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I've had a minor obsession
with Detroit
for the past year or so, ever since I learned that one could purchase a
single family home there for $5,000 or less. In the world of sky high housing
prices in my adopted hometown of Boston,
$5,000 wouldn't be enough for even a down
payment on a tiny condo. In my neighborhood,
converted duplex units start
at $350,000. Apparently there are people willing to pay that much for half a
duplex, but I'm not one of them. Needless to say, for countless young people
like myself who have been shut out of the inflated housing market, the idea
of a home of my own (and several investment properties to boot) for the price
of a used car was intriguing.
When I told people of my Detroit
obsession, nearly everyone laughed at me. "Why would you want to move
there?," they asked incredulously. I took this
as an encouraging sign - after all, any good investor knows that the way to
riches is to find value where others simply aren't looking. Mocking laughter
is an especially good sign. So it was with great optimism that when an
opportunity for me to visit Detroit
arose, I jumped at it. My wife and I were returning from a business trip to Taiwan, and by chance we had a stopover in Detroit.
The first thing that struck me when we got off the plane in Detroit and into our rental car was the
price of gas. It was well over $4.00 per gallon - shockingly higher than when
we left Boston
two weeks prior. Our hotel was in a Detroit
suburb called Southfield,
which is about 15 miles
from Downtown, but jetlagged as we were, we decided to take a peek at the
city before doubling back and checking in at the hotel. Speeding down the
highway towards the city center, we noticed the
miles of sad houses lining the freeway on either side. Many of them - the
majority of them - were semi destroyed: Windows broken, roofs collapsed,
paint peeling away to expose the bleached gray wood below. Some were just
charred skeletons. It was an eerie feeling, zipping down a modern highway
that bisected a ghost town.
 From my cursory
observation, the downtown core was like any booming modern American city, a
model of cleanliness. The glass and steel GM Renaissance center
rose high above the city, sprouting forth from a gleaming, revitalized river
walk park along the Detroit
River. The downtown was
unique in that the skyline is punctuated by the ornate architecture of well
preserved, early 20th century skyscrapers. They just don't build buildings
like those anymore. (Check them out at Forgotten
Detroit). This was the Greenzone.
Both the Detroit Lions and Tigers have their sports stadiums downtown, and
across the street is the beautifully restored Fox theater.
(Beautiful pictures of downtown
Detroit here.) The activity gave the downtown a festive, bustling
feel - at least on the Tigers game night when we were there. Another bright
spot was the Eastern Market - an outdoor
meat, produce and local goods market amid brick stalls, old warehouses,
antique shops and greasy spoon cafes. On the Saturday morning that we
visited, the market was packed and bustling, both with foot traffic and
unfortunately, automobile traffic. Parking was a nightmare, with cars idling
in the streets and trolling slowly through the market looking for parking.
I suppose I have been spoiled by the excellent public transportation system
of Boston. From
my home in the leafy suburb of Arlington,
I can walk to a subway station in ten minutes, hop the train, read the
newspaper for a spell and arrive in the heart of downtown half an hour later.
I couldn't help compare the two cities from a transportation perspective,
which in my opinion is fundamental to informing real estate investment
decisions in this age of $4 (and likely much higher) gasoline. Unlike Boston, which was settled before cars roamed the streets, Detroit
was clearly built for, and centered around the
automobile. In contrast to the preponderance of narrow lanes, winding roads,
crooked one way streets, and overwhelming congestion that make driving in Boston a nightmare, the streets of Detroit are wide and straight. The main
arterial in the city, Woodward
Blvd, is a full eight lanes wide - four in
either direction. The surprising lack of traffic combined with expertly
synced traffic lights made it a pleasure to drive the long, wide open
expanses. Stores and restaurants on either side of the wide boulevards were
pulled far in to provide ample parking. But this made it daunting for
pedestrians. Distances between anywhere on foot -
even downtown - were immense, and psychologically exhausting. Simply crossing
the street, all eight lanes of it, was an exercise in intimidation.
Between the downtown Green Zone described above, and the cultural center - home to Wayne
State University,
the public library, and the Detroit Institute of Arts (home of Diego's
fabulous Industry of Detroit as seen in the movie Frida)
- was a neighborhood known as Brush Park.
It was a distance of perhaps a mile, but seemed so much longer by the lack of
anything in between but vacant lots and abandoned houses.
