(co-authored with Ross Baird and Michael Saadine)

Opportunity Zones (OZs) have emerged as a significant tool in driving investment into underdeveloped areas, offering a compelling case for their continuation and expansion. Since their inception in 2017, OZs have attracted nearly $100 billion in private capital, according to the Economic Innovation Group (EIG).

These investments have catalyzed the creation of more than 500,000 jobs, demonstrating their efficacy as a tool for economic development. Notably, multifamily housing developments have accounted for a substantial portion of these projects, addressing the nation’s 7-million-person housing shortage. As of early 2024, a full 20% of multifamily units under construction were located in Opportunity Zones. By bridging financing gaps, OZs have enabled the construction of thousands of units that might not have been built otherwise.

A key reason for their success is the program’s ability to leverage private capital for public purposes. Unlike traditional federal subsidies, which often come with significant administrative costs and limitations, OZs provide a market-driven approach to development. The flexibility of OZs has encouraged investments in a diverse range of projects, from housing to industrial facilities, tailoring solutions to the unique needs of different communities.

It has been more than a decade since Opportunity Zones (OZs) were first introduced by Senators Tim Scott (R-S.C.) and Cory Booker (D-N.J.) as a policy innovation aimed at driving investment into underdeveloped areas. As we reflect on their initial impact and chart the path forward, it is clear that the economic and social context has shifted dramatically. Now, with a commercial real estate (CRE) crisis looming, growing housing challenges, industrial growth in small communities, and rising energy demands, the need for a revamped Opportunity Zone framework—“Opportunity Zones 2.0”—has never been more urgent.

Senators Scott and Booker, and a bipartisan group of House Members, introduced The Opportunity Zones Transparency, Extension, and Improvement Act in prior Congresses and are likely to do so again. Given the likelihood that Opportunity Zones will be extended and expanded, there is an urgent need to assess anew the rationale for the tax incentive, building on changing market dynamics as well as lessons learned from Opportunity Zone 1.0.

The Changing Context for Opportunity Zones

The original impetus for Opportunity Zones was based on a simple, compelling premise: that a generous tax incentive could entice investors to get out of their comfort zone and invest in distressed communities that are rarely the focus of private, return oriented capital. Today, the rationale for such investment remains strong, but market conditions in urban, suburban and rural communities warrant particular attention.

Development Challenges: The early years of OZs coincided with a relatively stable and high-growth period in key real estate sectors, pairing with low interest rates and active construction markets. Many purely economically motivated actors came into the program, took advantage of “low-hanging fruit” — i.e., the deals whose genesis preceded OZs and which likely would have gotten built with or without OZs — and then exited the space. The players still focused on OZs are doing the harder work of understanding more distressed geographies and projects designed with OZs in mind while contending with an extremely challenging construction lending interest rate environment that has all but halted new development in key sectors.

Commercial Real Estate Crisis: The commercial real estate sector faces a historic reckoning. Remote and hybrid work have permanently reduced demand for office spaces, leaving downtowns and suburban office districts across the country struggling with high vacancy rates and declining property values. According to a recent report from MSCI Real Assets, loan defaults on commercial real estate hit $11 billion in the first half of 2024, up from just $3.5 billion during the same period in 2022. San Francisco, for instance, exemplifies the crisis: office vacancy rates surpassed 30% in 2024, with property values for Class A office buildings plummeting by 40-50% compared to pre-pandemic levels. Cities like Chicago and New York are experiencing similar trends, exacerbating fiscal stress for municipalities reliant on property tax revenue.

Growing Housing Challenges: At the same time, the U.S. housing market is grappling with a supply-demand mismatch that cuts across income levels and geographic areas. The National Low Income Housing Coalition estimates a national shortfall of 7.3 million affordable rental homes for extremely low-income renters. Meanwhile, middle-income households in cities like Austin, Nashville, and Denver are increasingly squeezed, with median home prices rising over 50% in the past decade. Even in smaller towns experiencing industrial growth, housing supply has failed to keep pace with demand, putting pressure on existing infrastructure and leading to skyrocketing rents.

Industrialization in Small Communities: America’s ongoing reshoring and industrialization efforts are transforming small and mid-sized communities, particularly in the South and Midwest. Investments in semiconductor plants, EV battery factories, defense related production and advanced manufacturing hubs are creating economic booms in places like Mobile, Alabama, and Youngstown, Ohio. However, these communities often lack the housing stock, infrastructure, and services needed to support the influx of workers and their families. Without targeted interventions, these growth opportunities risk being stymied by bottlenecks in local development capacity.

