Why I’m Investing Big in Detroit

Today’s announcement of the NEW University of Michigan Detroit campus is just one of the reasons…

In the past year since selling HookLogic and completing my commitments to the buyer, the bulk of my energy has been focused on helping to launch a real estate private equity investment manager and development firm, Greatwater Opportunity Capital, focused on making high impact investments in Detroit neighborhoods.

There are many reasons to be bullish on Detroit, many of which I’ll outline here. That said, I was inspired to post this today following the announcement of the new University of Michigan Detroit Innovation Center, a watershed moment that truly makes me proud of my alma mater and hopeful for Detroit. For many years Detroit and Ann Arbor couldn’t have seemed farther apart, with the university feeling oddly detached from the challenges facing Detroit just 40 miles down I-94. Today demonstrates the acknowledgement of a shared responsibility for the prosperity of the city and the region as a whole – and also proof that better times are indeed ahead for Detroit.

I grew up in the Detroit area, and spent my childhood hearing about Detroit’s problems. They seemed gigantic and intractable—a cautionary tale of industrial and urban decline. In 1960, Detroit was the richest major city in America. By the 1980’s, it was on its way to becoming the poorest. Other American cities have experienced decline, but few have done so as publicly and dramatically as Detroit. It was America’s original boomtown – the Motor City, the Arsenal of Democracy – and it went bust on the national news, complete with surreal images of blighted homes and abandoned factories.

Though I have not lived in the area for nearly twenty years, I still call Detroit my home. I still root for all the sports teams, take pride in all things D, and spend parts of every year there, even more now. I’ve always had a deep respect for the Midwest values Detroit embodies; a place where hard work, honesty and humility matter the most. Despite starting in New York, I located nearly half of HookLogic’s team in Michigan and we were more successful for it.

Despite the talents of its people and prevailing urbanization trends, Detroit struggled to make its long-anticipated comeback, instead experiencing multiple false starts and sinking further into decay and depopulation. Emotionally, I always wanted Detroit to recover and several times hoped “this time things will be different” only to be disappointed.

Well this time IS different. I’ve spent considerable time understanding why, working closely with my Greatwater partners to analyze the data, while also getting to know people in the city who are working hard to turn the tide and change the narrative.

Here are 5 reasons I’m investing a significant portion of my wealth in my hometown:

1. Restructuring & Political Change: Detroit’s economic decline was long and complex, but 2008 dealt the City’s finances a final blow. Predatory loans begot vacant homes, and a declining tax base declined even further. The loss of residents didn’t change the city boundaries, though; the police and fire departments, sanitation and other services had to cover the same ground as always. Underfunded to a new degree, government could no longer provide basic services. Most streetlights didn't function. Naturally, this led to even further population decline. While other parts of the country recovered post-2008, Detroit hemorrhaged residents. A City built for two million was now home to under 700,000. The 2013 municipal bankruptcy put a stop to this vicious cycle. The City was able to restructure its balance sheet, trim massive debt service payments, and reallocate those dollars to municipal services (before 2013 nearly 40% of the city’s tax revenues went to paying down debt, now it’s closer to 10%). This started a virtuous cycle. Emergency response times trended back to the national average. New residents began to move to the city. Tax revenues began to recover. The city recently had a successful bond issue, only a few years removed from defaulting on its debt. The highly competent administration of Mayor Mike Duggan deserves a lot of the credit for managing successfully through the crisis and putting Detroit on a path to growth. City residents agree: he earned re-election with 72% of the vote in 2017.

2. Families and Foundations: A few wealthy families and foundations made massive bets on Detroit at times that it looked unlikely they would get their money back. The Ilitch family restored the Fox Theater and oversaw the construction of Comerica Park, Little Caesar’s Arena and a new business school for Wayne State. Dan Gilbert moved nearly 20,000 employees of Quicken Loans and his other companies to the central business district and has bought and restored dozens of buildings downtown, including opening the Shinola Hotel. Several leading foundations, including Kresge, Ford and Ralph Wilson pooled resources to strike the grand bargain that helped Detroit exit bankruptcy successfully, and have continued to drive major civic projects in the city. Countless other corporate, philanthropic, and community stakeholders played roles in Detroit’s comeback, making what Greatwater and others are doing today in the city possible.

3. Common Cause: The thing that has struck me most during my time in Detroit is the tone. People you meet in the city – those who live there and those commuting from the suburbs – are upbeat about the recovery. As an analytically-minded person, I usually don’t go for a “soft” argument about mood, but this is the first time in my lifetime that I’ve seen nearly universal optimism about the future of the city. People in the Detroit metro area are no different from those in other parts of the country in wanting a functioning urban center in which to live, work and/or play. The recovery of America’s cities has been a big trend in the last 30 years yet structural factors noted above hindered Detroit’s ability to fulfill that role. Now that more Detroiters are getting a renewed taste for vibrant urban life, it will be hard to go back.