Photo credit
People told me, and it does look like, the area is reviving. We
spotted several new developments, and many classic older buildings being
converted back into upscale condos. These can be had for a song. But the
question that must be considered for an investor is whether real estate
purchased today will appreciate or depreciate in the future. While the
Downtown core was vibrant, and the cultural center
area appeared pleasant, the outskirts of the city was
the epitome of depression. Driving northwest out of the city on Grand River
Blvd, another empty eight lane arterial, gave me the feeling that I was Will
Smith in I Am Legend. Block
after block, mile after mile the scenery was the same: empty, abandoned,
dilapidated, boarded up, burned out, decaying
storefronts and vacant lots. Most of the functioning businesses were streetfront churches or missions. Here and there were sad
down-and-outers loitering on the corner, old men
wandering in the vacant lots, poor souls in tattered clothes out in the
middle of the street, trying to make the crossing from noplace
to nowhere. It gave me such a deeply disturbing
feeling that I am at a loss to describe. Here stands one of America's once
great cities, a gilded age paradise, home of the automobile manufacturing
giants and the dictum that what is good for GM is good for America and of
course good for Detroit. Today, the prosperity that once built the sturdy,
now vacant high quality brick homes and buildings has evaporated away with America's
manufacturing economy.
A Tale of Two Depots
The greatest feeling of shock and despair came when, driving aimlessly and
half lost though downtown, we rounded a corner to find towering before us the
abandoned ghost tower of the Michigan Central Depot. Prior to my trip I had
heard of this building, had even seen pictures of it on the internet, but
nothing prepared me for the feeling I had when this ghostly building suddenly
and unexpectedly materialized before our eyes like a pirate ship from the
mist. It was sickening, shocking and profoundly disturbing. The building cost
$15 million when it was constructed in 1913, designed by the same architects
of New York's
Grand Central Terminal.
Picture credit & more fabulous
pics: Forgotten Detroit
As New York's Grand Central bustles, its unfortunate twin, rots away behind a
hastily thrown up chain link fence, every single window broken, every facade
defaced by graffiti, towering over the nearby and also abandoned old Tiger
Stadium like a menacing spirit of prosperity past.
Wikipedia says that the station was built before
there was much concern about competition from the automobile. It wasn't built
in the center of the city, but on the outskirts -
so most people arrived at the station not by foot, not by car, not by bus,
but by street car or by the interurban. Interurban? What the heck
is that? Even the vocabulary of the pre-automobile world is being lost to us.
The reason that you likely don't know that word is because you've never seen
one, and for that you can thank - guess who - General Motors.
In 1921, GM lost $65
million, leading [GM President Alfred P.] Sloan to conclude that the auto
market was saturated, that those who desired cars already owned them, and
that the only way to increase GM's sales and restore its profitability was by
eliminating its principal rival: electric railways. At the time, 90 percent
of all trips were by rail, chiefly electric rail; only one in 10 Americans
owned an automobile. There were 1,200 separate electric street and interurban
railways, a thriving and profitable industry with 44,000 miles of
track, 300,000 employees, 15 billion annual passengers, and $1 billion in
income. Virtually every city and town in America of more than 2,500 people
had its own electric rail system. Source
Subsequently, according to Wikipedia:
General Motors, Firestone
Tire, Standard Oil of California and Phillips Petroleum formed the National
City Lines (NCL) holding company, which acquired most streetcar systems
throughout the United
States, dismantled them, and replaced them
with buses in the mid 20th century. After all was said and done, and all the
streetcar systems gone, GM was convicted of violating the Sherman Antitrust
Act, fined a whopping $5,000. Each executive was ordered to pay a fine of $1
for a conspiracy to force the streetcar systems to buy GM buses instead of
other buses (but not for dismantling the streetcar systems, which were also
being dismantled by non-NCL owned systems). Source
Still think that what's good for GM is good for America?
Detroit's abandoned train station symbolizes the
ultimate failure of the automobile, the effects of globalization, America's
throwaway culture, all wrapped up in the second great depression. The recent
financial crisis and credit bust has memories of the great depression
floating once again through the financial news with regularity. "Worst
crisis since the great depression," we are told. It may or may not seem
that way, depending on your vantage point. But ask the millions of residents
of the once great industrial cities like Detroit,
Cleveland or Pittsburgh,
or any of the countless smaller industrial mill and textile towns that time
has forgotten (cities like Lawrence, Fitchburg or Lowell
in my neighborhood). For many in these cities, the
second great depression has long ago settled in and is making itself quite comfortable.
