Has Targeting Specific Detroit Neighborhoods for Public Investment Resulted in Higher Home Values?

By Martin Lavelle

In this blog entry, I look at whether targeted public investments in certain Detroit neighborhoods has helped produce higher homes values in those parts of the city. Before going over the results of such efforts, first let me explain why some have considered targeted investments to be a worthwhile approach to addressing some of the city’s problems.

In 1950, Detroit’s population reached its peak of 1.8 million.(1) At that time, Detroit’s land area of 140 square miles seemed appropriate for its population. Since then, Detroit has suffered a significant loss of population (a well-documented long-term trend). The U.S. Census Bureau’s 2016 estimate put Detroit’s population at 672,795.(2) Detroit’s population hasn’t been that low since the 1910s (over that decade, it more than doubled from 466,000 in 1910 to 994,000 in 1920).(3) Nowadays, Detroit’s footprint seems to be far too large for its number of residents. Moreover, dense clusters of population can be hard to find in Detroit’s 100-plus neighborhoods.

Over the past decade, the Detroit city government has undertaken many efforts to promote population density in the city’s neighborhoods. In 2010, then-Mayor Dave Bing announced the start of the Detroit Works Project—an effort to come up with both short- and long-term plans to improve the city. Included in this project was the provision of financial incentives for residents to relocate to more stable neighborhoods in order to deliver city services more efficiently.(4) After that part of the initiative was vociferously opposed by city residents, Mayor Bing decided in 2011 to focus on a couple of smaller initiatives. First, Detroit police officers were provided financial incentives to relocate to the Boston–Edison and East English Village neighborhoods.(5) Second, later in the year, Mayor Bing designated three Detroit neighborhoods as Detroit Works “demonstration areas,” which would receive increased city services. Those three demonstration areas were Bagley, Boston–Edison, and Hubbard Farms.(6)

So, for over six years now, the four neighborhoods of Bagley, Boston–Edison, East English Village, and Hubbard Farms have received increased investments from the city government. Arguably, the increased government service delivery and/or police presence should have made those neighborhoods more desirable places to live. And the greater desirability of these areas should be reflected in their having higher home values now. In this blog entry, I examine the changes in home sale prices in those four neighborhoods since 2011 (when Mayor Bing began his initiatives). I also explore changes in home sale prices in the neighborhoods adjacent to the four that received investments from the city since 2011 to see if targeted neighborhood funding has made a difference.

Profiles of Detroit demonstration neighborhoods(7)

For those unfamiliar with Detroit neighborhoods, I provide here brief profiles of the four neighborhoods of interest. For the sake of simplicity, I will refer to all four as “demonstration neighborhoods” (though technically speaking, East English Village was only targeted with incentives to bring in more police residents and not designated by the Bing administration as a “demonstration area”).

Bagley

The Bagley neighborhood is located in northwest Detroit, bordered by 8 Mile Road to the north, McNichols to the south, Wyoming to the west, and Livernois to the east. The neighborhood anchors are Sinai-Grace Hospital, Marygrove College, and the University of Detroit Mercy. Across Livernois Avenue from Bagley are the even more stable, relatively higher-income Sherwood Forest and Palmer Woods neighborhoods, which border the Detroit Golf Club. After targeted by Mayor Bing for demonstration area funding in 2011, the Detroit Future City plan highlighted northwest Detroit and the Bagley neighborhood as a primary employment area with the potential for larger-scale job growth.

Boston–Edison

Boston–Edison is bordered by Woodward Avenue to the east, Linwood Avenue to the west, Glynn Court to the north, and Edison Avenue to the south. This neighborhood was established shortly after the turn of the twentieth century, after Detroit’s elite made the trek north up Woodward Avenue from Brush Park.(8) Boston–Edison is situated about halfway between struggling Highland Park and the northern edge of vibrant Midtown. Known for its wide, tree-lined avenues and large green public spaces, the neighborhood includes the Motown Mansion, the property built and lived in by Berry Gordy, Jr., when he ran Motown Records.(9)

East English Village(10)

East English Village was originally established in northeast Detroit as five ribbon farms in the 1800s. However, it wasn’t until the 1930s when home construction and migration into the neighborhood accelerated. The neighborhood’s boundaries are those that were laid out in the 1800s: Harper Avenue to the north, Mack Avenue to the south, Outer Drive to the west, and Cadieux Road to the east. East English Village is situated near the Grosse Pointes. A new secondary school, the East English Village High School, was constructed there in 2012.(11)

Hubbard Farms(12)

Hubbard Farms is situated in southwest Detroit, and is bordered by Vernor Highway to the north, Interstate 75 to the south, Clark Avenue to the west, and Grand Boulevard to the east. Hubbard Farms is named after Bela Hubbard, a geologist who became a lawyer and real estate developer. The majority of Hubbard Farms was developed in the late nineteenth and early twentieth centuries.(13) The early residents of Hubbard Farms were industrial workers who worked in Detroit factories.(14)

Background

Before diving into the analysis, I want to provide some sense of the state of Detroit’s housing market. To this end, I present details on the types of transactions conducted in the demonstration neighborhoods and outline Detroit’s home assessment process.

Table 1. Summary statistics of home purchases in select Detroit neighborhoods, 2010–15
Note: REO means real estate owned, and refers to property owned by a lender (typically, a bank or government entity) following an unsuccessful sale at a foreclosure auction.
Source: Author’s calculations based on data from CoreLogic Real Estate.

Table 1 provides some color on home sales in Detroit. Not surprisingly, all but a few of the transactions involved existing homes. Additionally, the majority of the sales involved foreclosed homes (real estate owned, or REO, sales) and was paid for with cash. Interestingly, a higher percentage of home sales involved mortgages in the demonstration neighborhoods than in the nondemonstration neighborhoods. A further look at the mortgage data reveals that, overall, home sales involving mortgages made up a higher percentage of transactions in the demonstration neighborhoods after the city government filed for bankruptcy (in July 2013) than before it did.(15) A greater share of home sales involving mortgages and a lower percentage of foreclosed sales in the demonstration neighborhoods relative to the nondemonstration neighborhoods may show the degree of stability already present in the former before Mayor Bing’s initiatives began in 2011. Also, a deeper dive into the transaction data reveals that sales rose in all but one of the neighborhoods analyzed in the period 2010–15 after Detroit entered into bankruptcy protection in July 2013.

Before sharing my full analysis of the demonstration neighborhoods, I will describe the assessment process that determines the market values of homes and its implementation in Detroit. All Detroit properties are required to be assessed annually. And 30% of Detroit properties require annual on-site visits.(16) Each property is assessed a reasonable market value based on local real estate market conditions. The study of housing market includes the inspection of new construction, analysis of market conditions, and observation of neighborhood advantages and disadvantages. Market conditions take into account property, neighborhood, and homeowner characteristics. Property characteristics include the age of the house, total living area, and lot size. Neighborhood characteristics consist of the number of sales, the percentage of nonresidential properties, the percentage of mixed-use properties, and other economic and social characteristics. Homeowner characteristics include whether or not the homeowner is an in-state or out-of-state owner and if the home is the owner’s primary residence.

In recent years, Detroit struggled to conduct assessments consistent with the practices outlined in the previous paragraph. In addition to the inconsistent and/or unsound practices followed by city assessors, the unhealthy local housing market contributed to the recent erratic assessments of Detroit properties. The Detroit city government was slow to react. Finally, in 2012, the Detroit Auditor General indicated layoffs in recent years and the lack of other resources contributed to the overassessments of home values.(17) However, it wasn’t until after the Detroit News reported on the overassessments in 2013 that the Michigan Tax Commission opened a probe into Detroit’s assessment process. The probe, which found that the average Detroit property hasn’t been assessed in 30 years,(18) resulted in the city’s effort to complete its first city-wide reassessment of property values since the 1950s. The probe finished earlier in 2017. The completion of the citywide assessment will most likely lower most of Detroit home market values further.(19)

Analysis

Chart 1 shows the median home sale prices in the demonstration neighborhoods versus such prices in the adjacent neighborhoods. The demonstration neighborhoods are depicted by the darker shades of colors in the graph.

Chart 1. Median home sale price, 2015: Detroit and select Detroit neighborhoods
Source: Author’s calculations based on data from CoreLogic Real Estate.

Median home sale prices of the demonstration neighborhoods were not only well above those of the adjacent neighborhoods but that of Detroit as a whole. Not surprisingly, the largest gap in median home sale prices between a demonstration neighborhood and an adjacent neighborhood is for Boston–Edison and LaSalle Gardens. As mentioned earlier, Boston–Edison was a destination for Detroit’s elite in the early twentieth century. Even during Detroit’s tougher times, Boston–Edison was still a desirable neighborhood. Meanwhile, the gap in median home sales prices between Bagley and its two adjacent neighborhoods can be explained by their respective proximity to Bagley’s neighborhood anchors (such as Sinai-Grace Hospital) and the quality of homes in each neighborhood. All four demonstration neighborhoods possess relatively strong homeowners’ associations.

