EXPERT WITNESS: Development of the Detroit real-estate market

By Dr. John F. Sase with Gerard J. Senick "Every person who invests in well-selected real estate in a growing section of a prosperous community adopts the surest and safest method of becoming independent, for real estate is the basis of wealth." -Theodore Roosevelt Many attorneys who read this column own real estate or will invest in it at some time. In this column, we will explore the underpinnings of the Detroit real-estate market and, hopefully, will help our readership to avoid pain. Let us look at this market from the viewpoint of Urban History, Urban Economics, and Property Law. The field of Real Estate is comprised of elements of all three. Recently, I (Dr. Sase) have watched the television series Pawn Stars, a show on the History Channel that focuses on a family-owned pawn shop. From the title, I originally thought that the show would be a joke. However, as my wife and I watched, we realized that the shop owners who bought antique guns, autographed first-edition books, signed baseball bats, and a wide range of other goods really knew the history and scarcity of and the market demand for these items. Without a focused study of the market, these Pawn Stars never would have become successful, remained so, or gotten their own television show. The real-estate-investment market requires a similar application of intelligence and knowledge, especially under current conditions. In order to provide a personal perspective, I will share some insights based upon growing in a real-estate family (my dad was a broker and my stepmother worked in the field of abstracts and titles) as well as my formal study, writing, and teaching of Urban Economics and Real-Estate Markets at Wayne State University. If we Google the word "Detroit" on YouTube, we will find an abundance of videos, some of which bear such titles as "Detroit in Ruins!," "Detroit's Ghetto: The Worst Ghetto in the USA," and "Capital of Scrap: Dying Detroit Looting Itself." Many gawkers visually lap up the boneheaded sensationalism of the videos and dismiss the entire city as one huge sewer. However, learned potential investors see the opportunity in which properties have dropped to, or below, their firm-foundation value. Those who know Detroit well quickly will realize that most of this YouTube footage focuses on the same isolated parcels on the Lower East Side and Lower West Side of the city. The spread of each of these areas is one to two square miles. In these neighborhoods, the churches and schools have been removed from service and continue to be torn down. More than ninety percent of the homes in these areas have been razed or remain uninhabitable due to fire damage. However, these residences were designed and built to last for only sixty years, the expected length of the automotive boom that began in the 1920s. Therefore, this sequence of events, which we might term Creative Destructionism, is part of a logical progression. Due to the location of these parcels, it makes political and economic sense to prepare them for urban renewal. Contiguous to major rail lines, these residential parcels could be rezoned for commercial use. Nevertheless, most of the investment opportunities exist, or will exist, throughout the remainder of the city. Therefore, we turn our attention to garnering some basic insight as to how more than a dozen submarkets developed geographically and what differentiates one from the others. Essentially, we ask, "What makes Detroit real estate tick?" Location, Location, Location Throughout history, most cities have developed in much the same way as Detroit. Therefore, as old realtor humor goes, the three most important factors about real estate are "location, location, and location." Many of the enduring cities in the world have rivers running through them: Berlin, Warsaw, Budapest, Paris, London, New York, Chicago, and Detroit are but a few examples. Waterways provide sources of water for drinking and cleaning, routes for low-cost transportation, and barriers for defense. For instance, Paris was rooted on the Isle de Cite in the middle of the River Seine and was accessible only by a number of bridges connecting to the mainland. In the story of Abelard and Heloise, we read that twelfth-century Parisians fought back packs of roaming wolves during the dead of winter along these limited access routes. What has been called the Cite De Troit, Detroit, in recent centuries began as a settlement that has remained centered at this location since at least 800 BCE. "Say what?" you might think. In the lesser-known archeological history of Michigan, we find that the site of the present city as well as its major pathways, the avenues of Jefferson, Michigan, Grand River, Woodward, and Gratiot, date back to at least the civilization of mound-builders that flourished here from a half-millennium BCE to the fourteenth century CE. (In fact, we have evidence that many paths converging at Detroit existed during the Copper Culture of 2500 BCE.) When we explore sources like the Archeological Atlas of Michigan by Dr. Wilbur B. Hinsdale (University of Michigan Press, 1931), the hand-drawn survey maps of Douglass Houghton and Bela Hubbard from 1840, and other historical farm atlases of the city, we find that many Pre-Columbian burial sites in Detroit have been preserved as part of the property occupied by churches and other religious