QOZ Investing in the Age of COVID-19

By: Pete LaMassa, Managing Director, Capital Markets

IN 2019, BRIDGE INVESTMENT GROUP RAISED AND DEPLOYED ALMOST $1B INTO REAL ESTATE IN QUALIFIED OPPORTUNITY ZONES (“QOZ”), a program that makes it possible to create investment value, build community, manage to ESG principles and help taxpayers capitalize on what some call a once-in-a-generation tax break. We partnered with a range of wealth management firms and spoke to thousands of potential investors with capital gains that came from appreciated stock, real estate, business sales, K-1s and other sources. We forged joint ventures with leading developers to build a largely multifamily portfolio of assets in a dozen markets around the country.

We turned the corner into 2020 and continued our strategy. Little did we know that the Coronavirus pandemic would strain our country’s health system, economy and socio-political framework to the extent that it has, drastically changing the way that we all work and live. Through this, Bridge’s core QOZ strategy – to build needed apartments in cities with high occupancy rates – has not changed. In fact, we doubled down on the key pillars of our approach as we raised another $330M through midyear, making us one of the nation’s top QOZ managers.

BUILDING COMMUNITIES

Creating communities is in Bridge’s DNA. Our flagship strategy is multifamily, where we own $5.1B of assets across 60 properties (21,800 units), and we manage another 9,600 units on a third-party basis.

Another vertical is a workforce and affordable housing initiative (8,800 units) that is dedicated to maintaining and building apartments that are affordable for families that earn 80% or less of average median income. In this business, we partner with non-profits to provide extensive social and community services for our tenants, such as activities and education for youth, job skills enhancement, personal finance training, health education and nutrition programs. All of this is part of Bridge’s ongoing effort to create living spaces that are “more than four walls and a roof.” Since March, as the virus and high unemployment have increased the need, we have distributed more than 27,000 meals, performed more than 2,400 wellness checks and made more than 800 resident referrals to employment assistance, academic resources and other programs.

Naturally, Bridge endeavors to follow the letter AND spirit of the QOZ legislation – our 17-person opportunity zone team is actively sourcing investments in Bridge’s target markets with a focus on delivering essential real estate. Nine of the 14 QOZ apartment projects that we currently have under construction have a workforce/affordable component. We will strive to implement the same social programs in our QOZ properties, where appropriate, and we will report on the impact of our projects over time.

TRANSFORMATIVE INVESTMENTS

Bridge recognizes that the QOZ legislation was passed to incentivize long-term value creation in metropolitan areas that have long experienced disinvestment. We believe that the Coronavirus crisis makes the program even more compelling, as the incentives to stay invested for at least ten years keeps capital locked in and aligned with the long-term needs of communities. Furthermore, our projects are creating much-needed jobs just as the pandemic has wiped out more than a decade of employment gains, shaken investor confidence and disrupted the construction financing markets.

One example of a transformative investment is in a Western U.S. metro area. We are building a mixed-use project on a 1.5-block site that has not seen significant investment for decades; a few of the existing buildings are suffering from neglect and decay. Our development will combine apartments with office and industrial space and a food hall, creating community and enlivening the city’s main entry/exit.

CONSERVATIVE UNDERWRITING

To make use of the tax incentives, an investor is required to hold a QOZ project for ten years. Given this long time horizon, we always anticipated that a recession would occur during the life of our commitment. As such, we apply very conservative underwriting. Post-virus we have, of course, sharpened our pencil as we revisit all of our assumptions.

For example, we have a project in a Southwestern U.S. market with one of the country’s most educated populations and a broad range of employers. The city enjoyed robust rental growth – 3.1% annualized – from 2010 through 2020. The current market disruption has forced us to reduce our future rental growth expectations, but we still believe this market presents a compelling long-term opportunity.

Meanwhile, the pandemic has caused a drop in new real estate development, leading to lower prices for some of our construction inputs. We can renegotiate land prices on a wide scale for the first time in several years, and lower demand for labor will ultimately lead to reduced costs. We are underwriting all of our projects to meet our target returns while incorporating the negative inputs (i.e., slower rental growth) – but not the positive ones – into our models.

We anticipate that it will take 36-42 months to build, lease up and stabilize our properties. We expect that by the time we deliver them, scientists will have developed a vaccine for the Coronavirus and the economy will be back on track. We intend to sell in ten years, when this crisis should be well behind us.
This is a general analysis of the certain real estate market aspects prepared by Pete LaMassa and are not related to any specific products or services of Bridge Investment Group LLC (“Bridge”) or any of its affiliate. Sources for statistics and other factual data included herein are maintained by Bridge Research. Such data has not been verified by Bridge and we can give no assurance that it is accurate or complete. Statements contained herein that are nonfactual constitute opinions of Bridge, which are subject to change. Financial projections contained herein are estimates only and are based on assumptions, including assumptions regarding future rent growth, the availability and cost of financing, changes in market capitalization rates, and various micro- and macro-economic trends. No assurance can be given that either the projections or the assumptions will prove to be accurate. Investment in real estate involves substantial risk of loss.
The views expressed do not constitute investment or any other advice and are subject to change. They do not necessarily reflect the views of Bridge or any of its affiliates and no assurances are made as to their accuracy.
This discussion is for information purposes only and does not constitute an offer or invitation to anyone to invest in any Bridge funds and has not been prepared in connection with any such offer.