Chart 2 shows the change in median home sales prices between 2010 and 2015. I use 2010 as the starting point because it is the first full year of data available.

Chart 2. Percentage change in median home sale price, 2010–15: Detroit and select Detroit neighborhoods
Source: Author’s calculations based on data from CoreLogic Real Estate.

During the period 2010–15, Detroit’s median home sale price rose 21%. Over those years, Bagley and East English Village saw home prices increase more percentage wise than the city as a whole.(20) Median home sale prices in all four demonstration neighborhoods outperformed those of their adjacent neighborhoods. Only four neighborhoods saw positive changes in their median home sale prices. Median home sale prices for three of the four demonstration neighborhoods (the exception being Boston–Edison) were higher in 2015 than in 2010 (before Mayor Bing’s initiatives began). The same can only be said of one of the neighborhoods used for comparison, Pembroke, which is south of Bagley in northwest Detroit. Despite these findings, it should be noted that the demonstration neighborhoods began the period with higher home sale prices than the neighborhoods adjacent to them.

Conclusion

The City of Detroit announced in 2011 that specific neighborhoods would be designated as demonstration areas receiving increased city services. That year, the city government also announced certain neighborhoods would be targeted with incentives for police to relocate to them. Following the implementation of both of those initiatives, the median home sale prices in what I’ve referred to as the “demonstration neighborhoods” rose through 2015, outperforming median home sale prices in adjacent neighborhoods. This fact does not necessarily mean that targeted neighborhood funding was entirely successful. The demonstration neighborhoods could still be benefiting substantially from their strong historical roots, which made them desirable before any city investments took place. Also, Detroit’s housing market conditions (e.g., fairly low sales activity with continued prevalence of cash and foreclosure sales) may have slanted the data in favor of the demonstration neighborhoods. However, one could argue these results helped persuade current Detroit mayor, Mike Duggan, to pursue similar initiatives in the Clark Park, Fitzgerald (analyzed above), and West Village neighborhoods.(21)

(1) See https://www.census.gov/population/www/documentation/twps0027/tab18.txt.
(2) See https://www.census.gov/quickfacts/fact/table/detroitcitymichigan/PST045216.
(3) See http://www.mlive.com/news/index.ssf/2017/05/detroit_population_drops_again.html.
(4) See http://www.mlive.com/news/detroit/index.ssf/2010/02/detroit_mayor_dave_bing_reloca.html.
(5) See http://www.mlive.com/news/detroit/index.ssf/2011/02/detroit_to_renovate_boston-edi.html.
(6) See http://www.crainsdetroit.com/article/20110727/FREE/110729908/detroit-works-project-to-be-measured-in-three-demonstration-areas.
(7) Neighborhood geographic boundaries were determined by the author using information from https://localwiki.org/detroit/Detroit_Works_Project, https://en.wikipedia.org/wiki/List_of_neighborhoods_in_Detroit, and https://detroit.curbed.com/2013/8/20/10206758/finally-a-complete-attempt-at-mapping-detroits-neighborhoods. The neighborhoods chosen to be compared with the demonstration areas are largely residential and are not separated by a significant natural or man-made (expressway) barrier.
(8) See https://www.historicbostonedison.org/History.
(9) See https://www.historicbostonedison.org/Musicians-&-Artists-of-BE#gordy.
(10) See http://www.eastenglishvillage.org/history.php.
(11) See http://detroitk12.org/schools/eevpa/.
(12) See http://www.detroit1701.org/HubbardFarms.htm.
(13) See http://www.detroit1701.org/HubbardFarms.htm.
(14) See http://www.detroit1701.org/HubbardFarms.htm.
(15) The City of Detroit filed for municipal bankruptcy protection in July 2013 (and officially exited bankruptcy in December 2014).
(16) See p. 6 of http://www.detroitmi.gov/Portals/0/docs/Auditor%20General/Performance%20Audits/2012/Finance_Assessment_Performance_07-2008_06-2011.pdf.
(17) See https://www.metrotimes.com/detroit/could-detroits-tax-foreclosures-be-unconstitutional/Content?oid=4522278.
(18) See p. 9 of http://www.detroitmi.gov/Portals/0/docs/Auditor%20General/Performance%20Audits/2012/Finance_Assessment_Performance_07-2008_06-2011.pdf.
(19) See http://www.detroitnews.com/story/news/local/detroit-city/2017/08/30/state-lifts-oversight-detroit-property-assessments/105130886/.
(20) When 2016 data are included, Boston-Edison falls into this category as well.
(21) See http://www.crainsdetroit.com/article/20170324/NEWS/170329889/study-detroiters-must-travel-outside-neighborhoods-for-groceries.

A Look into Changes in Home Prices in Detroit and Wayne County, Michigan, Between 1991 and 2016

By Martin Lavelle and Dan McMillen

Since the early 1990s, the housing market in Wayne County, Michigan, whose county seat is Detroit, has experienced substantial price swings. Housing market volatility has varied by municipality (and by neighborhood within Detroit). Changes in the Wayne County housing market show us which areas have thrived and which have struggled in the past quarter century or so. In this blog post, we take a look at how home prices across the county have changed between 1991 and 2016, with a focus on changes in the Detroit housing market.

Analysis of maps

We used a nonparametric procedure to estimate hedonic price indexes for each census tract (or neighborhood in Detroit) for five-year intervals throughout the overall sample period between 1991 and 2016.(1) The nonparametric procedure uses the census tract (or Detroit neighborhood) centroids as target points, and then just uses weighted least squares with more weight on sales near the target points.

Before going over each of our five maps individually, we want to highlight a few aspects common to all of them. The numbered and colored axis on the right of each map shows the five-year percentage change in home sale prices. Broadly speaking, red areas indicate relatively hotter housing markets (within Wayne County), while blue areas indicate relatively cooler housing markets. The darker a shade of red an area is, the relatively more positive (or less negative) the change in home sale prices; the darker a shade of blue an area is, the relatively less positive (or more negative) the change in home sale prices.

Each map covers all of Wayne County. Wayne County’s boundaries are the Detroit River to the east; 8 Mile Road to the north; Napier Road and Rawsonville Road to the southwest; and Oakville-Waltz Road, Will Carleton Road, and the Huron River to the south. The Grosse Pointe communities begin in the northeastern corner of Wayne County. In each map, the city of Detroit’s borders appear as thick black lines. Going west from Detroit’s city center, one would encounter Redford Township, Livonia, and Plymouth. Going southwest from Detroit’s city center, one would travel through Dearborn, Metro Airport, Wayne, Belleville, and Canton Township. South of Detroit lie Allen Park, plus the Downriver communities that include Lincoln Park, Trenton, and Woodhaven.

The two smaller areas demarcated with thick black lines within Detroit’s borders are Highland Park and Hamtramck; both cities were outside of Detroit when they were originally founded, and they decided to remain incorporated after Detroit expanded further northward in the first quarter of the twentieth century.(2) The white areas just outside of Southwest Detroit are Ford’s corporate headquarters and its Rouge River plant and associated industrial areas.

Map 1. Home price changes in Wayne County, Michigan, 1991 to 1996
Source: Authors’ calculations based on data from CoreLogic Real Estate.

In the first half of the 1990s, much of Wayne County saw increases in home sale prices. Notably, there isn’t much variance in home sale price changes in map 1. There were areas both inside and outside Detroit that experienced the greatest relative increases in home sale prices. Within the city, Midtown and northwest Detroit saw the largest positive changes in home sale prices. Outside of Detroit, the exurban areas of Plymouth and Canton Township experienced the greatest positive changes. With the exception of Dearborn, which on the map appears to be poking Detroit’s southwest border, Detroit’s first ring of suburbs experienced increases in home sale prices that were at the lower end of the spectrum of gains.

The results in map 1 are in line with Detroit’s economic narrative at the time. Detroit enjoyed an economic boom in the first half of the 1990s (following the brief national recession of 1990–91). One factor that specifically helped Detroit back then was low oil prices, which boosted sales of sport utility vehicles (SUVs) made by the Detroit Three automakers (Chrysler, Ford, and General Motors). Higher profits at the Detroit auto manufacturers had a positive ripple effect on the local and regional economies. Another factor helping the Detroit area was stable public finances. An often overlooked achievement of the 1990s was the fact that Mayor Coleman Young’s administration balanced Detroit’s budget before his tenure ended in the mid-1990s.

Map 2. Home price changes in Wayne County, Michigan, 1996 to 2001
Source: Authors’ calculations based on data from CoreLogic Real Estate.