buildings in our modern era. We can surmise that some of the same locational attributes that drew the mound-builders to specific points in the area also attracted the more recent settlers from Europe. Many small towns, villages, and places existed in Wayne County toward the end of the nineteenth century. Of the fifty that were enveloped into the expanding City of Detroit, half were situated along the ancient trails now known as Grand River, Woodward, and Gratiot Avenues (see the videos Early Villages That Became Detroit, http://youtu.be/qT5vaRimnms and Early Villages of Detroit-Part 2, http://youtu.be/7PeHGUe1zRo). Some commercial/residential sites in Wayne County flourished, while others vanished. An example of the latter is Maybury, a village near Gratiot Avenue that was founded in the late 1800s. Maybury faded away into the property of Detroit City Airport, which opened in 1927. However, the vestiges of most of the absorbed towns and villages retained their economic importance as neighborhood commercial centers. Even though many of these loci may appear dilapidated, their location and inherent attributes continue to provide a significant core for any future revitalization. For example, places such as the village sites of Greenfield at the intersection of Grand River and Greenfield, Sand Hill (Old Redford) at Grand River and Lahser, and Griener at Gratiot and Seven Mile remind us that local economic hubs still exist throughout the city. The precise locales of these economic nodes were established in respect to important routes of travel as well as to the quality of available land. A quick study of the U.S. Geological Survey Maps of 1915 reminds us that Lake St. Clair was once much deeper. It submerged most of Wayne County and the southern portions of Oakland and Macomb Counties. Over a course of thousands of years, the periodic retreat of the waters left subsequent belts of sand, clay, and gravel that determined the present quality of the soil. Knowledgeable folks of past centuries determined which sites would sustain large-growth trees, grasslands, or very little vegetation. These planners also determined the levels of local water-tables and the resulting probability of recurrent flooding; incorrect decisions could land careless parties in the courtroom Judge Augustus Woodward for whom Woodward Avenue is named. Decisions on the location of preferred habitable sites reflected the careful study of these inherent conditions and access to least-cost transportation routes. Local zoning combined with winning competitive bids by various classes of commercial and residential developers established our current use of land. Rail Rights-of-Way and Industrial Parcels Next, let us direct our attention to the major human-established determinant of our local economic development. Before Detroit became known as the Automobile Capital of the World, the city was considered the Railroad Capital of the World. During the quarter-century following the American War Between the States (the Civil War), Detroit factories produced the greatest amount of steel rail of any site. This steel rail was used for the expansion of railroads through the western United States. Rail manufacturers used the old Bessemer process, which was brought from Germany to sites along the Detroit River in the late nineteenth century. This process requires a large amount of flowing water for cooling the metal. Detroit also headquartered the leading producers of steam locomotives, passenger railcars, and other rolling stock. Throughout this era, the present layout of railroad rights-of-way developed as the State of Michigan gave land grants to the existing railway companies in order to encourage economic development of outlying areas of the state. Along the rail-beds, adjacent land was set aside, zoned as industrial property, and sold to the highest commercial bidders, who valued the direct access to the lines. As a result, ninety percent of the industrial parcels in the city front the rail lines and ninety percent of the rail corridors are fronted by these industrial tracts (see the video Detroit Rise, Fall, and Rebirth-Part 1, http://youtu.be/q55xD50Bx8Y). As of 1885, the City of Detroit extended outward a mere three miles from the Central Business District to the beltway known as East and West Grand Boulevards. Before the city expanded, the pattern was predetermined by the layout of the rail lines and industrial sites. Present-day Detroit grew from the rapid annexation of more than forty established towns, villages, and places. Most of this growth occurred during the First World War through 1926 (see the video Detroit Growth by Annexation, http://youtu.be/5duzNAvJgnE). The placement of rail lines and industrial sites in the late nineteenth century resulted in the partition of the future city into fourteen isolated pockets of varying size. More than half of these pre-determined urban areas were smaller ones that developed into blue-collar neighborhoods surrounded by railways and industrial plants. These neighborhoods that contributed to Detroit's early industrialization helped to coin the term "Walk-to-Work Detroit''; workers lived close enough to their places of employment to enjoy a mid-day meal at home before returning to work for another five or six hours. Two larger areas and two medium-sized ones grew through multiple subdivisions into socio-economically stratified communities. The