Coming Back from the Brink Capital Flows and Neighborhoods Patterns in Commercial, Industrial, and Multifamily Investment in Detroit
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NEIGHBORHOODS, CITIE S, AND METROS Coming Back from the Brink Capital Flows and Neighborhoods Patterns in Commercial, Industrial, and Multifamily Investment in Detroit Brett Theodos, Eric Hangen, Jay Dev, and Sierra Latham September 2017 Though the economic decline of Detroit has been well chronicled in national media, the city’s resurgence is bringing new stories into play. Population loss has slowed. The city has begun to gain jobs. Home prices are starting to climb out of the cellar. The city has exited bankruptcy. The Detroit homeownership market has received considerable attention, including the challenges of high vacancy rates, vandalism, blight, homes appraising for below the cost of rehabbing them, a shortage of licensed and bonded contractors, the highest property taxes of any major city, an anemic mortgage-lending market, and, of late, an increase in contract for deed sales (Bai et al. 2016; Lincoln Institute of Land Policy and Minnesota Center for Fiscal Excellence 2015).1 Though these stories are deeply important, they do not address the landscape of other properties in Detroit—commercial, industrial, multifamily, and institutional. Despite considerable weaknesses in these markets, as with the broader city, they are witnessing some growth. Signs of stabilization and renewal are evident in the city. Quicken Loans has located 12,000 additional jobs in downtown Detroit, and Blue Cross has added 3,400. Office vacancy rates stood at 15 percent as of 2016, the lowest level seen in 20 years.2 Midtown Detroit saw 18 new housing developments with 750 units either begin construction or sign deals in 2015, more than double 2014 levels.3 BOX 1 The Urban Institute’s Collaboration with JPMorgan Chase The Urban Institute is collaborating with JPMorgan Chase over five years to inform and assess JPMorgan Chase’s philanthropic investments in key initiatives. The goals of the collaboration include using data and evidence to inform JPMorgan Chase’s philanthropic investments, assessing whether its programs are achieving desired outcomes, and informing the larger fields of policy, philanthropy, and practice. One of these programs is its $100 million, five-year commitment to support and accelerate Detroit’s economic recovery. This brief is part of a larger project identifying general trends in commercial investment in Detroit. We are paying close attention to the neighborhoods and districts where investments are made and the players, both community development financial institutions and other commercial lends, that are making them. There have been several significant developments that have bolstered confidence in core neighborhoods of the city. There is ongoing construction of the QLINE streetcar along Woodward Avenue. There is a flurry of development in Midtown Detroit, including the TechTown business accelerator, the Roxbury Group’s development of an $82.5 million multifamily and boutique hotel, George Stewart’s mixed-use development of the $44 million Woodward Garden Block, and Wayne State University’s development of 181 apartments and condos on the northern edge of Midtown.4 Downtown has also received attention, including McCormack Baron Salazar’s new development of a $55 million mixed-use project a block from the Detroit River and Adient’s acquisition and renovation of the Marquette Building in Downtown Detroit.5 These are just a few examples of projects under way in the city. There appears to be improved access to credit for commercial real estate financing in Detroit and a “sense among developers and lenders that most redevelopment projects are financially feasible, whereas just a few years ago questions were rampant about whether enough demand existed.”6 Despite these green shoots, there is ample reason for concern, especially when looking outside of Downtown and Midtown. This brief is meant to supply a better understanding of investment flows in the Motor City. We explore the following key questions: What is the local context in Detroit in terms of jobs, population levels, and owner-occupied single-family homes? What do sales and construction or rehabilitation (i.e., building permit) data indicate about investment in Detroit over time? What is the pricing for these deals, and how has this changed? How much debt financing is flowing to Detroit for the development of commercial, industrial, and multifamily properties? How concentrated or diffuse is investment in Detroit across the city’s neighborhoods? 