During the latter half of the 1990s and the beginning of the twenty-first century, Wayne County continued to see widespread increases in home sale prices, though with slightly greater variance than in first half of the 1990s. Large home sale price increases were found throughout Detroit. During the late ‘90s, government payrolls were expanded, adding to Detroit residents’ disposable incomes. An increase in local government jobs, combined with the surging automotive industry and general economy, led to a sharp decrease in unemployment in Detroit: The city’s unemployment rate averaged 6.6% in 2000, a significant drop from the 1990 average of 15.0%.(3) Meanwhile, Detroit’s first ring of suburbs witnessed a slight pickup in growth in home sale prices. However, Wayne County’s exurban areas saw a modest deceleration in their rate of growth in home sale prices. Overall, the Wayne County housing market was strong throughout the 1990s.

Significant changes were made to how state and local revenues would be collected and used between 1996 and 2001. Dennis Archer replaced Coleman Young as the mayor of Detroit (in 1994) and added to city payrolls, which raised the disposable income of the city at the cost of unbalancing Detroit’s budget. Also, Proposal A, Michigan’s large school-reform bill,(4) flushed Detroit Public Schools with additional cash, adding to the district’s appeal. And state revenue sharing hadn’t been cut yet, giving city government additional resources for services. A lot of economic and fiscal factors worked in Detroit’s favor during the 1990s, most likely making positive impacts on the city’s housing market. However, the next decade would reveal the mistakes of increasing government spending as Detroit’s population (i.e., its tax base) continued to shrink.

Map 3. Home price changes in Wayne County, Michigan, 2001 to 2006
Source: Authors’ calculations based on data from CoreLogic Real Estate.

Home sale price appreciation endured through 2006 across Wayne County, though with slightly greater variance compared with the appreciation seen in the previous five-year interval. Again, the largest relative gains in home sale prices were in Detroit. Gains in home sale prices flattened in the first ring of suburbs, whereas some exurban areas saw a slight pickup in growth. From looking at map 3, one might conclude that the Detroit and Wayne County economies had stayed the course and built on the 1990s expansion. Unfortunately, that wasn’t the case. After the turn of the millennium, the subprime housing crisis began. During the early 2000s, Detroit didn’t see the massive boom in homebuilding or the surge in home values seen in places such as Las Vegas, Phoenix, Tampa, and southern California. That said, Detroit home values remained elevated as a result of the U.S. housing bubble.

After falling to a low of 3.7% in 2000, Michigan’s unemployment rate rose to 7.2% in 2003.(5) The state’s unemployment rate bounced around that rate until it began to rise again with the beginning of the U.S. Great Recession in December 2007. Many analysts have contended Michigan’s economy fell into recession sometime late in 2003, as the boom in SUV sales receded with the rising price of fuel. Then, beginning in 2005, layoffs and voluntary buyouts of long-tenured employees of the Detroit Three automakers began, helping to slow economic activity further. Simultaneously, Detroit’s economic momentum was halted. Detroit residents were already weighed down by high city income tax rates, and revenues from its local casino wagering taxes began to wane. Moreover, the city’s unemployment rate rose quickly after hitting its 2000 low; it reached 14.1% in 2004, and lingered there until late 2007.(6)

Map 4. Home price changes in Wayne County, Michigan, 2006 to 2011
Source: Authors’ calculations based on data from CoreLogic Real Estate.

After experiencing widespread home sale price increases between 1991 and 2006, home sales price decreases permeated throughout much of Wayne County between 2006 and 2011. Of all the Wayne County municipalities, Detroit suffered the most from the popping of the housing bubble. Even areas of the city that one might assume would be more stable than others (for instance, Midtown Detroit) suffered sizable home sale price decreases. The further out one went from the city, the lesser the decline in home sale prices. However, almost no area was spared. One can almost divide the map into auto-industry-dependent, blue-collar areas and relatively more diversified, white-collar areas (the blue areas were the former, the red areas the latter). Another thing to keep in mind is that outmigration accelerated during this time. Economic misfortunes, early retirements, and the aging of the population persuaded many to leave and seek residence elsewhere.

Map 5. Home price changes in Wayne County, Michigan, 2011 to 2016
Source: Authors’ calculations based on data from CoreLogic Real Estate.

The year 2011 marked a turning point for Wayne County’s economy. In that year, Dan Gilbert moved the headquarters of Quicken Loans downtown and started incentivizing his employees to live there as well. Also in 2011, Gilbert began buying downtown real estate. Now, Gilbert owns over 90 buildings downtown. The year 2011 was also when Mayor Dave Bing announced his intention to supply additional funding to certain stable neighborhoods of Detroit that were deemed “demonstration areas.”(7) The Detroit neighborhood of Boston–Edison (one of the demonstration areas) shows up in map 5 as a lighter red area (indicating it had modest home price increases). Bagley (another demonstration area) is one of the lighter blue Detroit neighborhoods (indicating a slight rebound in home values there).

In map 5, Detroit’s Downtown, Midtown, and Corktown, plus their surrounding areas, show signs of life. As we mentioned, Dan Gilbert was the catalyst for downtown investment. And it turns out that Midtown Detroit, Inc., was the catalyst for Midtown investment. In 2011, Midtown Detroit, Inc., Detroit Medical Center, Wayne State, and Henry Ford Health Systems announced the start of the Live Midtown program, which provided monetary incentives for people to move to Midtown.(8) This program helped increase the rental occupancy rate in Midtown Detroit to nearly 100% in 2014.(9) And high occupancy rates have endured in Midtown even with the additional living capacity built over the past few years.(10) In Corktown, the owners of Slows BBQ helped draw new investment to other vacant Michigan Avenue storefronts, improving the neighborhood’s attractiveness.

Conclusion

During the late 1990s and early 2000s, home sale prices rose much more rapidly in (already relatively low-priced) Detroit neighborhoods than in many other parts of Wayne County (see map 2). However, these same Detroit neighborhoods were the areas where home prices fell more significantly as Michigan endured its one-state recession from around 2003 through 2009 and as the U.S. housing bubble burst in 2006 (see map 4).

Map 5 (which describes the five-year home price changes between 2011 and 2016) almost perfectly demonstrates the argument that there are now “two Detroits,” as public and private investments to date have helped only some parts of Detroit to revitalize and raise their home values. The areas in red are where the bulk of Detroit’s revitalization is taking place, while the areas in blue are the neighborhoods still waiting to participate in the city’s rebound. At this point, the blue areas in Detroit are vastly outnumbered by the red ones. But many public sector and private sector efforts are under way to improve the city’s living conditions, which may lead to higher home prices (and, in turn, higher tax receipts and perhaps expansions of city services to draw more people). So, in the coming years, Detroit may start to see its red neighborhoods outnumbering its blue ones.

(1) Nonparametric regressions are used when the relationship between the independent and dependent variables aren’t already known. The regression analysis from the data provided determines the relationship between the independent and dependent variables. A hedonic price index identifies price factors (the characteristics of the good itself and the external factors affecting its sale). (For more on census tracts, see https://www.census.gov/geo/reference/webatlas/tracts.html.) Details on our procedure are available upon request.
(2) For details, see https://wdet.org/posts/2014/09/19/80119-why-do-hamtramck-and-highland-park-exist-inside-the-city-of-detroit/.
(3) Author’s calculations based on data from the U.S. Bureau of Labor Statistics.
(4) See http://www.mlive.com/education/index.ssf/2014/04/a_brief_history_of_proposal_a.html.
(5) Author’s calculations using data from the U.S. Bureau of Labor Statistics
(6) U.S. Bureau of Labor Statistics.
(7) See http://www.crainsdetroit.com/article/20110727/FREE/110729908/detroit-works-project-to-be-measured-in-three-demonstration-areas.
(8) See https://www.freep.com/story/news/local/michigan/detroit/2015/11/01/midtown-incentives-boost-diversity/74014992/.
(9) See http://www.mlive.com/business/detroit/index.ssf/2014/04/with_shortage_of_housing_optio.html.
(10) See https://detroit.curbed.com/2018/2/20/17031664/report-apartments-downtown-highest-average-rent-detroit and https://www.freep.com/story/money/business/2017/02/18/detroit-apartments-real-estate/97640058/.

Potential Seventh District Contenders for Amazon’s HQ2

By Martin Lavelle

In September 2017, Amazon announced its search for a second North American headquarters location. Ultimately, 238 North American metropolitan areas submitted bids within the six-week allotted period, including several in the Seventh District (1). In this blog, I examine the potential Seventh District contenders based on some important criteria relating to logistics, business environment, and labor force.

Amazon’s request for proposals laid out its location preferences:
• Metropolitan areas with more than 1 million people
• A stable and business-friendly environment
• Urban or suburban locations with the potential to attract and retain strong technical talent
• Communities that think big and creatively when considering locations and real estate options

In the Seventh District, the metropolitan areas with a population of greater than 1 million are Chicago, Detroit (2), Grand Rapids, MI, Indianapolis, and Milwaukee.

Logistics

The table below shows that each of the Seventh District’s metropolitan areas with more than 1 million residents fulfills most or all of Amazon’s other logistical preferences, though to varying extents.