two medium-sized areas developed before the larger ones. The rectangular area of approximately seven square miles located across from Belle Isle grew first. It is readily identified by its peak neighborhood of Indian Village. As one moves east, west, and north of the Village, the residences become progressively simpler and usually smaller. Around the periphery of the area adjacent to the industrial parcels, we find more modest homes that were built as walk-to-work housing. The upper third of this community is demarcated by Gratiot Avenue. The north end of this area is identified as the bastion of the German-American Bund ("band"), a pro-Nazi organization established in 1936. Currently, this area is recognized as the turf of the National Socialist Movement. North by northwest of the Central Business District and Cultural Center of the city, a larger community developed. It was built upon the burgeoning automotive wealth of the first quarter of the twentieth century. This area, encompassing more than fourteen square miles can be identified in respect to three peak neighborhoods. The most prominent of these currently is known as the Boston-Edison Historic District and the contiguous Arden Park-East Boston Historic District. This development straddles Woodward Avenue about a mile north of West Grand Boulevard. The mid-sized neighborhood known as Russell Woods is situated southeast of the intersection of Livernois Avenue and Oakman Boulevard. The smallest of these neighborhoods is LaSalle Gardens, a community that extends around a small residential park to the north of West Grand Boulevard and to the east of Linwood Avenue. Eastside, Westside, All around the Town The two largest areas of Detroit include the northeast and northwest parts of the city. Major development of these areas occurred during the boom of the1920s. Further expansion happened after the Second World War. The northeast area encompasses more than thirty square miles. Technically, the more affluent parts of the northeast are separately incorporated cities: the five Grosse Pointe Communities and Harper Woods. So, the remaining land, which is part of the City of Detroit, is about twenty square miles. The entire northeast area emerged out of the older Hamtramck Township that bore the name of John Francis Hamtramck, second in command to General Anthony Wayne, the officer who took possession of the territory for the United States after the American Revolution. Due to the existence of a five-mile-long swamp along Mack Avenue, an area known to early French settlers as the residence of the local Loup Garou (werewolf), early surveys and road development reflected older methods of identifying land rights. The formation of long, narrow farms by habitants resulted in a subdivision and street layout that is significantly different than the square grid pattern that appears in Northwest Detroit. In contrast to the Northeast, most of the northwest part of the city and beyond was surveyed under the Public Land Survey System that was developed by Thomas Jefferson and others. Under this system, square townships of thirty-six square miles were established by measurement in respect to a base line (Eight Mile Road) and a meridian line (Meridian Road, east of Lansing). The survey method divides a standard township into thirty-six sections of one square mile each. It is set with a grid of east-west and north-south mile roads. Normally, each mile section is divided into four quarters; half-mile roads are positioned accordingly. The western portion of Northeast Detroit was measured under this newer system in the 1830s as Michigan approached statehood. All of the northwestern area was measured and subdivided under the Public Land Survey System. Northwest Detroit remains the largest area of the city. It encompasses approximately fifty square miles of land. Most of the northwest was developed during the automotive boom of the 1920s, with the periphery along the north and west city limits being completed after the Second World War. This wide rectangular part of the city often is viewed as two distinct areas. Most of the section in the eastern half developed south and westward from a group of peak neighborhoods north of the University of Detroit Mercy and west of the Detroit Golf Club and the former State Fairgrounds. The most affluent neighborhoods include the contiguous subdivisions of Palmer Woods, Sherwood Forest, and the University District. This half of the northwest area extends westward past Marygrove College to Greenfield Road. The western half of Northwest Detroit emerged out of the northeast portion of Redford Township and is centered at the peak neighborhoods of Rosedale Park and the contiguous South Rosedale and Grandmont communities. Due to geographic proximity, the affluence of this part of Northwest Detroit has been associated with Detroit Diesel and the former American Motors Corporation and Massey-Ferguson Tractor plants. Two Lone Ducks In order to avoid omission, let us mention the cities of Highland Park and Hamtramck. Both cities were able to remain independent during the period of rapid expansion by Detroit that engulfed other towns and villages. These cities retained their status because the City of Detroit Charter requires that Detroit must completely surround an entity in order to incorporate it involuntarily into the City of Detroit. However, Highland Park and Hamtramck are joined