Rising Demand for Energy: The surge in energy demand, driven by artificial intelligence, advanced manufacturing, and population growth in high-sunbelt areas, presents another challenge. Data centers alone, many of which are being sited in rural and suburban areas, now account for 2% of total U.S. electricity use. Meeting these demands requires modernized infrastructure and innovative investment—areas where Opportunity Zones could play a critical role if properly adapted.

Lessons from Opportunity Zones 1.0

The first iteration of Opportunity Zones offered important lessons about what worked and where improvements are needed.

Multifamily Housing Production: One of the clearest successes of OZ 1.0 was its role in catalyzing multifamily housing development. According to a report by the Economic Innovation Group, 68% of OZ investments went to real estate projects, with multifamily housing representing a significant share. In cities like Charlotte and Phoenix, OZs were instrumental in filling financing gaps for projects that increased housing supply in high-demand areas.

The ability of OZs to catalyze a big burst of supply, including market-rate housing, is critical. Market-rate housing—often criticized for its lack of affordability—plays a significant role in local affordability by reducing competition for housing at lower price points. When higher-income households move into new market-rate units, they are no longer competing for older, more affordable stock, thereby easing pressure on rents. Evidence from prior Opportunity Zone projects suggests that, despite initial fears of displacement, rents in many areas have remained stable or even decreased as supply increases. During this economic cycle, the high-growth markets such as those in the Sun Belt demonstrated “filtering”, wherein significant new supply of high-quality multifamily appeared to result in relatively more affordable rents for older and lower-quality properties falling even more than higher-quality property rents. These dynamics underscore the high leverage of market-rate housing for broader affordability.

Diversification of Downtown Economies: In some communities, OZs helped mitigate the commercial real estate downturn by diversifying downtown economies. For example, in Birmingham, Alabama, OZs supported the development of mixed-use projects that incorporated retail, office, and residential components, providing a buffer against the decline in office demand. In San Antonio, Weston Urban, established in 2012 by entrepreneurs Graham Weston and Randy Smith, has significantly contributed to the revitalization of downtown San Antonio, with housing and retail efforts that would not have been possible without Opportunity Zones. Notably, Opportunity Zone capital has supported 300 Main and the Continental Block development, offering over 600 mixed-income units as well as retail space invigorating the area. Weston Urban has also supported local startups through small business programs like Geekdom, as well as anchor employers such as Frost Bank, whose new downtown headquarters they built.

State and Local Leadership: The most transformative outcomes often occurred in places where state and local leaders took an active role in organizing capital and aligning OZ investments with broader economic strategies. Alabama’s Opportunity Zone initiative, led by Opportunity Alabama (the subject of a recent newsletter), is a case in point. By creating a state-wide ecosystem of investors, developers, and community leaders, Alabama directed OZ funds toward transformative projects like the redevelopment of historic properties and workforce housing.

Similarly, Erie, Pennsylvania, successfully leveraged OZs to revitalize its downtown and waterfront, attracting over $100 million in private investment. This success stemmed from a deliberate strategy to combine OZ incentives with other funding sources, a model that could be replicated elsewhere.

These local successes have garnered Congressional attention. Significantly, Representatives Mike Kelly (R-PA-16) and Sewell (D-AL-7) were two of the cosponsors of the reauthorization legislation in the House.

Supporting Industrial Development: Opportunity Zones also played a role in supporting development around industrial areas. In Mobile, Alabama, CapZone Impact Investments facilitated the construction of housing and commercial spaces near industrial facilities, ensuring that economic growth translated into tangible benefits for local communities.

What This Means for Opportunity Zones 2.0

The lessons of OZ 1.0, combined with the shifting economic landscape, underscore the need for a reauthorization bill that adapts to today’s challenges and opportunities. The bill introduced in the last Congress would already make critical improvements to the tax incentive. The initial designation of Opportunity Zones relied on outdated 2010 census data, leading to the inclusion of some areas that no longer meet the intended income criteria. The directive to sunset zones that no longer meet national purposes – and the ability for states to replace zones that are sunsetted with eligible high-need communities – are smart reforms. The legislation would also put in place a series of necessary reporting requirements that were dropped out of the original bill due to procedural rules.

These reforms are essential and needed. In our view, there are three additional focus areas for OZ 2.0:

• Selection of Zones: In addition to the reforms described above, the process for selecting Opportunity Zones could be further modified to ensure alignment with current economic realities. While the initial designation of zones was based on 2010 census data, many areas have since undergone significant changes. New industrial and innovation hubs, such as those emerging around semiconductor plants, EV factories and defense production facilities, should be prioritized. Additionally, zones should be reevaluated to reflect the needs of rural and suburban areas experiencing rapid growth. Downtowns struck by the sudden CRE crisis should be considered as well. One of the greatest features of OZ 1.0 was its local flexibility, and this needs to be preserved.