Table 1: Seventh District MSAs and Amazon’s Logistical Requirements (3).

Chicago possesses the flexibility for Amazon to locate anywhere in its metro area because of the various modes of mass transit available to Chicagoland commuters. Milwaukee’s bus rapid transit lines offer some flexibility as well as to potential HQ2 locations. Chicago and Detroit provide an adequate number of air connections to Amazon’s most important North American metropolitan areas. In addition, O’Hare and Detroit Metro Airports are large enough to potentially adjust operations and increase connections.
Logistics also include freeway networks and the ability of employees to navigate freeways. The work/life balance is disrupted the longer one spends stuck in traffic. The table below shows how the Seventh District metropolitan areas with more than 1 million people rank relative to other major North American metropolitan areas with regard to how many hours one
spends in congested traffic annually.

Table 2: Select North American Metro Areas by Traffic Congestion (4)

While it may not seem like it, especially during road construction season, Seventh District metropolitan areas rank favorably on congestion, relative to population size. What Detroit and Indianapolis lack in mass transit, they compensate for with the number of freeway connections. However, according to the 2015 American Community Survey (ACS), Chicago and Detroit have higher drive and total commute times than the national average in each category. Per the ACS, the percentage of Chicago commuters that utilize some mode of mass transit is slightly above 10%, similar to that of Seattle.

Business Environment

Amazon’s second location requirements include a stable and business-friendly environment. States with more business-friendly tax climates tend to use their corporate tax structure as an incentive to attract new business. The table below shows how Seventh District states rank in the 2017 Overall and Corporate Business Tax Climate Index.

Table 3: Ranking of Select U.S. States in the 2018 Overall and Corporate Business Tax Climate Index (5)

Source: https://statetaxindex.org.

The overall rankings of the Seventh District states compare favorably relative to some states with sites that are considered top contenders for Amazon HQ2 such as Minneapolis, MN and Washington D.C., which are included in the above and remaining tables. Indiana and Michigan rate in the top half, helped by the fact they have the lowest flat individual income and corporate income tax rates among the Seventh District states (6). Illinois fell out of the top half in the most recent annual update to the rankings. Meanwhile, Michigan has moved into the top 10 overall.

Theoretically, business activity levels should increase if the state is relatively friendlier to business. One could surmise that a greater number of businesses would place their corporate headquarters in a state that ranks as more accommodating to business. The chart below plots a state’s corporate tax climate ranking versus the number of Fortune 500 companies headquartered in that particular state.

Chart 1: Corporate Business Tax Climate Index Ranking vs. Actual and Predicted Fortune 500 Headquarters

Sources: https://www.ceo.com/entrepreneurial_ceo/two-charts-showing-states-with-the-most-fortune-500-companies and https://statetaxindex.org.

As shown by the green trend line on the chart, there’s actually a slight positive relationship between a state’s corporate tax climate index ranking and the number of Fortune 500 companies headquartered there. The lower the state is ranked, the greater the number of corporate headquarters located in that particular state. That’s the opposite of what one would expect, which is the red dotted line on the chart above.

So if a state’s overall business tax climate doesn’t impact where a corporation will locate its head offices, what variable does influence those decisions? Another example of a state with a business-friendly environment is one that offers incentives to help influence companies’ location decisions. The table below displays how the Seventh District states with eligible metropolitan areas compare with others in that dimension.

Table 4: Annual Business Incentives Per Employee

Source: Moody’s Analytics

By this measure, Michigan ranks highly relative to sites in states that many analysts think have major contenders to land Amazon’s HQ2 such as Austin, TX; Philadelphia, PA; Boston, MA; Portland, OR; Denver, CO; Atlanta, GA, San Francisco, CA; Raleigh, NC; and Salt Lake City, UT. Michigan is noticeably more generous with incentives than other Seventh District states. A major reason companies seek incentives is to offset tax liabilities. The Upjohn Institute created a database with national tax and incentive data, as well as state tax and incentive data for 33 states across 45 industries over the past 26 years. From the database, one can determine the magnitude of a state’s tax liability and incentive for a given industry as a percentage of that industry’s economic value-added. Then, by taking the incentive percentage (of its value-added) for a given state and dividing that by its tax percentage (of its value-added), one can determine to what extent a state’s incentives offset an industry’s tax liabilities in that specific state. The table below compares state tax liabilities and incentive offerings as a percentage of their respective value-added, along with the percentage of state tax liabilities covered by incentive offerings for some of the Amazon HQ2 contenders and the U.S. overall.

Table 5: Incentives and Taxes by U.S. and Select State, 2015 (7).

Source: Tables 10, 13, and 15 of http://research.upjohn.org/cgi/viewcontent.cgi?article=1228&context=reports.

Except for Illinois, the Seventh District states rank favorably relative to other states when looking at incentives as a percentage of state’s value-added and as a percentage of a state’s gross taxes. Having a greater percentage of its gross tax liabilities offset by incentive offerings would likely make a state more attractive to a business. Another takeaway from the table is that it doesn’t follow the previous table that showed incentives per job. Texas may have the highest incentive per job, but its incentive offerings constitute a relatively low percentage of its value-added. Conversely, Indiana possesses a relatively low incentive amount per job, but incentives offset almost 60% of its gross taxes. Lastly, Washington stands out for being a relatively high tax, low incentive state that lags significantly behind the other contending states.

Talent

Amazon has stated that it “will hire as many as 50,000 new full-time employees with an average annual total compensation exceeding $100,000 over the next 10-15 years, following the commencement of operations.” (8) In order to fill that many positions, Amazon will need to attract and retain highly skilled workers. That requires access to a college-educated population, including a substantial number with degrees in science, technology, engineering, or math (STEM) fields. The table below compares the Seventh District candidate metropolitan areas with other contenders on the relative education level of the adult population, as well as the percentage with a science or engineering background.

Table 6: College-educated Population in Select U.S. Metropolitan Areas

Source: 2016 American Community Survey, Seventh District locations are highlighted.

Among the group above, the Seventh District metropolitan areas don’t match up well. The Michigan metros don’t rank well when looking at the percentage of the population that possesses a bachelor’s degree. Grand Rapids ranks last when looking at the percentage of population with an advanced degree. Some of the areas known for their ability to retain and attract talent stand out in the table above. Washington D.C., San Francisco-Oakland, Raleigh, and Boston have world-class universities and globally renowned employers that require and need the best and the brightest.

Of course, not all STEM fields require a bachelor’s degree. Certain occupations in manufacturing and information technology only require a two-year degrees or specific certification. The table below shows the Seventh District candidate cities’ STEM employment relative the same group of U.S. cities listed in the previous table.

Table 7: Percentage of Employees in STEM (9) Occupations; Seventh District and Select U.S. Metropolitan Areas

Source: Author’s calculations based on data from the U.S. Bureau of Labor Statistics, Occupational Employment Statistics database, available at www.bls.gov/oes/tables.htm. Seventh District locations are highlighted.

By this broader measure, the Seventh District metropolitan areas compare more favorably with their peers. Detroit, Indianapolis, and Milwaukee have higher percentages of employees in STEM occupations than the U.S. average. Of the group of metro areas listed above, Detroit ranks behind just five of them.

An important factor in attracting talent is a relatively low cost of living. The next table examines the gross median rent in the Seventh District metro areas and select U.S. metros. Also, the table lists the gross median rent as a percentage of median household income in each metro area.

Table 10: Median Rent and its Percentage of Median Household Income

Source: Author’s Calculations Using Data from the 2016 American Community Survey. Seventh District locations are highlighted.

While there’s a noticeable disparity in the monthly rents among the metro areas, the range considerably tightens when looking at the percentage of household income that is devoted to rent. Detroit has one of the lowest monthly rents, but it comprises a relatively high percentage of household income because of Detroit’s relatively low median household income. Meanwhile, the Washington D.C. metro area, known for its relatively high housing costs, has a median rent almost twice that of Detroit, but it comprises a lower percentage of the metro’s median household income because the metro area has a higher median household income. Among the Seventh District metro areas, rents in Grand Rapids make up the lowest percentage of household income.

Potential Amazon Sites in the Seventh District Cities

Do you have an eight million square foot piece of land to spare in your metro area? That’s what Amazon is asking for their HQ2 site. Amazon requires an initial space of 500,000 square feet that can expand to as large as eight million square feet in order to accommodate the number of employees they plan to have working at their HQ2. Where would Amazon place their HQ2 in each of the Seventh District’s large metro areas? Potential Seventh District contenders have suggested particular sites that could accommodate Amazon’s HQ2.

Chicago

Chicago proposed ten sites that could accommodate Amazon’s new headquarters. They were revealed to the public and can be viewed here. A couple of the sites stand out for different reasons. The Downtown Gateway District site, which includes the old Post Office building, contains move-in-ready buildings, but would also allow Amazon to design its own headquarters. Outside of Downtown, the River District site would also give Amazon some autonomy in designing its headquarters without having to undertake the kind of massive redevelopment effort that some of the other proposed sites would require.

