When it comes to investing in opportunity zones, what’s the best way to determine the O-Zones with richer investment potential? Is it the traditional facts and figures, such as those from substantially out-of-date U.S. Census data? Or would the better choice be alternative data sources, such as street views, cellular data and social media?
A recent whitepaper from Skyline AI, the New York City- and Tel Aviv-based artificial intelligence investment manager for commercial real estate, suggests answers. In its whitepaper entitled “The Map is Not the Territory: Discerning the True Opportunity Within Opportunity Zones,” Skyline AI found considering these alternative data sources rather than traditional census data delivers clearer views of tracts’ potential opportunity.
Maps and other data tend to grow steadily less accurate the older they become. Consider that 99% of tracts used to determine today’s O-Zones were surveyed based on 2011 to 2015 U.S. Census data. Many are simply a freeze frame capturing a moment in time when there existed more than 18 million fewer Americans and many fewer developments.
A number of the tracts became more well-heeled over time, with most experiencing up to a 20% surge in household income. From 2014 to 2017, 4,981 tracts scored higher median household incomes, while only 1,977 suffered lower incomes. The states showing greatest decline: Louisiana, New Mexico and Nevada. A handful of New York City and Washington D.C. tracts gave evidence of critical and bewildering anomalies. Among them: Enclaves that showed both high household income levels and unexplained poverty ratios.
It’s no shock the U.S. Census data doesn’t provide the critical insights O-Zone investors need. After all, a major census is undertaken only once every 10 years, and is largely conducted through the mail and by in-person census surveyors. The digitization of the census should help bring greater accuracy and clarity. But that provides little comfort to today’s O-Zone investors, who need greater insights now.
“Arrival of the first-ever digital [U.S.] Census marks an especially promising development for OZ investors in 2020,” says Or Hiltch, co-founder and chief technology office for Skyline AI. “But this alone will not be enough. While updated data will help drive better OZ investment decisions, alternative data sources will still be critical in ensuring investors have a clearer picture of where true opportunities lie.”
Skyline AI’s research examined such alternative data points as average commute times, consumer and mobile phone trends, international flights, percentage of people with health insurance, distance from subway stations and carpool availability.
The company discovered an assortment of non-standard signals could be leveraged to ascertain area economic growth long before it’d be recognized by traditional data sources.
For instance, by utilizing anonymous mobile device locations, forecasts can be undertaken of alterations in area college student and graduate demographics right up to current day. Variations in the number of Airbnb listings enable the correlation of points of interest with year-over-year rent increases. Adjacency to a Whole Foods Market or Trader Joe’s provides a dependable indicator of commercial real estate rent and value expansion.
“When we apply these new lenses to O-Zone tracts, we find lots of these positive indicators of sustained economic growth present in areas otherwise listed as troubled,” the whitepaper’s authors noted, adding at least 20 designated tracts now contain a Whole Foods Market, making them eligible for O-Zone tax benefits and fairly safe bets in improving enclaves.
“Poverty and income data alone cannot serve as meaningful indicators of opportunity for investors,” Hiltch says. “Alternative data sources are needed, as they can reveal which communities significantly matured, which stand out as prime, under-tapped opportunities, and which are in decline. Short-term rental listings, car ownership rates, proximity to public transportation and consumer and credit card data can all help indicate a community’s trajectory and identify worthwhile investment opportunities.”