Opportunity zones were created to spur development in distressed neighborhoods, but developers in some areas are struggling to find tenants for their new properties. Their savior may be another rising trend in commercial real estate: co-working.
Lured by the lower cost of shared office space, start-ups also gain access to a network of eager investors looking for companies to back, a combination that is helping to create incubators in underserved markets.
The former General Electric campus in Fort Wayne, Ind., a long-planned development called Electric Works, sits in an opportunity zone. The project encompasses 2.7 million square feet, and co-working is expected to account for more than 72,000 square feet of that space.
The project’s co-working component — available month to month to companies with up to 15 employees — is a key part of an attempt to draw the surrounding community into what its backers say will be an innovation hub in the city.
“There’s a lot of interesting stuff happening around Fort Wayne, but it was all happening within silos,” said Jeff Kingsbury, chief connectivity officer at Ancora, a private real estate firm based in Durham, N.C., that is backing Electric Works. “By creating that kind of center of gravity, we achieve a density, coupled with amenities, that really helps to draw innovation.”
Construction on Electric Works is scheduled to start in the first quarter of 2020, and is expected to take at least 18 months. The co-working component echoes a larger trend that is drawing more entrepreneurs to opportunity zones.
The opportunity zone program, enacted as part of the federal tax overhaul in December 2017, was created to stimulate private investment in economically distressed communities in exchange for a break on the capital gains tax. There are now more than 8,700 such zones nationwide.
Investors can defer taxes on capital gains that are invested in a qualified opportunity zone fund until Dec. 31, 2026. Only 85 percent of capital gains invested in such a fund are subject to tax, as long as the investment is held for seven years. If the investments are held for a decade, new gains are tax-free.
One of the biggest challenges, however, is finding businesses to move into opportunity zones.
Co-working spaces are a natural draw, enticing start-ups and established companies looking for short-term, flexible office space. Marry the investment via the zones with such entrepreneurial spirit, and the co-working spaces can help incubate the economic turnaround the distressed areas need.