Detroit

The executive summary of Detroit’s Amazon proposal offers few surprises. Dan Gilbert, Chairman and Founder of Rock Ventures and Quicken Loans, was appointed to lead Detroit’s bid for Amazon, which includes Windsor, Ontario, Canada, just across the Detroit River. Gilbert owns 95 Downtown Detroit buildings, giving Downtown Detroit flexibility to move things around if it were to be chosen by Amazon. One potential complex is the now open space that was supposed to have Wayne County’s new jail, and then was bought by Gilbert with much talk surrounding a soccer stadium. With the old jail site on one end and Gilbert’s proposed skyscraper on the old Hudson’s department store site on the other, this location could be attractive. Of course, Detroit doesn’t have a shortage of vacant space that Amazon could build to use. However, Detroit doesn’t have the extensive mass transit system that would allow relatively easy access to some of the larger vacant sites.

Grand Rapids

Grand Rapids hasn’t given any clues publicly as to where it has proposed Amazon would locate within the area. However, the relatively small size of the metro area means it only takes 15-20 minutes to drive from any corner of Greater Grand Rapids into downtown. The metro area includes plenty of space around Holland, only a 35 minute drive from Downtown Grand Rapids, and Grand Valley State University in between.

Indianapolis

Indianapolis didn’t make their Amazon bid public either. Indianapolis may arguably have the most shovel-ready location that would not just fulfill Amazon’s initial 500,000 square foot requirement, but go a long way toward hitting the eight million square foot target. The site used to have a General Motors stamping plant, which it was demolished in 2013. It is located in Downtown Indianapolis on the White River, just across from the central business district and IUPUI, and has relatively easy access to the city’s freeway system. The old GM site has been talked about publicly by city stakeholders. (10) As with Detroit, in Indianapolis, a less extensive mass transit system limits where Amazon could go.

Milwaukee

Milwaukee’s bidding group didn’t reveal its Amazon bid publicly. However, according to the local press, two sites in Walkers Point were included.(11) Walkers Point lies immediately south of Milwaukee’s central business district, contains old industrial sites, and provides access to freeways and Milwaukee’s bus rapid transit system. In addition, one would expect potential locations to be identified in the vicinity of Milwaukee’s airport, which is south of the central business district.

Conclusion

If Amazon were to choose a Seventh District location for HQ2, where would it be? Looking at all of the variables, the most likely Seventh District metro area to attract Amazon would seem to be Chicago. However, if Amazon wanted to transform a community, then Detroit or Milwaukee might be more appealing. If Amazon preferred the most shovel-ready site, then Indianapolis could merit greater consideration. Grand Rapids could emerge as a candidate if Amazon were to place greater weight on its ability to work with local stakeholders, as well as having their employees enjoy a relatively low cost of living. Amazon plans to make an announcement sometime in 2018. (12)

Foot Notes

1 – The Seventh Federal Reserve District serves a five-state region, comprising all of Iowa and most of Illinois, Indiana, Michigan and Wisconsin.
2 – Although Detroit submitted a joint regional bid with Windsor, Ontario, Canada, the statistics I cite here are for the Detroit MSA.
3 – See Information on Airport Hub Size Type from the FAA, number of Direct Flights from October 24, 2017 using the By Route tab at http://www.panynj.gov/airports/flight-status.html?view=DEPARTURE&apt=EWR. Airport data includes all commercial metropolitan airports, i.e., New York consists of Kennedy, La Guardia, and Newark airports. Seventh District locations are highlighted.
4 – Population data from the U.S. Census Bureau, Traffic data from inrix.com/scorecard. Seventh District locations are highlighted.
5 – The overall ranking of the State Business Tax Climate Index is derived from five components: state income tax, sales tax, corporate tax, property tax, and unemployment insurance tax. The corporate tax has the third heaviest weight of the five components at 19%. The corporate tax subindex is divided into three of its own subindexes. The first subindex revolves around the structure of a state’s corporate tax rate, its level, and how many brackets and how quickly does a corporation’s tax liability reach the highest bracket. The second subindex examines variables related to the corporate tax base, such as the caps and number of years allowed for carryback and carryforward, gross receipts tax deductions, and whether or not the state has an alternative minimum tax. The final subindex studies the size and effectiveness of tax credits. Seventh District locations are highlighted.
6 – See p. 59 and p. 64 of https://files.taxfoundation.org/20171016171625/SBTCI_2018.pdf.
7 – Table reports present value of incentives, gross state and local business taxes, and net business taxes after incentives, all calculated as percent of present value of value-added. All incentive and taxes are weighted average, using value-added weights, across all 31 export-base industries, for a new facility starting up in 2015. Table also reports the state’s share of private value-added, which is used to create national averages across these states. Incentives as a percent of gross taxes are simply ratio of the two other columns. All present value calculations use 12 percent real discount rate, and consider facility with life of 20 years. The U.S. incentive percentage is weighted by a state’s gross state product. Seventh District locations are highlighted.
8 – See p. 2 of https://images-na.ssl-images-amazon.com/images/G/01/Anything/test/images/usa/RFP_3._V516043504_.pdf.
9 – The criteria to define STEM- and non-STEM-related occupations were taken from the U.S. Census Bureau. See www.census.gov/people/io/files/STEM-Census-2010-occ-code-list.xls.
10 – See https://www.indystar.com/story/money/2017/09/28/if-amazon-chooses-indianapolis-heres-where-h-2-q-should-go/685599001/.
11 – See http://www.tmj4.com/news/local-news/making-a-pitch-possible-locations-for-amazons-hq2-site.
12 – See p.1 of https://images-na.ssl-images-amazon.com/images/G/01/Anything/test/images/usa/RFP_3._V516043504_.pdf.

Comparing the City of Brotherly Love with Motown: Reflections on How to Effectively Transform Urban Economies

By Martin Lavelle

When I think of Philadelphia, the following subjects come to my mind: Benjamin Franklin, Betsy Ross, the Liberty Bell, Independence Hall, the Declaration of Independence, and the Constitution. Also, being a sports fan, I think of what a great sports city it is: There’s quite a passionate fan base for its professional teams, as well as Big 5 college basketball at the Palestra. Admittedly, as someone who works in and studies Detroit, it doesn’t naturally occur to me to compare Detroit and Philadelphia like I would Detroit and Pennsylvania’s other major city, Pittsburgh, with its historical reliance on one manufacturing sector, steel. However, as I looked more deeply into Philadelphia’s history, I found myself drawing multiple parallels between the Motor City and the City of Brotherly Love.

On September 21–23, 2016, the Federal Reserve Bank of Philadelphia, other Federal Reserve Banks, and additional sponsors and supporters convened the Seventh Biennial Reinventing Our Communities Conference. The theme of this year’s conference was how to transform our economies. The conference’s sessions covered topics such as how to increase access to capital, how to supply a greater stock of affordable housing and address workforce needs, and how to make philanthropic foundations play a more effective role in communities’ economic transformations. This conference provided an opportunity for me to learn about initiatives in other communities and compare them with developments in Detroit. This will be the first of two blog entries in which I discuss the conference and some of my own analysis inspired by it. Here I will draw some historical and current comparisons between Detroit and Philadelphia. In my follow-up blog post, I will recap the conference and compare Detroit’s efforts to transform its economy with ongoing efforts occurring across the country.

Background

As part of my usual preparation for a conference (especially when a city tour is included), I did a statistical comparison of Detroit and Philadelphia. The table below shows the statistical similarities and differences I found most interesting between the two cities.

portland-chart-1

Note: MSA means metropolitan statistical area.
Source: QuickFacts Beta, U.S. Census Bureau.

The population figures stand out for many reasons. First, it’s easy to forget that back in 1950, when their populations peaked, Detroit and Philadelphia were similarly sized cities. Nowadays, just six and a half decades later, Philadelphia has almost two and a half times as many people as Detroit. Back in the middle of the twentieth century, the population of each city made up around 57% of its respective metropolitan area. But as of last year, Philadelphia’s population share of its metropolitan area (26%) was noticeably larger than Detroit’s population share (16%) of its metropolitan area. The fact that Philadelphia’s population increased over the past 15 years boosted the divergence in population trends. Over the period 2000–15, Philadelphia added almost 50,000 people, while Detroit lost 274,154 people. In terms of demographics, Philadelphia is much more diverse. Also, a higher percentage of Philadelphia’s population has attained a bachelor’s degree or higher—thanks in part to the University City neighborhood, anchored by the University of Pennsylvania and Drexel University, and the presence of many other institutions of higher learning within the city’s limits. Given the divergence in demographics, the difference in home values isn’t surprising, but it still jumps off the page.

