Investing in the Industrial Sector: A Smart Move for Opportunity Zone Investors

Industrial Sector is a New and Booming Opportunity Zone Investment

In the last year or two, opportunity zone investments and qualified opportunity funds have taken the spotlight in terms of capital gains diversion and tax benefits for a variety of investors. With that said, the industrial sector has seen relatively minimal discussion yet dominated in terms of its growth throughout 2022. Ten to fifteen years ago, the industrial sector was widely viewed as a relatively stagnant or unpopular investment strategy for funds; however, this sentiment has significantly shifted in the past couple of years. Peter from GTIS Partners, a New York-based firm with $4.5 billion in assets under management, noted that the industrial sector is one of their largest allocations for opportunistic clients as of late. 

Opportunity zones provide investors with a handful of benefits that can be particularly explored with investments in the industrial sector. Given that reality, the sector has grown in prominence over the course of 2022, becoming one of the fastest growing opportunity zone investment options throughout the year. Generally speaking, industrial parks have recognized growing rents and, in some areas, an extreme under-supply when compared to the demand in the region. 

Opportunity Zones: Industrial Sector has Unique Advantages

In order for an investment to be qualified within an opportunity zone, there are a handful of requirements that must be met. One of the most specific requirements that GTIS Partners recognized as a possibility to further explore revolves around the definition based on household income. Opportunity Zones require that the household income in the specified zone must make less than 80% of the median income in the area. In the case of industrial investing, though, there generally aren’t any households within the area. Put simply, the industrial sector meets this requirement by default as there aren’t any households within the region. 

Industrial parks are becoming more and more prominent as investment opportunities within qualified opportunity zones. Given the increasing fiscal opportunity for industrial sector investments and the reality that they meet the requirements of opportunity zones pretty simply, it is no wonder the industrial sector has recognized extreme investment growth over the course of 2022 and the past few years.

Tax Benefits Well-Beyond the Typical OZ Benefits

There are quite a few advantages to the industrial sector in qualified opportunity zones, with tax benefits being the most obvious and bountiful. One of the specific benefits of an opportunity zone that can be significantly used in the industrial sector revolves around depreciation recapture. Under an opportunity zone investment, investors maintain the advantage of avoiding depreciation recapture which ultimately treats the asset as a permanent deduction. In the case of an industrial zone, investors typically will have assets and specialty items that could be classified as short-life personal property – they’ll essentially be able to have a permanent deduction on their industrial assets.

Given the latest legislation pertaining to bonus depreciation, which declines by 20% each year and currently sits at 80% in 2023, the industrial sector is ripe for investing. While this bonus depreciation is set to steadily decline to 0% over the course of four more years, investors in the industrial sector have a serious benefit at the moment. Investors have the ability to deduct that much of a property’s acquisition or construction costs when operating within an opportunity zone – this benefit alone can result in after-tax rates of return in excess of 100 basis points. By front-loading accelerated depreciation and ultimately not having to recapture it, those investing in the industrial sector ought to explore the possibility of shifting their location within a qualified opportunity zone. 

More than Just a Tax Benefit

With the continual growth of qualified opportunity zones and investors' interest in pursuing investment in qualified opportunity zones, the industrial sector has largely gone unrecognized and undiscussed for most. Throughout 2023, though, the industrial sector has taken off for investors pursuing their options in qualified opportunity zones. Industrial parks meet the necessary criteria within qualified opportunity zones, resulting in a variety of tax benefits via depreciation and gains deferral. 

Investors have the ability to defer their capital gains through an investment into an industrial sector with growing rents and a somewhat under-supplied environment; they can take the benefit even further through the depreciation benefits and the lack of recapture. The biggest takeaway for investors, in this case, should be the following: if their industrial sector deal makes sense without the consideration of the benefits from a qualified opportunity zone, it makes a whole lot more sense because of them.