expanded our Short Term and Long Term classifications to include “Stable” and returned two areas. The reason is these areas have stable growths in population meaning whatever was growing previously is still growing.  

Findings

Public Datasets

Housing Value Index


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Building Permits Census 2020-2025 Forecast Growth

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Summary of findings for Public Datasets

Each public dataset suggests different Opportunity Zones to focus on; very little overlap in recommended zones for each public dataset. Housing Value Index shows that opportunity zones in Fort Lauderdale are most promising

  • Already developed & mature area
  • Building Permits shows that opportunity zones in southern tip of Miami is most promising
  • Might include a lot of greenland
  • Census 2020-2025 Forecasted Growth shows that the Opportunity Zones that are further inland should be prioritized

Unacast Datasets

Using Unacast Datasets, we found a quite different story.

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By comparison to the wide net cast by Public Datasets alone, Unacast data pinpoints just two census tracts that should be prioritized. More recent data that captures different facets of people’s interactions with each other and their neighborhoods helps companies find hidden gems for investment & development. 

To learn more about how Unacast can help you, please contact us!


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