Back on Highway 10 driving out to the suburbs, the dilapidated, burned out,
crumbling and abandoned houses stretched on for miles. We exited the freeway
to drive though a random neighborhood. It was
surprising clean, like any you'd find in your home town. Big trees lined the
streets, unique and majestic craftsman brick homes sat back from the curbs,
most of them tragically abandoned, boarded up and falling apart, inspiring a
feeling of loss and emptiness so deep. After a few miles of this, the suburbs
once again grow "prosperous," which is to say that people can be
seen again and the characteristic brick homes give way to nondescript square
buildings so typical of suburban America. And in the distance,
from the tangle of streetlights and strip malls, sprouting from the flatness
of the suburban nowhere, rises a huge tower of glass
and steel, the windows tinted gold in the style of the GM renaissance center. Surrounding this behemoth of a building far too
large and out of proportion for its surroundings (the headquarters of the
struggling Fifth Third Bank), a generic micro economy has sprung up to serve
it. A steel and glass hotel where we were staying, strip malls with chain
donut and sandwich shops, overpriced cookie-cutter townhouses that looked for
the most part empty, a five story parking garage and acres of parking all
tossed together in a riot of suburban sprawl.
I could not help but wonder when I saw it - would this gleaming modern office
tower one day share the same fate as the Michigan Central Rail Depot? Its
placement made no sense. In an era of $4.00 gasoline, with no public
transportation, and out in the middle of nowhere, I wouldn't bet against it. After
seeing the that majestic, beautiful rail station
abandoned, I wouldn't bet against permanence of any kind.
But back to the question at hand. Is real estate in Detroit a good investment? The answer to
that question is inextricably tied with Detroit's
chances of revival. In order for property values to return, people must flow
back to the city in droves. For this to happen, it must be an attractive
place to live in work, and this requires a solid foundation of good, well
paying jobs. But the Detroit economy remains
heavily dependent on the auto industry, and the US auto industry isn't doing
well. On the plane ride over, I read in the WSJ that the auto industry was a
bubble. This is what the Detroit FP headline was on the day we arrived. And
here is an excellent article from Portfolio magazine about how to revive the
Big 3. Unfortunately, it is all about downsizing, cutting more workers, and
cutting production. None of this is good for the D. Jobs in this country are
disappearing from manufacturing as quickly as jobs disappeared from
agriculture during the first great depression. The city must transform its
economy.
Second, the lack of public transportation is a huge minus for the city. Without
a car, it is nearly impossible to get around and the city is simply huge. There
is a tiny tram that serves the downtown core - the "People Mover,"
but it doesn't serve the suburbs, and I didn't see many buses.
A third strike against the city, and Michigan
in general, is the high prison population. According to this article, Michigan's
prison system costs $5 million per day, or $2 billion per year and rising. This is
another tragedy and a serious drag on the economy. The opportunity cost of a
$2billion prison system is tremendous, especially considering that the state
spends more on incarceration than on higher education. If the prison industry
is the best growth industry a state can muster, then I'm afraid
investors must consider other locations, if only from a moral standpoint.
My conclusion, at least for now, is that as attractive as the prices in Detroit are, there are
good reasons why they are low. But please do not consider this as investment
advice - I was only in the city for a day and a half, and there is certainly
plenty about the city that I do not know. In my online travels, I found this
potentially positive development:
Gov.
Jennifer Granholm on Monday signed into law a
package of incentives that supporters say makes Michigan the most financially
attractive state in the nation for movie production. Michigan's film industry
generated about $4 million in economic activity last year. When states such
as Louisiana and New Mexico passed incentives similar to those signed Monday,
their state film industries grew into $100 million industries.
Perhaps this is the beginning of a revival. Detroit has been on a 50 year downslope. A weaker dollar may allow the city to rise as
a manufacturing hub once again. If GM would release the stranglehold on the
city, it should build a streetcar system right down Woodward Ave. The street is wide enough
that it could accommodate an interurban and still have 6 lanes for traffic. Construction
would revitalize the city, and stops along the new tram could become popular
destinations.
Detroit still
does have great potential, in my opinion - one of the reasons for my minor
obsession. One of its great advantages its proximity to fresh water. While
the recent boomtowns have sprung up in the sunbelt, one day the residents of
Phoenix, Las Vegas, Atlanta and other southern towns may find the climate is
both too hot and too dry (as in the taps run dry) to be comfortable. In such
an event, Detroit
has a large, cheap housing supply, and plenty of fresh water. But for now,
the city remains mired in a long, second great depression.
I am deeply interested in any comments or insights readers may have on Detroit, and other
rustbelt and sunbelt cities. Please post
your comments here. In the future, I will have more reports on my
adopted hometown of Boston
which I increasingly appreciate is expensive for a reason. If you'd like to be notified,
please sign up to my low volume email announcement list.
By :
Michael A.
Nystrom
Editor, Bull not Bull
If you are
interested in exploring this idea further and finding out how to preserve a
sane, real life, please sign up to my low volume
email announcement list. I will be
discussing these issues further in the coming weeks and months.
* The title of this piece is borrowed from and inspired by a song by Remo Conscious from his latest album, Infliltraton
Any and all comments, observations and other feedback welcome here.
- News & charts tracking the unfolding second great depression
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