Following World War II, western Europe’s municipal and rural economies were devastated. In response, the United States in 1948 launched the Marshall Plan to provide $13 billion of capital and assistance for the rebuilding effort.
Seventy years later, in 2018, the U.S. government moved to spearhead the revitalization of its own urban and rural areas by creating opportunity zone (OZ) tax incentives codified in the controversial 2017 Tax Cuts and Jobs Act.
Adjusting for inflation, the Marshall Plan’s $13 billion investment would represent about $136.5 billion in current dollars. In contrast, the OZ incentives will be energized by the potential of an estimated $6 trillion in unrealized capital gains, cash parked in various assets and sitting on the tarmac of the American economy—and, legislators hope, ready to soar into reinvestment opportunities.
To be clear, these new zones are unlikely to attract anything near that $6 trillion figure. But they do not need to in order for the incentive to be hugely successful. If America’s emerging urban markets can attract just 2 percent of that potential pool, OZs would rival—and perhaps surpass—the Marshall Plan in terms of economic impact. But unlike the Marshall Plan, which was deployed for only four years, these zones will be operational for at least the next 10 years. Time is of the essence to fully capitalize on those benefits of tax deferral and tax reduction.
I recognize that the analogy should not be overstated. The zone initiative is radically different from the Marshall Plan’s provision of government loans and grants. The OZ program is market driven and focused on the attraction of equity capital for business development and real estate projects in distressed areas. The OZ capital will have the freedom to be scalable and concentrate investment where risk-adjusted underwriting dictates. Project investments can be as big and transformative as necessary to succeed. There will be no additional political decisions of how much investment should go where.
However, history suggests that one of the most important factors for the success of the OZ incentives will be something that the Marshall Plan recognized: the importance of cultivating local human capital for a redevelopment effort. A critical component of the Marshall Plan was its capacity-building technical assistance in which corporate managers from European countries were invited to learn modern management skills through study trips to the United States.
Similarly, the pools of capital forming to pursue OZ development and investment deals constitute unique opportunities to cultivate human capital for inner-city economies. Not only does economic justice dictate that this should happen in order for the program to embrace the American ethos of opportunity for all, but also it is consistent with the intent of the legislation’s key sponsors.
In a February 5, 2018, interview on the Fox Business Network, one of those sponsors, Senator Tim Scott of South Carolina, expressed his vision. “What we hope to see is a real investment of time, talent, and treasure into these areas—and by doing so, they will excavate the hidden talent in these communities and put them to work right in their own backyards,” he said. Scott’s cosponsor, Senator Corey Booker of New Jersey, likewise advocates for human capital development, having also introduced legislation to stimulate apprenticeship programs in private industry.
But, aside from furthering these policy objectives, the cultivation of managerial talent mirroring OZ communities is ultimately in the vested interest of commercial real estate (CRE) stakeholders.
First, inclusion of talented women and minorities at all levels of the project investment process will take the political spotlight, helping maintain a favorable legislative environment for the incentives.
At some point, Congress, the executive branch, or both will ask whether the tax incentives have accomplished all the intended policy goals—both those expressed and those implied. It will be in the country’s interest to highlight numerous examples of professionals of color working at all levels of management on the projects that OZ capital will fund—and not just as laborers on construction sites. That human capital should also include the minority business owners and developers who will have grown and thrived as a result of collaboration with larger firms on OZ deals.
Second, bringing talented minorities into CRE deals enhances project work teams by incorporating diverse perspectives of local markets and business practices. Will viable opportunities in OZ census tracts be dismissed because of failures to read neighborhood potential? Will risks be appropriately managed for those opportunities that are pursued? Will development programs in emerging markets be properly configured to serve the interests of the users and tenants attracted to those markets?
This value proposition of diversity is particularly critical for those real estate sectors engaging in direct interface with consumers. The shopping center industry discovered this decades ago when its evolution was enhanced by the recruitment of women as marketing directors, leasing agents, and other positions—particularly since women were the dominant customers patronizing those malls and marketplaces.
More recently, the National Multi Housing Council and the National Apartment Association have published estimates that by 2030 the United States will need to build more than 4.6 million apartment units at a variety of price points. That will be two years after the first OZ investments will have reached the 10-year holding period that promises the most lucrative tax benefits. That will also be just 15 years before the majority of the nation’s population will be made up of members of minority groups, according to Brookings Institution projections.
So will female and male professionals of color be involved in developing, building, financing, leasing, and owning those commercial real estate assets? Will they be recruited to bring their talents to projects where millennials and members of generation Z will live, work, shop, heal, and lodge while they are traveling?
The pools of minority talent to support the impending capital flows into Opportunity Zones already exist—or they are waiting to be hired and cultivated. Project REAP—the Real Estate Associate Program, the nation’s leading diversity and inclusion initiative serving the CRE industry—has been educating and promoting such talent for 20 years.
It continues to connect real estate organizations with ambitious professionals in nine major metropolitan markets and is poised to expand its network into additional cities. The real estate divisions of numerous companies—including JP Morgan Chase, Walmart, Shake Shack, JLL, Netflix, Howard Hughes Corp., Starbucks, Duke Realty, the Bozzuto Group, Nike, and RXR Realty—have all hired Project REAP alums and discovered that diverse talent enhances organizational growth.
As the industry is poised to tap what may be the most significant pipeline of financial capital ever created for inner-city economic development, CRE executives should be cognizant of the role that human capital plays in redevelopment projects. It was a keystone to the success of the Marshall Plan and the European nations that subsequently became trading partners for American companies.
G. LAMONT BLACKSTONE, chairman of the board of Project REAP, is an urban redevelopment consultant and the former chief investment officer of an inner-city investment fund.
