By ELI TILSON, YEHUDA LIEBERMANGeneral Motors World Headquarters in downtown Detroit(photo credit: REUTERS)
Just under a century ago, the automotive industry in Detroit fueled a period of rapid growth for the city, making it one of the wealthiest in the US with a booming real estate market. However, in the second half of the 20th century, the city experienced a spectacular collapse reducing it to a mere shell of its former self. Ever since then, Detroit has been suffering from widespread poverty, crime and urban decay and with property values among the lowest in the country. Today, despite increasing reports of a revival prompting some speculative investors to take note, the city in large parts is still suffering badly from the great decline with precious little hope for the near future. In the height of its industrial prowess, which was driven single-handedly by the success of its automotive industry, Detroit had one of the highest median household incomes in the country – 13% above the national average. The real estate market was on the rise with properties across all asset classes being built at a rapid pace, trying to keep up with the rising demand throughout the city. As the demand for housing, office, retail and leisure/hospitality properties increased, so too did their values, making Detroit one of the hottest property markets in the country.However, during the automotive industry’s great decline, from 1950-1970, the city lost 325,000 residents, leaving behind a predominantly African-American demographic that was suffering from a high level of poverty and severe unemployment.The real estate market suffered hugely as the lack of demand for properties caused values to plummet. At its lowest ebb, in 2009, the average value of a home in some central areas stood at a shockingly low $7,000. The culmination of the misery occurred in 2013, when, after years of economic despair, the city finally filed for bankruptcy – the largest municipal bankruptcy filing in US history.Over the past few years, however, there has been increasing talks of Detroit making a comeback. The city was successful in resolving its bankruptcy and appointed new forward-thinking municipal leadership in an attempt to restore the city back on the path to its former glories. Some progress has been made in redeveloping the city’s economy prompting many academics and news outlets to praise Detroit for its resilience and strength in turning their bleak situation around. The Downtown/Midtown area has indeed experienced somewhat of a revival with a recent uptake in development of multifamily housing, retail, corporate/government offices and restaurants.This area, covering roughly seven square miles, represents just 5% of the city and is therefore not a true reflection of the city as a whole. Development outside Downtown and Midtown has been painfully slow. Many neighborhoods are still littered with abandoned houses and citywide property values are lagging far behind most of the other major cities in the Midwest. Detroit’s overall population, employment and income are still trending down and with many of the city’s new jobs being taken up by residents of the surrounding suburbs and towns, Detroit’s fortunes do not look to be picking up any time soon. In recent years, many Israeli investment houses have been offering seemingly opportunistic investments in Detroit. With their cheap purchase prices and attractive rental rates, on paper the deals look extremely attractive. The draw of investing in a big-name city in the US and the promise that property values can only go up is enough to entice many to take a chance on Detroit. However, when investing in real estate, it is extremely important to have a deep understanding of the property’s market. The state of the city’s population, economy, job market and social/crime situation are all things that must be looked at in determining the market’s strength. A market such as Detroit, with its bleak economic and social outlook, is an inherently riskier market compared to a city with a healthy economy and positive population trends. On the face of it, a deal may look numerically good on an excel spreadsheet, but, if the property is not backed by a strong growing market the deal is unlikely to succeed in the long run.Eli Tilson is the owner and CEO of Pancho Real Estate, Yehuda Lieberman is its markets analyst.
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