Philadelphia’s Financial Challenges

Like Detroit, Philadelphia has encountered fiscal challenges. And like Detroit, Philadelphia’s financial problems simmered for many years before boiling over in the early 1990s. The City of Brotherly Love became the first U.S. city to impose an income tax when it did so in 1939. (1) Philadelphia’s income tax remained in a range of 1.0% to 1.5% until the 1960s, when it started to increase, eventually reaching 3.0% in 1970 and almost 5% in 1985. (2) The increase in the city’s income tax rate was one of the leading factors in city residents deciding to leave for suburban communities. Philadelphia’s fiscal crisis peaked in 1990–91 when a structural budget deficit of $154 million was revealed, with expectations of deeper budget deficits in future years. (3) The city received financial assistance in the form of the Pennsylvania Intergovernmental Cooperation Authority (PICA). PICA sold bonds on Philadelphia’s behalf. It also required the city to adopt a five-year financial plan that had to be approved in order to gain access to capital markets and state funding. (4) Led by Mayor Ed Rendell, the city followed its five-year plan while privatizing selected services, introducing more competitive bidding for city projects, and freezing wages for city employees, all of which helped lead to Philadelphia’s recovery in the late-1990s. (5) Philadelphia also began lowering its commuter tax in 1995, converging city and suburban residents’ respective tax burdens. (6) It has been estimated that increases in Philadelphia’s city wage tax cost the city 207,000 jobs from 1973 to 2003. (7) Two separate tax commissions created in the 2000s concluded Philadelphia’s tax system was outdated and needed to be reformed. (8) In 2014, the Greater Philadelphia Chamber of Commerce released a public/private collaborative plan with the aim of organizing growth-based activity in and around Philadelphia. The chamber’s plan called for improving the city’s competitiveness, producing a well-educated workforce, creating an environment for business growth, and enhancing Philadelphia’s infrastructure. Such efforts will have a familiar ring to Detroiters too.

West Mount Airy: A Gift to Philadelphia from Detroit

The conference began with a tour of Philadelphia’s West Mount Airy neighborhood, one of the nation’s first intentionally racially integrated neighborhoods. The effort to preserve racial diversity within West Mount Airy was led by West Mount Airy Neighbors (WMAN). WMAN was founded in 1959 to deal specifically with the issue of racial integration. (9) One of the founders of WMAN was George Schermer, who tried to organize a similar effort in Detroit before coming to Philadelphia.

After Detroit’s 1943 Belle Isle uprising, Mayor Edward Jeffries formed an Interracial Commission and appointed Schermer as its director. (10) In the early 1950s, Schermer lobbied for an integrated housing development in Detroit’s west side. The development was to be called Schoolcraft Gardens. The Schoolcraft Gardens development attracted private funding and the United Auto Workers (UAW) as a partner. (11) Unfortunately, multiple forces prevented the integrated development from taking shape. First, the neighboring, all-white Tel-Craft homeowners association opposed the Schoolcraft Gardens development. Also, later on, a different Detroit mayor, Mayor Alfred Cobo, vetoed the approval of the development project. Soon afterward, the Interracial Commission was dissolved and replaced by the Commission on Community Relations, whose members would be appointed and could be removed without cause by the mayor. (12) Not surprisingly, when the City of Philadelphia offered Schermer the opportunity to head its newly created Commission on Human Relations, Schermer left Detroit. (13)

Under Schermer’s leadership, WMAN fought housing and education policies that advocated for segregation. WMAN and the neighborhood itself consisted of high-achieving, well-educated, progressively minded people, who were the demographic they looked to attract to the neighborhood. One might argue this allowed integration to work, whereas Detroit saw comparatively less educated groups across different races compete for similar jobs and economic standing, putting the groups at odds with each other.

Impressively, the commitment to diversity in West Mount Airy remains strong. Since 1980, at least 40% of West Mount Airy’s residents have been African Americans. (14) According to Sarah Zelner, who presented background information about West Mount Airy during the conference tour, the neighborhood has a strong LGBTQ presence, in addition to being diverse in terms of race and education. Efforts to maintain the neighborhood’s diversity and affirm its commitment to open dialogue include the long-running Mt. Airy youth baseball league and, more recently, monthly conversations about racial issues. In the evening of the day of the tour, the neighborhood’s main thoroughfare shut down and turned into a street fair that showcased West Mount Airy’s diverse restaurant community.

All that said, the neighborhood isn’t without its challenges. Between 1950 and 2010, West Mount Airy lost around half of its population. This loss in population has impacted the dynamics of the neighborhood in many ways, especially in terms of its educational offerings. The high school located in West Mount Airy closed in 2013—a direct result of the population loss, as well as more-affluent students enrolling in private schools in other neighborhoods. In addition, while the overall racial diversity of West Mount Airy has been maintained, African Americans have been clustering closer to the East Mount Airy and East Germantown neighborhoods, which are both predominantly black. (15) While traveling through the area, I noticed a contrast between West Mount Airy with its homes constructed of stone native to the area and East Mount Airy with housing stock of relatively poorer quality. To combat population loss and preserve the neighborhood’s identity, West Mount Airy is trying to attract more immigrants, highlighting the neighborhood’s cultural history and mixed small business community as selling points.

Gifts in Return from Philadelphia? Possible Lessons for Detroit

The background material I read on Philadelphia’s West Mount Airy neighborhood discussed housing density (as measured, for example, by homes per city block) and its correlation with racial integration. The material cited multiple studies that suggested lower housing density is more amenable to achieving greater racial diversity. (16) This might be one lesson from Philadelphia’s experiences that Detroit might want to apply as it remakes itself. The Motor City is seeking to create dense and diverse population centers within its borders, as it once had decades ago. Part of this goal is being achieved by removing blight. But as neighborhoods are reorganized, city officials may want to keep in mind how racial integration was achieved in Philadelphia and not make the housing density of newly configured neighborhoods too high. Striking the right balance between population and housing density to achieve better racial integration and higher-level services for all citizens than at present will be a challenge, but Detroit can look to some of Philadelphia’s neighborhoods for some examples to follow.

Widening the focus back to the entire city, I think the topic of city residents’ tax burdens should be explored in greater depth. As mentioned previously during my review of background material on Philadelphia and as discussed somewhat during the conference, Philadelphia has reformed its tax system in order to have the tax burden of its citizens be more similar to that of residents in the surrounding suburbs. This is yet another lesson Detroit officials might learn from Philadelphia in order to draw more people to reside within its borders. Indeed, Detroit may want to look to reform its tax system as well. When studying the tax burdens of the largest city in each state and Washington, DC, (17) the total tax payments expected from Detroiters as a percentage of their income rank in the top five. (18) When breaking down tax payments by category, Detroiters’ income tax burden ranks near the top for families making $50,000 or more, and their property tax burden is the highest among the states’ largest cities and Washington, DC. (19) While Detroiters’ sales, use, and gasoline tax burdens rank relatively low, significantly high auto insurance premiums more than make up for it. Detroiters pay more than twice as much as the next city (New Orleans) and over three and a half times more than Philadelphia, which ranks tenth. (20) Current Detroit Mayor Mike Duggan has proposed legislation that would create an auto insurance product specific to Detroit, though this proposal has its critics. (21)

Following what initiatives are and aren’t working in other cities and informing city officials and stakeholders about the results of those different initiatives is important to Detroit’s rebound. This is one of the main reasons why I attended this year’s Reinventing Our Communities Conference. The Detroit Branch of the Federal Reserve Bank of Chicago serves the function as information gatherer for the mayor’s Post-Bankruptcy Working Group, as well as the city’s group that works on affordable housing efforts. Efforts to strengthen communities in Detroit and elsewhere through philanthropic, private, and public partnerships have become more widespread in recent years. The Federal Reserve—especially the Detroit Branch of the Federal Reserve Bank of Chicago—has played a major role in bringing different types of organizations together generate solutions that will benefit those communities for years to come.

Read my next blog entry to get more details on the conference panels that I participated in.

