Opportunity Zones, a tax-advantaged investment program, have garnered significant attention in recent years. These zones, designated by the U.S. government, offer tax benefits to investors who fund projects in economically distressed areas. Since the program’s launch in 2018, these Opportunity Zones have seen an estimated $150 billion in equity raised. However, despite this impressive figure, the year 2023 proved to be a slow year for fundraising in this asset class.
According to data from Novogradac, Qualified Opportunity Funds (QOFs) only raised $3.53 billion in equity last year, marking it as the slowest fundraising year in the history of the program. It is important to note that Novogradac’s survey is not comprehensive and only captures a fraction of the total equity raised. Therefore, the actual total could be three to four times greater, bringing the estimate closer to $112 billion to $150 billion.
The slowdown in Opportunity Zone fundraising in 2023 was not an isolated incident. Various asset classes experienced a drop in transaction volume due to negative investor sentiment and rising interest rates. U.S. commercial real estate investment volume fell by 52 percent year over year, while total M&A transaction volume dropped by 32 percent. Additionally, non-traded alternative investment fundraising saw a decline of 30 percent.
However, there are reasons to be optimistic about a potential resurgence in Opportunity Zone fundraising in 2024 and 2025. The S&P 500 reached new record highs in recent times, with a 24 percent increase in 2023. The possibility of lower interest rates in 2024 could also provide a boost. Furthermore, bipartisan OZ reform legislation, expected in the near future, may contribute to further growth in QOF fundraising.
While the fundraising slowdown in 2023 indicates challenges, it is crucial to consider the broader industry trends and economic factors that influenced this decline. With an optimistic outlook for the future, Opportunity Zones continue to offer potential for investment growth and positive impact in economically distressed communities.
