The creation of the new federal opportunity zone program is enhancing investor interest and placing upward pressure on property valuations in downtown Houston, according to the Deal Sikes property valuation firm.
“Investors are gaining an understanding of the benefits and potential value of property owned in one of the new opportunity zones,” said Mark Sikes, principal at Deal Sikes. “This is particularly true in downtown Houston where the investment potential is significant. Over the last year, valuations appear to be up 5 or 10 percent for specific properties in downtown because of the opportunity zone designation. As additional transactions are closed, price gains may prove to be even stronger.”
Opportunity zones were approved by Congress as part of the Tax Cut and Jobs Act to promote investment in distressed communities nationwide. There are more than 8,000 census tracts around the country designated as qualified opportunity zones.
Sikes said that opportunity zones allow investors to defer capital gains tax if the properties are substantially improved and held for a number of years. If a property is held for 10 years, the capital gains may be permanently excluded from federal taxation.
“The requirement for substantial improvements to the property will likely exclude Class A office towers from the opportunity zone benefit,” Sikes added. “However, downtown’s older commercial buildings, parking lots and obsolete office properties appear to offer investors significant incentive for development and growth to enjoy these tax incentives.”
A joint venture between international real estate giant Hines and Cresset-Diversified QOZ Fund, an opportunity zone fund launched by Cresset Partners and Diversified Real Estate Capital, recently started construction on The Preston, a residential high-rise tower located in a qualified opportunity zone in downtown Houston.
“Sophisticated investors are already making significant moves,” said Matthew Deal, principal of Deal Sikes. “This trend is likely to spread as the IRS clarifies its regulations and attorneys and tax consultants become more familiar with opportunity zones, which offer major federal tax incentives across the city and the nation.”
Deal Sikes is based in Houston and provides valuation and counseling services for real estate firms, governmental agencies, law firms, and investors.