4. Momentum: While the University of Michigan announcement is huge, it isn’t the first positive news for the city:

· Ford announced last year that it was building a new “future of mobility” campus (separate from its Dearborn headquarters/campus), with the Michigan Central Station in Corktown as its centerpiece. The train station has been empty for over thirty years, and was perhaps the most notorious blighted structure in all of Detroit, sometimes called the “tombstone” of the city given its rectangular shape. On the surface, Ford’s move may have looked sentimental, yet at the core it is all about recruiting. Future transportation companies will be driven by cutting-edge software and artificial intelligence. To compete with Silicon Valley for talent, the work – and the workspaces – must be exciting and attractive, with proximity to great amenities. I’ve been through the construction site and it will be quite awe-inspiring. (I’ve also spent a lot of time in Silicon Valley in non-descript suburban office spaces that don’t come close)

· The Pistons moved to the brand-new, state-of-the-art, Little Caesars Arena in 2018 and a few weeks ago completed the move of their administrative and training facilities to Midtown Detroit. With this move, all 4 major sports teams are back in the city for the first time since 1975.

· Ironically, today’s news wasn’t the first major new University of Michigan commitment to the city. Last year, the School of Education announced a joint venture with Detroit Public Schools to open a Pre-K to 12 model school and teacher residency program at the former Marygrove College. I’ve spent significant time with Dean Moje who is leading the effort and am a big believer in the impact this could have for the school system. Combined with the university’s recent purchase of the Rackham Building near the Detroit Institute of Arts and the announcement of the new campus on the east side of downtown, it’s clear that the university is laying down roots. Many leading cities lean heavily on world-class “meds and eds” as a base from which jobs, research, and start-up activity emanate, leading to economic development. Michigan’s commitment could be pivotal.

· The city is working to build and extend greenways, including bike paths and walking trails on disused train lines and along the city’s formerly industrial waterfront, with a plan to connect most major parts of the city. The administration has also organized serious efforts (including tens of millions of dollars in corporate sponsorships) to improve key commercial districts in many neighborhoods.

· Companies are moving their headquarters and regional offices to Detroit, often relocating from the suburbs per the desire of employees, but also expanding regional headcounts. Recent moves and expansions include TCF Bank, Google, Amazon, LinkedIn, Tata Technologies and UBS. Downtown is finally experiencing network effects.

· FCA/Chrysler is beginning a vast expansion of its Mack Avenue assembly plant, the first such expansion by an auto company in the city in over 30 years. This is expected to bring 6,500 new jobs to the east side of Detroit. GM also recently announced it would retool its Hamtramck plant to produce electric trucks after previously announcing plans to close it.

Of course, it’s not all perfect. It’s no secret that Detroit needs more industry diversification. The auto industry is in the throes of disruption, and there are no guarantees that the “Big 3” can successfully transition to the new era. Accordingly, attracting new companies and start-ups is a key focus of local leaders and an area I’ve begun to get involved with as well.

5. Opportunity: While places like Brooklyn and Pittsburgh began to thrive, Detroit remained stuck behind the starting gate. The city’s bankruptcy removed many impediments to activity and while there still aren’t enough cranes on the horizon to say that Detroit is the hottest real estate market in the country, the signals are bright. Detroit’s path to urban revival has been unique from almost every other city, giving it an authentic edge and enabling it to avoid some of the pitfalls of other cities. Independent businesses, rather than national chains, abound. Boutique hotels, unique restaurants, and local craftspeople and artists are dominating the landscape. City planning has had time to be thoughtful about the path and character of development. Interesting housing and workplace experiments are underway. Much of Detroit was built before 1940, with an astonishing mix of great architecture from art deco skyscrapers, to beaux arts and neo-classical structures many of which are only now being restored and re-occupied. All of which makes it an interesting place; it’s even starting to show up high on tourism itineraries.

Not to mention, every time we refurbish apartment buildings in the city (over a dozen to date!), they have been full within weeks and have remained full, providing strong returns for our investors. Despite having one of the largest municipal land areas in the country, only 15% of the metro area population lives in the city, compared to a city like Chicago which accounts for 28% of its metro area population. If only 1% of residents relocate to the city, it would quickly overwhelm the housing supply. It’s still early, Detroit is not “institutional grade” (yet), so the big national developers and financiers aren’t really there. Meaning there is opportunity! As each of the once-vacant buildings come back into use, the need to start building again becomes apparent. Detroit is suddenly new and cheap, with plenty of upside. On top of this, the recent “Opportunity Zone” legislation creates huge tax advantages for investing in many of the most promising areas of the city.

Detroit still has many problems. Blight. Poverty. Struggling schools. A complex history of race relations. There is still a monumental effort ahead to make Detroit a truly world-class city again. But for the first time in my lifetime, the current is flowing and the ships all seem pointed in the same direction.

I’ve had the good fortune of partnering with a rock star team at Greatwater, with hyper-local neighborhood expertise, strong local connections, access to capital and commitment to doing things right. I’m excited to work with Matt, Justin, Jed, and Roger to build a high-impact business and help build the future of Detroit.

More about the University of Michigan Detroit Innovation Center: https://www.crainsdetroit.com/real-estate/ross-gilbert-teaming-300-million-um-innovation-center-former-jail-site-detroit