Why These 5 Investors Are Interested in Detroit

Posted on June 2, 2015

Detroit, Michigan was once a manufacturing mecca, a city where industry and production combined with a rich culture all built around the automotive industry. Recent years have shown a downward trend into citywide chapter 9 bankruptcy, and the perception of Detroit has become one of a dangerous ghost town. The reality is, it’s a city waiting to make a comeback; a city of rich history and great potential, and it’s something many people are beginning to recognize.

What evidence is there of investor interest?

Dan Gilbert, the billionaire founder of Quicken Loans who began a stream of investments when he started buying up commercial property in Detroit in 2013, eventually engaged in a number of bidding wars over buildings including the David Stott, One Detroit Center, and Clark Lofts. In 2013, Gilbert had bought over 70 different properties, and DDI Group — a Chinese investment company — bought the old Free Press building on West Lafayette.

JPMorgan Chase has also been heavily involved in Detroit, investing some $34 million since May of 2014. “We have a long history doing business in Detroit and our commitment is a sustained, strategic, and comprehensive effort that supports innovative approaches to complex challenges,” said CEO Jamie Dimon, according to MarketWatch.

Warren Buffett, whose investment track record is fairly impressive, has also spoken with enthusiasm about the future of the city, according to MLive. He referred to its recent difficult financial period as similar to that of America’s big three auto makers going bankrupt. “You actually have a major industry now, a huge industry, that’s come back big, big time. And that’s been a difference not only to Detroit, that’s been a difference all over the United States. We needed it. The suppliers, everybody. The deals in Omaha, you name it,” he said. “The United States with a flourishing Detroit is going to be a lot better than a United States without one.”

Recently, a real estate investment firm from Chicago, Capri Investment Group LLC, began taking investors for a project in Detroit, specifically asking for $200 million to put toward multifamily dwellings. “Capri believes the attractiveness of living in Detroit’s urban core continues to grow, as evidenced by the recent success of multifamily investments; but the lack of high-quality, multifamily dwelling options remains an impediment to the revitalization of the greaterdowntown ,” reads the offering, according to Crain’s Detroit Business.

Dennis Bernard of Bernard Financial Group Inc. echoed the trend in movement towards city. “It’s a herd mentality,” he said. “When the word was bad about Detroit, they were told to get out. Now the herd mentality is to come to Detroit.”

Source: iStock

Source: iStock

Why invest?

Here we start to get into the meat of the issue, which is what makes Detroit an appealing investment in the first place. Detroit is a symbolic city for the U.S., as Buffet points out. As the economic recovery continues, the growth and development there makes it almost a poetic brand of sorts for businesses that can afford to put money there now and watch its progress back toward a major contributor.

The city is, in ways, a skeleton waiting to be fleshed out and built into something living once again. At the same time, it has a long and rich background already scrubbed into place, and that too can be an advantage. From a cultural perspective this becomes a particularly important and sensitive topic, especially for residents that have lived there for years.

From a monetary standpoint, now is a good time to buy property. The prices are low, and while competition is clearly building in response to attention, it’s still not the same as bidding for a building in a major metropolitan area such as New York City. And speaking of New York, we come to another argument in favor of Detroit. New York City was formerly the place that attracted creative types — artists, writers, and musicians who were struggling and broke. But they’re ultimately part of what made New York this very exclusive, expensive, and complex city with an amazing community.

Now, New York is no longer a realistic or affordable place for much of this kind of attention. Someone looking to start small, network, and grow big can’t afford to do that in New York as easily as in the past, and some are suggesting that Detroit may be the “New New York.”

Philip Kafka, founder of Prince Media Co. told Business Insider that Detroit presents an opportunity for experimenting in ways he would not be able to elsewhere. “I can do things there as a young guy that I could never imagine doing in New York or any other major market in the U.S.,” he said. In April, he was working toward opening a new business — a Thai restaurant, and was in search of local employees.

Finally, there’s the appeal of tax incentives to think about. Detroit real estate investments are sometimes eligible for the New Market Tax Credit (NMTC) which is meant to help draw small business and development efforts to Detroit. What it does is give tax credits of 39% of investments that are made into depressed socioeconomic areas. There are certain qualifiers to this, including that the investment must be at least $5 million and must remain in the area for at least a seven-year period.