2 COMING BACK FROM THE BRINK In brief, we find that sales volumes of commercial, industrial, multifamily, and institutional properties starkly declined through the Great Recession but are reemerging. Prices per square foot declined precipitously and remain low, but the number of sales is approaching prerecession levels. Investments in construction and rehab of these types of properties are nearly 10 times the dollar volume of sales, as developers seek to add value to the market. Moreover, permit volumes have risen appreciably in recent years. Another lens into these types of properties is not how owners use capital (for purchase, construction, or rehab), but how they access it. As might be expected, loans for these properties had a significant drop during the crisis, but of late have shown considerable growth. Commercial, industrial, multifamily, and institutional sales, construction and rehab, and lending are spread throughout Motor City, but projects in the Central Business District and Woodward Corridor are larger. As a result, those areas have seen the highest levels of these investments. In a companion brief (Theodos et al. 2017), we take an in-depth look at the role of mission-oriented investments, including investments by and through community development financial institutions (CDFIs), in facilitating commercial real estate development. Detroit in Context That Detroit faces continued economic challenges is well known. From 2000 through 2015, the city lost 28 percent of its population. Nearly 30 percent of housing units were vacant in 2015. In that year, unemployment stood at 17 percent for working-age adults, and another 37 percent of working-age adults were out of the labor force. (These figures are well above the national numbers, where just 5 percent of working-age adults were unemployed and 23 percent were out of the labor force).7 By 2015, the poverty rate in Detroit stood at 40 percent, a significant increase from 26 percent in 2000 and two and a half times the overall US poverty rate of 15 percent. The number of jobs located in the city was something of a bright spot, remaining stable from 2003 to 2014. (However, according to one estimate, roughly three-quarters of jobs located in Detroit, Hamtrack, and Highland Park are held by people who commute in from surrounding suburbs [Coxen et al. 2016].) The following are key elements of context in Detroit to keep in mind when considering the investment patterns in commercial, industrial, and multifamily properties: Population levels declined 28 percent from 2000 through 2015, but they have been declining at a lower rate in recent years (figure 1). The city exhibited consistent and severe population loss across most neighborhoods, though there were a few areas that saw little loss or even gained residents (figure 2). Detroit’s population from 2011 through 2015 (which we refer to as 2013 for shorthand) was spread throughout the city, but it was concentrated in the residential neighborhoods away from the city center (figure 3). COMING BACK FROM THE BRINK 3 The number of jobs located in Detroit has been more resilient than population levels. After declining by roughly 18,200 (7 percent) from its peak of approximately 264,500 in 2005 to a low of about 242,200 in 2010, the city has since added 4,100 net jobs (2 percent) (figure 1). From 2003 to 2014, most of the job growth was concentrated along the Detroit River and in the Central Business District and Lower Woodward Corridor (figure 4). Detroit’s jobs are highly concentrated in the Central Business District and Lower Woodward Corridor (figure 5). Looking at the price per square foot of single-family homes in Detroit, prices appear to have increased, up $2.39 from their low point. Values in 2015 stood at just 8 percent of their peak in 2005 (figure 6). (All dollar amounts in the brief are adjusted for inflation to 2015 dollars.) Sales of single-family homes in Detroit is down as well, from their peak of 13,500 in 2006 to roughly half that by 2015 (figure 7). Values for single-family housing range quite a bit across the city (figure 8), with appreciably higher values in the neighborhoods surrounding the Central Business District. FIGURE 1 Citywide Change in Detroit Population and Number of Jobs, 2000–15 Population Number of jobs 1,000,000 900,000 800,000 700,000 600,000 500,000 400,000 300,000 200,000 100,000 - 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Sources: US Census Bureau, Population Division; US Census Bureau, Longitudinal-Employer Household Dynamics (LEHD). Note: As of the drafting of this brief, population data available 2000 through 2015, jobs data available 2003 through 2014. 4 COMING BACK FROM THE BRINK FIGURE 2 Change in Detroit Population, 2000 to 2013 Sources: US Census Bureau, 2000 Decennial Census; US Census Bureau, American Community Survey (ACS) (2011–15 tract- level average). Notes: 2013 refers to 2011–15 (five-year estimates). a Population changed by fewer than 50 residents. FIGURE 3 Detroit Population, 2013 Source: US Census Bureau, ACS (2011–15 tract-level average). Note: 2013 refers to 2011–15 (five-year estimates). COMING BACK FROM THE BRINK 5 FIGURE 4 Change in Detroit Number of Jobs, 2003–14 Source: US Census Bureau, LEHD. a Employment changed by fewer than 25 jobs FIGURE 5 Detroit Number of Jobs, 2014 Source: US Census Bureau, LEHD.