together along a small piece of property that used to be known as Kenwood, a station-stop along the Grand Trunk Railroad that now is used for industry. As neither Hamtramck nor Highland Park can be surrounded individually, they cannot be incorporated into Detroit involuntarily. This situation has remained a point of legal contention for almost a century. So, what finally determined the geographic growth and development of the city? From our discussion, we can conclude that it was due to the riverside (straitside) location and inherent soil conditions, the Pre-Columbian radial-road system, the mixture of survey methods and resulting surface-street layout, and the rail and industrial development of the late nineteenth century. As a whole, the city is viewed by some observers as a cluster of contiguous sub-cities, each with its own social, political, and economic diversity. Therefore, rather than considering the Detroit real-estate market as a homogeneous unit, it may be wise to approach it geographically as a number of separate sub-markets. Tax Base and Property Values Presently, the City of Detroit and the County of Wayne have too many unproductive properties in their tax portfolio. In addition, taxes for productive (non-abandoned residential and commercial) properties have grown disproportionately for taxpayers in respect to market values. Hence, the common goal for property owners and local government is to increase the market value of city properties and to restore nonproductive ones to the tax role. There is no one, simple solution to this problem as property values and the city/county tax base depend upon commercial and residential demand for land and buildings. Commercial demand reflects sustainment of present businesses and the development of new ones. Conjointly, residential demand rises and falls with employment opportunities. Fossilization (in which major advancements in product and process slow down) has caused the automotive industry to spread throughout the world. The auto industry and related industries have become more high-tech, thus requiring a more skilled labor force. Though significantly smaller, the automotive industry in Detroit will continue to play a major, but more limited, role in the local economy. Alternatively, area companies in biotechnology, computers, and other fields continue to grow and to fill a portion of the basic-industry gap. Furthermore, numerous fine institutions of higher education increasingly provide opportunities for international students in an affordable "college-town" atmosphere. The larger institutions continue to grow as centers of research and development. In additions, many large hospital systems have taken an advancing role in medical research and education as well as in patient care. Finally, other opportunities in the fields of freight transportation and logistics appear along the sidelines, ready to come into play. What we make clear to investors, attorneys, and others is that Detroit probably will not experience a rapid turnaround. All of the opportunities mentioned in the preceding paragraph will develop slowly. Also, in respect to both commercial and residential demand, Detroit cannot expect to return to a substantial income-base that was supported previously by hundreds of thousands of high-paying unskilled and semi-skilled manufacturing jobs. As Head of Research for the Focus: HOPE Machinist Training Program during the 1990s, I clearly saw the writing on the wall. Detroit can and will rise again. However, it can only happen through developing a workforce that possesses high levels of education, knowledge, and world-class competitive skills. Not intending to sound harsh, but the time has come for individuals either to move forward and upward or to go back to the farm. Apart from a limited number of low-paying, lower-skilled jobs, there is no promise or likelihood of sustainable employment for anyone without the acumen that employers locating in Southeast Michigan need to survive in the highly competitive global markets throughout this century. For attorneys, I predict that, with this progression, we will see significant increases in the volume of work in Real Property, Intellectual Property, and other areas of Law. By analyzing the history of the Real-Estate Market in Detroit, those involved with Real Property Law will find information and case leads as well as insights that will guide them to a better understanding of the market. ---------- A PDF copy of this article is posted at http://www.saseassociates.com/legalnewscolumn.html. We continue to post videos related to our monthly column on www.YouTube.com/SaseAssociates in the Legal News Features playlist. ---------- Dr. John F. Sase of SASE Associates, Economic Consulting and Research, earned his MBA at the University of Detroit and his Ph.D. in Economics at Wayne State University. He is a graduated of the University of Detroit Jesuit High School. Dr. Sase can be reached at (248) 569-5228 and by e-mail at drjohn@saseassociates.com. Gerard J. Senick is a freelance writer, editor, and musician. He earned his degree in English at the University of Detroit and was a Supervisory Editor at Gale Research Company (now Cengage) for more than 20 years. Currently, he edits books for publication and gives seminars on writing. Mr. Senick can be reached at (313) 342-4048 and by e-mail at gary@senick-editing.com. Published: Wed, Sep 19, 2012