California Nominates 620 Opportunity Zones to Revive Stalled Projects
California has submitted 620 census tracts for federal Opportunity Zone designation, aiming to unlock capital for developments stalled by market volatility. As Bisnow reports, while the permanent federal tax incentives offer relief, industry experts warn that high borrowing costs and construction expenses continue to hinder the start of new multifamily projects from scratch.
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Context from Industry Pulse
The transition to the revamped Opportunity Zone program reflects a maturing understanding of how tax incentives interact with broader market cycles. Since the 2018 inaugural wave, California has refined its selection process to ensure designated tracts truly lack traditional investment. However, the 50 percent increase in construction costs and a 35 percent national decline in apartment values have created a valuation gap that tax breaks alone cannot bridge. While the program offers a five-year capital gains deferral, the current disconnect between building costs and market value in Los Angeles means only developers with existing land holdings or advanced entitlements can realistically utilize these incentives for multifamily housing.
"To go out and think that you would buy a new site, spend all that money and time permitting — I think we're still a ways away from that."
The state of California recently proposed several hundred census tracts for the updated federal Opportunity Zone program, targeting areas such as South Los Angeles, Long Beach, and the San Fernando Valley. According to Bisnow, the Treasury Department must still grant final approval for these designations, which allow investors to reduce or defer capital gains taxes. The program is designed to attract capital to lower-income neighborhoods, yet the current economic climate is forcing many developers to focus exclusively on existing sites rather than new acquisitions.
Market dynamics have shifted significantly since the program first launched in 2018. Bisnow reports that development costs have surged by approximately 50 percent since early 2020. In the Los Angeles market, the cost to build a single apartment unit has risen from under 500,000 dollars to over 700,000 dollars including permits and land. Simultaneously, the finished value of these units has dropped to roughly 400,000 dollars, creating a financial gap that makes new ground-up construction difficult to justify.
Developers indicate that the revamped program is most likely to assist projects that are already entitled or partially capitalized. Because many nominated tracts are located in areas where rents are stagnant or declining, the high expense of multifamily construction is hard to recover through leasing income. Consequently, industrial development may see a larger boost from the incentives than the residential sector, particularly in rural zones where land is more affordable and building costs are lower.
The updated selection process under Governor Gavin Newsom included public webinars and comment periods to address past criticisms that previous designations favored areas that did not require financial aid. As Bisnow notes, the new rules also feature a stricter definition of low-income qualifications. While the five-year tax deferral remains a strong draw for investors, the immediate impact of the program will likely be limited to rescuing projects with existing sunk costs rather than fueling a new wave of permit applications.
The Industry Pulse Bottom Line
California's new Opportunity Zones will likely function as a rescue mechanism for stalled developments rather than a catalyst for new construction, as high interest rates and construction costs continue to outpace potential rental yields.