• Preference for Housing Production and Renovation: Given the acute housing crisis, OZ 2.0 must prioritize projects that increase housing supply across income levels. This could involve ways the program can be leveraged for adaptive reuse of underutilized commercial properties, such as converting vacant office buildings into residential units. Policymakers should also explore mechanisms to encourage affordable housing development in high-opportunity areas, ensuring that OZs contribute to both economic growth and social equity. Most importantly, the program need not be prescriptive, but flexible enough for communities to use the tool as it is needed best: a central business district in Seattle or San Francisco that is looking to convert abandoned offices or shopping malls to housing has very different needs than university towns or hospitality-driven areas that have plenty of expensive housing, but little attainable housing for the workforce.

• Crowding in Other Federal Investments: A key recommendation for OZ 2.0 is to better integrate Opportunity Zone incentives with other federal programs, such as the Low-Income Housing Tax Credit (LIHTC), New Markets Tax Credit (NMTC), and infrastructure funding under the Bipartisan Infrastructure Law. This “stacking” of incentives, championed by HUD Secretary-designate Scott Turner during his tenure as executive director of the White House Opportunity and Revitalization Council, could amplify the impact of OZ investments and ensure they align with broader policy goals.

Place and the Importance of Permanence

Current legislation to extend the program is a critical step, but policymakers must ultimately make a version of Opportunity Zones permanent to ensure long-term benefits.

Opportunity Zones are not just about projects; they are about places. The permanence of the program is essential for cities to effectively plan and organize OZ investments alongside other incentives. Short-term programs often fail to achieve their full potential because they lack the continuity needed for comprehensive planning. Permanence would enable cities to:

• Coordinate Investments: Many of the most successful OZ investments we have seen are when OZ projects are aligned with local economic development strategies, infrastructure plans, and housing initiatives. San Antonio’s complete downtown renovation and transformation, the creation of “deck parks” linking the wealthiest neighborhoods in Dallas to some of its poorest, and large civic projects like the Beltline in Atlanta and the Cross-Charlotte Trail in Charlotte come to mind. Intentionally integrating Opportunity Zones with broader long-term initiatives can maximize the impact of investments and ensure they address community priorities.
• Attract Long-Term Capital: A permanent OZ framework would provide the stability investors need to commit to complex, multi-phase projects. This is particularly important for large-scale developments, such as mixed-use districts or industrial parks, that require sustained investment over several years. Specifically, the ability to attract non-capital gains to these projects can increase what has already been catalytic.
• Foster Public-Private Partnerships: By making OZs a permanent fixture and setting up the renomination of zones every ten years, cities can build stronger partnerships with private investors, leveraging their resources to achieve public goals. These partnerships can drive innovation and ensure that investments deliver meaningful benefits for residents.

Thinking about place also means addressing the unique challenges and opportunities in different types of communities. In small towns experiencing industrial growth, OZs can support the development of housing, schools, and infrastructure to accommodate new workers. In urban areas, they can drive the revitalization of underutilized spaces, creating vibrant mixed-use neighborhoods. And in rural regions, OZs can attract investment in renewable energy, agriculture, and other industries critical to local economies.

The initial OZ program motivated places of all sizes across the country to get organized and create coalitions; OZ 2.0 can catalyze another round of place-based action in an even more critical time.

Conclusion

Opportunity Zones represent a powerful tool for addressing some of the most pressing challenges facing American communities today. By extending the program and adopting a thoughtful, forward-looking approach to OZ 2.0, policymakers can build on the successes of the original framework while addressing its shortcomings. The key lies in focusing on the selection of zones, prioritizing housing production, and leveraging federal partnerships. Most importantly, making the program permanent will provide the stability needed to achieve lasting, transformative impact.

With the right design and bipartisan support, Opportunity Zones can fulfill their promise as a catalyst for revitalizing communities, addressing housing shortages, and fostering sustainable economic growth. The time to act is now.

Bruce Katz is the Founding Director of the Nowak Metro Finance Lab at Drexel University. Ross Baird founded Blueprint Local, which has invested $250M in Opportunity Zone capital in projects across the country. Michael Saadine is a Senior Advisor to the Nowak Lab and Managing Partner at Invisible Group, an interdisciplinary real estate investment platform.