A Chicago real estate fund manager has closed a $310 million fund for investing in residential developments within qualified opportunity zones, with hopes to start raising another fund of similar size amid a challenging real estate market and overall economy.
Origin Investments recently closed its Opportunity Zone Fund II, which followed an initial $264 million fund, the firm announced Wednesday.
The funds invest in ground-up developments within some of the 8,746 areas that were set aside as part of the Tax Cuts and Jobs Act of 2017, which was meant to encourage development and jobs creation in areas designated as economically distressed.
Investors last year poured $9.68 billion into opportunity zones, a record since the federal program was created to defer or eliminate capital gains taxes for long-term investors, according to consulting firm Novogradac & Co. There has been more than $34 billion invested in the opportunity zone program in all, the firm said.
Within the next two or three months, Origin plans to begin raising a third fund of $300 million to $400 million, principal and co-CEO Michael Episcope told CoStar News.
Investing remaining dollars from the second fund and lining up investors for Fund II comes after months of rising interest rates, recent bank failures and broader economic worries that have slowed real estate deals throughout the country.
“We have a really robust pipeline, I think one of the best pipelines of deals in the country,” Episcope said. “Fundraising has been very steady, and we’ve become one of the more well-known qualified opportunity zone investors in the country. We just need to balance bringing in capital with the ability to find deals.
“For deals to get done in today’s environment, they have to stand up to much greater scrutiny. Deals are harder to pencil out. Everything has to align for us to approve a deal.”
Investment Pace Slows
The pace of investment in opportunity zones slowed by the fourth quarter of last year, and in the first quarter of 2023 there was less than $700 million in equity raised, the lowest since Novogradac began releasing quarterly updates in 2021, the firm said.
This in large part because opportunity zone investments use capital gains from previous investments. Since the stock market is down and real estate sales have slowed, there is a smaller pool of money being reinvested.
Origin said it hopes to stand out based on its track record of raising large funds, which allows the firm to weather today’s challenges.
“There’s a smaller pool of capital gains out there, but there also is a smaller pool of managers raising new funds,” Episcope said.
Origin’s focus is ground-up developments, often with joint venture partners, in states where there is job and population growth such as Texas, Colorado, Florida, Tennessee, Georgia and North Carolina.
Those are among low-tax states that are capitalizing on the remove-work trend since the onset of COVID-19, Episcope said. His Chicago-based firm has seen 20% of its workforce move to other cities during the pandemic, demonstrating the trend, he said.
Seven Projects
Origin’s second fund already has invested in seven projects that are planned or underway, the firm said. That includes the 1,600-unit apartment community called 500 Sawtell in Atlanta, in a venture with Kaplan Residential, and the 740-unit community called Edgehill Commons in Nashville, Tennessee, with Marquette Properties.
Origin also is investing in build-to-rent communities in Jacksonville, Florida, and near Atlanta and Nashville.
The firm uses a proprietary machine-learning program to identify cities, and pockets of cities, expected to achieve high rent growth, Episcope said.
“We’re in a precarious position with what’s going on with the [Federal Reserve] and rising rates,” Episcope said.
He added that “the nice thing about qualified opportunity zones is, there are a minimum 10-year hold. Some of these deals with be held for 10, 20 or 25 years. The key is using leverage responsibly, being in the right cities and the right locations and having the right sponsor.”