References
(1) See p. 3 of http://economyleague.org/uploads/files/783716581668902685-the-sterling-act-a-brief-history.pdf
(2) Ibid.
(3) See p. 5 of https://www.philadelphiafed.org/-/media/research-and-data/publications/business-review/1992/brso92rl.pdf?la=en.
(4) See p. 1 of http://www.picapa.org/docs/SRFYP/SRFYP_FY16FY20.pdf.
(5) See http://www.nytimes.com/1994/05/22/magazine/mayor-on-a-roll-ed-rendell.html.
(6) See p. 31 of http://www.philadelphiafed.org/research-and-data/publications/business-review/2003/q2/brq203ri.pdf.
(7) See p. 27 of http://www.philadelphiafed.org/research-and-data/publications/business-review/2003/q2/brq203ri.pdf.
(8) See p. 15 of http://www.centercityphila.org/docs/CCR14_employment.pdf.
(9) See p. 42 of Barbara Ferma, Theresa Singleton, and Don DeMarco, 1998, “Chapter 3: West Mount Airy,” Cityscape: A Journal of Policy Development and Research, Vol. 4, No. 2, pp. 29–59, https://www.huduser.gov/Periodicals/CITYSCPE/VOL4NUM2/ch3.pdf
(10) See p. 1 of https://libdigital.temple.edu/pdfa1/Oral%20Histories/AOHWMPJZ2015030001Q01.pdf.
(11) See p. 76 of Lloyd D. Buss, 2008, “Chapter 2: City Influences Religion’s Response,” The Church and The City: Detroit’s Open Housing Movement, University of Michigan, PhD dissertation, https://deepblue.lib.umich.edu/bitstream/handle/2027.42/61748/ldbuss_1.pdf?sequence=1&isAllowed=y.
(12) See Buss (2008, p. 77).
(13) See Ferma, Singleton, and DeMarco (1998, p. 42).
(14) The share of African Americans residing in West Mount Airy was 41% as of the 2010 U.S. Census.
(15) See http://philadelphiaencyclopedia.org/archive/mount-airy-west/.
(16) See Ferma, Singleton, and DeMarco (1998, p. 41).
(17) See pp. 12-21, 24 of http://cfo.dc.gov/sites/default/files/dc/sites/ocfo/publication/attachments/2014%2051City%20Study.final_.pdf.
(18) This ranking does not apply when examining families making less than $50,000 per year. A family is assumed to be made up of two income earners and one school-age child. See p. 13 of http://cfo.dc.gov/sites/default/files/dc/sites/ocfo/publication/attachments/2014%2051City%20Study.final_.pdf.
(19) See pp. 16, 31 of http://cfo.dc.gov/sites/default/files/dc/sites/ocfo/publication/attachments/2014%2051City%20Study.final_.pdf.
(20) See https://www.nerdwallet.com/blog/studies/expensive-cities-car-insurance/.
(21) See http://www.detroitnews.com/story/opinion/2016/03/23/detroit-insurance-cut-rate-policy/82194396/.

Are Businesses Returning to Detroit?

by Martin Lavelle, business economist

Introduction

Detroit’s population fell by almost 50% from its peak of 1.85 million in 1950 (1) to around 950,000 in 2000. Since 2000 (2), Detroit’s population has declined at a faster rate. The U.S. Census Bureau reports that Detroit’s population stood at 680,250 as of 2014 (3). As Detroit’s population migrated elsewhere, so did many of its businesses. How many businesses have left the Motor City since around the turn of the twenty-first century? And are new businesses replacing them in the aftermath of the Great Recession (which ended in mid-2009)?

In this blog entry, I will address these questions by using the County Business Patterns (CBP) data series from the U.S. Census Bureau. The CBP data series provide the number of business establishments (4) by county and zip code. The business establishments reported in the data are sorted by employment size classes. In addition, CBP data sets provide employment and payroll data. CBP data are collected on an annual basis, but with a two-year lag. Here I will analyze business patterns by geography and industry among Detroit zip codes (and elsewhere) between 1998 and 2013.

Analysis

Figure 1 shows a map of Detroit by zip code. The zip codes shown below were used to analyze the change in the number of business establishments in Detroit over the period 1998–2013 (5).

2016 0208 figure 1

Figure 1. Map of Detroit zip codes
Source: Lowell Boileau, available at http://www.atdetroit.net/forum/messages/107211/106465.jpg.

Table 1. Percent change in number of Detroit business establishments, by zip code, 1998–2013
2016 0208 table 1

Source: Author’s calculations based on data from the U.S. Census Bureau, County Business Patterns.

For each Detroit zip code area listed in table 1, I include the prominent neighborhoods and/or landmarks found within it.

Overall, the number of Detroit business establishments decreased 22.3% over the period 1998–2013, according to my calculations using CBP data. As of 2013, the city of Detroit was home to 8,817 business establishments. Approximately one-eighth of these establishments can be found in Downtown Detroit—which saw a similar share of its businesses depart as the city as a whole did over the sample period. Zip code areas that fared relatively better than the city in terms of business retention between 1998 and 2013 contain the Midtown/New Center area along Woodward Avenue, Eastern Market, some areas along East Jefferson Avenue parallel to the Detroit River, and southwest Detroit (including Corktown). These centers of commercial activity are now leading Detroit’s turnaround. Zip code areas that saw a larger percentage of their businesses leave relative to what the city as a whole experienced contain some of Detroit’s struggling neighborhoods—which include East English Village adjacent to Harper Woods and the Grosse Pointes, as well as areas near and around the old Packard plant in Detroit’s eastern industrial corridor (6).

Anyone familiar with Detroit’s narrative will likely be able to give several reasons why its business activity has declined over the past few decades. Besides the outward migration of the residential population, the downsizing and suburbanization of the local manufacturing industry, the deterioration of the city’s talent base as a result of the struggles of the Detroit Public Schools (DPS), government corruption, and the worsening condition of the city’s infrastructure are just some of the contributors to Detroit’s downward trend in business activity.

Given the narrative about Detroit, it is natural to wonder how its recent business losses compare with those of its surrounding areas. Table 2 shows the change in the number of establishments by selected areas in 1998 versus 2013. The national numbers are also given to provide another basis of comparison.

Table 2. Number of business establishments, 1998 versus 2013, and percent change in the number of business establishments, 1998–2013, by selected areas

2016 0208 table 2

Note: MSA stands for metropolitan statistical area; for further details on the Detroit MSA, see http://www.census.gov/population/estimates/metro-city/0312msa.txt.
Source: Author’s calculations based on data from the U.S. Census Bureau, County Business Patterns.

Table 2 shows that despite the 2001 and 2007–09 recessions, the number of business establishments in the nation as a whole increased over the period 1998–2013. However, the number of business establishments declined throughout most of Michigan during this time. Wayne County (including Detroit) and the Detroit metropolitan statistical area (MSA)—encompassing Macomb, Oakland, and Wayne counties—experienced less severe business losses than the city of Detroit. Nearby Washtenaw County, whose county seat is Ann Arbor (7), still saw a slight drop in the number of business establishments over the sample period, but fared much better relative to the city of Detroit.

When examining industry business patterns in the city of Detroit, it is not surprising to find that in percentage terms, manufacturing experienced the greatest loss of businesses over the period 1998–2013. Table 3 shows the change in the number of business establishments by industry during the sample period.

Table 3. Number of business establishments, 1998 versus 2013, and percent change in the number of business establishments, 1998–2013, in the city of Detroit, by industry

2016 0208 table 3

Source: Author’s calculations based on data from the U.S. Census Bureau, County Business Patterns.

One may be somewhat surprised by which subsectors of manufacturing experienced the greatest losses of business establishments (not shown). When analyzing the business pattern data by NAICS (8) code, I found that transportation equipment manufacturing—which includes motor vehicle and parts manufacturing—experienced a sizable drop in the number of establishments (41.5%); but this decline wasn’t the largest one. The manufacturing subsector that experienced the largest decline in establishments in percentage terms was printing and related support activities (–75.3%), followed by machinery manufacturing (–69.9%) (9). When just looking at the raw numbers of business losses among the manufacturing subsectors, I found that fabricated metal product manufacturing experienced the greatest losses: this subsector lost 86 establishments from 1998 through 2013 (almost a 50% contraction). Of the 26 zip codes I analyzed, 17 of them saw greater-than-50-percent declines in the number of manufacturing establishments.

Conclusion

During the 1998–2013 period, the city of Detroit lost business establishments every year. Detroit lost a higher percentage of establishments than its surrounding areas, the state of Michigan, and the United States. The most significant sectorial losses of businesses were from the goods-based side of the economy—most notably, from manufacturing. While the most severe manufacturing losses weren’t from direct transportation equipment manufacturing, they were in complementary industries, such as fabricated metal manufacturing, machinery manufacturing, and printing activities. Geographically speaking, establishments close to Detroit’s border with the Grosse Pointes and those around the former Packard automobile assembly plant shut down in greater proportions than those in other parts of the city.

Because the most recent data available are 2013 data, I am unable to provide any definitive insight into any possible changes in the trend of establishments leaving Detroit since the city exited bankruptcy in late 2014. By many anecdotal accounts, numerous new establishments have settled in the Downtown, Midtown, Corktown, and other select neighborhoods where the most significant public and private investment has occurred of late. As we receive more and newer data, it will be interesting to see whether new business establishments are sprouting up elsewhere in Detroit. Will business (and public) investment in Detroit remain concentrated in its high-activity areas or begin to noticeably branch out to the city’s relatively less active neighborhoods?

