Fueled By Opportunity Zone Funds, Outdated Office Product May Be Revived In Downtown Houston
Coupled with the resurgence of the city's core into a 24/7, live-work-play oasis, Houston's downtown is primed to capitalize on the federal Opportunity Zone program.
The Trump-era tax credit program is meant to encourage capital investment in economically challenged areas as determined by U.S. census information, and downtown stands to benefit.
Avison Young principal Darrell Betts is involved in several office deals in downtown that are enhanced by the program.
“There are some buildings that really need to be torn down or just will not be leased up," Betts told the crowd Wednesday at Bisnow's Capital Markets event in Houston.
Half of the Houston office inventory totaling 325M SF was built by the late 1980s. Faced with low occupancy and aged product, buyers are looking to purchase office buildings and convert them into a hotel or residential development, he said.
Downtown Houston isn't the only attractive area in the U.S. designated as an opportunity zone.
The Hanover Co. analyzed its 60-asset portfolio in some stage of the development process and found four were placed in an opportunity zone, CEO Brandt Bowden said. One was located in the heart of Hollywood — one of the best deals in the portfolio.
“There are some opportunity zones in fantastic spots," Bowden said. "And, some that are in awful spots."
Houston-area opportunity zones include Greenspoint, Sunnyside, Alief, East End and Richmond, a town about 30 miles from downtown and the county seat of Fort Bend County.
In October, the Department of the Treasury released new regulation guidelines and some clarification on the program. It accepted public input and will issue an update on the program early next year.
“Time will tell," Betts said. "We are in the early stages of it. It is complicated, and it is not fully written."
The Opportunity Zone program reminded several of the panelists of the Economic Recovery Tax Act of 1981. Signed by President Ronald Reagan, the regulation was the largest tax cut in American history and was reversed in 1986, according to Investopedia.
"It got really ugly, real quick," Invesco Managing Director Ron Miller said. "You are going to have to pay attention to the details."
Green Bank Senior Vice President Rhonda Sands agreed.
"We know what happened to real estate in those days," she said. "Real estate has to be done when it makes economic sense and not just because of a tax shelter or tax consequence."
Hartman Income REIT is considering the Opportunity Zone program as a possibility but hasn't made any formalized plans. CEO Al Hartman noted some of the challenges with the program.
"When you buy in an opportunity zone, you have to put into the property double what you paid for the building, excluding the land," he said, adding that property must also be an operating business and not just a triple net lease.
When the hype of the program settles, one common thread will remain. It must be a good deal.
"It is not just a tax-loss play," Allied Orion Group CEO Ricardo Rivas said. "It has to make money. You are not going to spend a dollar to save 40 cents. So, you still have to make money in the deal."
