Why Multifamily is such an Attractive Asset Class

Opportunity Zones (OZs) offer unprecedented tax savings for investors looking to invest recent capital gains. There are several asset classes available for investment, both within the real estate realm and beyond. Real estate has been the most popular place for Qualified Opportunity Funds (QOFs) to make investments, and within that, multifamily has emerged as the darling of real estate asset classes. It's easy to see why, the entire United States is facing a housing shortage, as we highlighted in this previous blog post about multifamily housing in OZ.

Nearly $7 billion was raised for deployment in Opportunity Zones  in the second half of 2021. Much of that is going into new multifamily developments in OZ hotspots like California, Arizona, the Pacific Northwest, Georgia and the sunbelt states. 

Offices, Retail & Warehouses

So, why aren’t other real estate asset classes as popular as multifamily in Opportunity Zone investing? They each bring their own challenges. According to Leo Backer, co-founder of Pinnacle Partners, “The problem with offices in OZ investing is that they too often don’t lend themselves to long term holds. Offices reach their peak value the moment you lease them up. They actually lose value as you get closer to tenants’ lease expirations.”

Retail has its own potential drawbacks. The pandemic accelerated the shift in consumers changing their behavior from shopping in person to buying more and more of their goods online. Most often, when you see retail as a part of an Opportunity Zone investment, it is a part of what is referred to as a mixed-use development. This means a building has retail space, usually on the first floor, with multifamily housing above. Mixed-use is extremely popular in areas of dense population, and is commonly invested in by Qualified Opportunity Funds as well. 

Warehouses are in high-demand with the consumer shift to online shopping. But so far, they have not been popular for OZ investment. According to Backer, “Developers don’t need much capital for industrial. They can put these buildings up with regular construction loans and lease them up with little effort and then sell them at peak value. There is rarely a reason for a 10-year hold.”

Why Multifamily Makes So Much Sense

Multifamily housing is well suited for OZ investing for several reasons. First of all, it's well suited for a 10-year hold. The short-term leases by residents do not determine the timeline of when an investment must be sold to be at its peak. Since rents are rising across the nation, and occupancy rates remain historically high, multifamily developments are easy for investors to hold on to. As long as the rental market remains strong, these properties are typically good investments. This, of course, is a golden-rule of a good OZ investment; the investment must first make sense on its own, before OZ tax benefits are taken into consideration. 

What's more, if an Opportunity Zone multifamily development is operating profitably, it can continue to be held past the 10 year hold required for maximum OZ tax benefits. This is particularly beneficial if the market is not in a good position for a sale at the end of the required hold.

OZ Early Adopter Pinnacle Partners Focuses on Multifamily

Experienced real estate developers and investors Jeff Feinstein and Leo Backer founded Pinnacle Partners in 2018 as a Qualified Opportunity Fund focusing on multifamily real estate. Initially, Pinnacle focused on projects specifically in the Seattle area (where they are based) and California. They raised 7 different single-asset funds, raising between $15-25 million each. Notable multifamily projects completed by Pinnacle include Canton Lofts in Seattle, Brooklyn Basin in Oakland and The Lair in Berkeley. Currently, Pinnacle is in the process of raising a new $100 million fund for their first multi-asset fund, planning 4 multifamily projects in various OZ hotspots across the US. 

Are you interested in Opportunity Zone investing? You’ve come to the right place. OZ FundHub is your premier resource for OZ educational tools and more. Check out our interactive fund map for a visual view of Opportunity Zones across the US. Use our Fund Finder tool to be matched to the right Qualified Opportunity Fund that meets your investment goals.