(1) See http://www.nytimes.com/interactive/2013/08/17/us/detroit-decline.html
(2) See http://censusviewer.com/city/MI/Detroit
(3) See http://www.freep.com/story/news/local/michigan/2015/05/21/census-estimates-michigan/27661485/
(4) See https://ask.census.gov/faq.php?id=5000&faqId=487 for what is considered a business establishment versus a business firm. In this blog entry, businesses refer to business establishments.
(5)Please note, however, that the 48203 zip code area also includes the city of Highland Park and the 48212 zip code area also includes the city of Hamtramck. The 48239 zip code area lies predominantly outside the city of Detroit, so it wasn’t included in the analysis.
(6) See http://archive.freep.com/interactive/article/20121202/NEWS01/120823062/The-Packard-Plant-Then-now-interactive-comparison-photos.
(7) See http://www.annarborusa.org/live-here/facts-rankings
(8) NAICS stands for North American Industry Classification System. For more details, see http://www.census.gov/eos/www/naics/ and http://www.bls.gov/bls/naics.htm.
(9) I only considered manufacturing subsectors with more than 50 establishments in 1998.

Preview of the upcoming Summit on Inner City Economic Development in Detroit

By Martin Lavelle

In a recent blog, I shared my observations about Pittsburgh’s efforts to revitalize its urban core. Then, I analyzed the extent to which Pittsburgh’s turnaround can serve as a model for Detroit as its city leaders and stakeholders look to revitalize the city’s urban core. While Detroit has begun to replicate the efforts of other cities, such as showcasing the city’s riverfront with the Detroit RiverWalk and collaborating with regional leaders and stakeholders, overall its efforts lag those of other Rust Belt cities. The relatively sluggish pace of Detroit’s efforts to revitalize its urban core are also reflected in the slow development of the city’s business clusters, including new business formation. Meanwhile, other parts of the Rust Belt have advanced the development of their respective business clusters, such as West Michigan’s office and institutional furniture cluster and Pittsburgh’s advanced materials and energy clusters.(1)

Policy professionals, researchers, and other experts will gather in Detroit for a two-day summit–“Revisiting the Promise and Problems of Inner City Economic Development,”—at the Renaissance Center on September 15th and the Federal Reserve Bank of Chicago—Detroit Branch on September 16th. The summit will look at new research and best practices in the field of urban revitalization. It is sponsored by the W.E. Upjohn Institute for Employment Research, the Initiative for a Competitive Inner City (ICIC), the Federal Reserve Bank of Chicago, Economic Development Quarterly, and Sage Publications. For those interested in attending, there is no registration fee but advance registration is required here.

Day 1 will focus on what’s currently happening in Detroit, with an introduction by the Chicago Fed’s Regional Research staff and a bus tour of Detroit provided by the Chicago Fed’s Community Development & Policy Studies group. The tour will highlight some of Detroit’s successes and challenges in its effort to revitalize its urban core and how the three levers of growth—business environment, clusters, and individual firms—are promoting and complementing the efforts of Eastern Market and Midtown Detroit. Eastern Market’s food cluster is expanding in part because of greater economic growth within the city of Detroit. Part of that growth is originating from the development of an innovation district along Detroit’s major boulevard, Woodward Avenue, which is helping to draw young entrepreneurs to work and live in Midtown Detroit. In addition, the tour will illuminate some of what Detroit must still overcome on the path to renewal. The first day ends with a presentation by Detroit Free Press writer John Gallagher, who will share his thoughts about the city.

The second day of the summit will feature two keynote addresses. ICIC Founder and Chairman Michael Porter will look back on his research of clusters and their competitive advantages in inner cities. Later on, Matthew Cullen, President and CEO, Rock Ventures LLC, will provide insight into how his firm has helped contribute to Detroit’s recent surge in economic development. Other featured speakers include Carol O’Cleireacain, Deputy Mayor for Economic Policy, Planning, and Strategy, City of Detroit. Sessions on the second day will examine new thinking on the competitiveness of inner cities and opportunities for business in the inner city.

References
(1)See p.5 of http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.199.4104&rep=rep1&type=pdf

Pittsburgh: A Detroiter’s Perspective

Written by Martin Lavelle

For Detroit or any Rust Belt city looking to revitalize its urban core, Pittsburgh is often brought up as a model to follow. Before World War II, Pittsburgh was well known for the black clouds of soot that often hovered over its downtown area. (Given its industrial legacy, it has been dubbed “the Steel City.” ) But more recently, it has been deemed America’s most livable city six times by three different publications since 2000.(1) According to Scott Bricker of Bike Pittsburgh, Pittsburgh is the fourth most active walking/biking city in the United States. Bike Pittsburgh and other civic-minded organizations and stakeholders have been the key to Pittsburgh’s turnaround. They are united by a mission to make their city thrive.

On June 18–19, 2015, the Federal Reserve Banks of Cleveland, Philadelphia, and Richmond sponsored a policy summit on housing, human capital, and inequality in Pittsburgh. This summit gave me not only a chance to experience Pittsburgh for myself, but also an opportunity to hear from some of the people whose efforts have steered the city in a positive direction. In this blog entry, I will share my thoughts on my visit to Pittsburgh and some observations on how Pittsburgh is and is not a model Detroit can follow in its revitalization efforts.

Background
In preparation for my trip, I did a statistical comparison of Detroit and Pittsburgh. The table below displays the similarities and differences I found most interesting.
Det Pitts table 1
Source: QuickFacts Beta, U.S. Census Bureau.

From the table, it’s clear that both cities lost a similar percentage of their respective populations after peaking in 1950. While both cities’ population densities are similar, the size of Detroit’s land mass stands out: Detroit is more than twice the size of Pittsburgh. When adding up the size of each of Detroit’s vacant land parcels, it amounts to 40 square miles—almost 30% of Detroit’s land area, but almost 75% of Pittsburgh’s!(2) Another major difference between the two cities is their racial composition: Pittsburgh’s population today is predominantly white, whereas Detroit’s shifted from mostly white to mostly African-American.
The other statistics in the table depict a higher standard of living in Pittsburgh versus Detroit. A higher percentage of Pittsburgh’s population has a bachelor’s degree, participate in the labor force and possess health insurance. Not surprisingly, per capita incomes are higher and poverty rates lower in Pittsburgh than in Detroit. The chart below shows how median household incomes have steadied and slightly rebounded in Pittsburgh versus the continued decline in Detroit.

Median Household Income: United States and Central Cities of Pittsburgh and Detroit, Select Years
Det Pitts table 2
Note: All values are in 2009 (inflation-adjusted) dollars.
Sources: Author’s calculations based on data from SOCDS (1969, ’79, ’89, and ’99) and the U.S. Census Bureau (2009, 2012); U.S. Census Bureau data adjusted using http://data.bls.gov/cgi-bin/cpicalc.pl.

When looking at the chart, keep in mind that the city of Pittsburgh lost population in this time frame, yet incomes have started to record positive gains in recent years. So even if the city of Detroit were to continue to lose population, positive income gains in the future are attainable as seen in Pittsburgh.

East Liberty
My business trip to Pittsburgh began by taking one of its rapid buses(3) to the neighborhood of East Liberty, located within the East End of Pittsburgh. According to Rob Stephany, director of community and economic development, The Heinz Endowments, East Liberty was Pennsylvania’s third busiest commercial corridor until World War II (only behind the downtowns of Philadelphia and Pittsburgh). However, activity decreased after World War II as consumers headed out to suburban shopping centers to do their shopping. To try and revitalize East Liberty, Pittsburgh’s Urban Redevelopment Authority decided to make the neighborhood’s center more walkable by transforming much of its outer surface streets into a one-way ring road where visitors could park and then walk to nearby shops. Developers hoped that this plan would also spawn development along the ring road. Unfortunately, the ring road deterred further commercial development and prompted businesses to close and residents to leave. The only major development projects along the ring road were large, multifamily apartment towers.

In the late 1990s, then-mayor of Pittsburgh, Tom Murphy, noticed the relatively poor condition of the East Liberty neighborhood when compared with wealthier neighborhoods Highland Park to the north and Shadyside to the south. Mayor Murphy’s recruitment of Home Depot to the neighborhood along with the creation of a new mixed-income housing development helped lead to East Liberty Development, Inc.’s (ELDI) 1999 community plan, which outlined the community’s vision for the neighborhood.(4) In subsequent years, Whole Foods and Target moved into East Liberty, the apartment towers were torn down, an old Nabisco factory was transformed into lofts and office space (where a unit of Google does business), and East Liberty came to symbolize how Pittsburgh has changed recently.

Because I took a rapid bus, my ride to East Liberty from downtown Pittsburgh only took ten minutes. The quick buses have contributed to East Liberty’s renaissance by providing residents fairly easy access to their respective places of employment while improving the neighborhood’s connections with the rest of the city. When I disembarked from the bus, I couldn’t help but notice the large development project taking place at the transit station. When completed, the East Liberty rapid bus transit station will include a retail/residential complex that will allow easier access to the neighborhood from the station.(5) The development of new residential units in East Liberty has made it a trendy place to live, driving up home values and rents. Unfortunately, recent development has made it more difficult for some lifelong residents to remain in the neighborhood. (6)

As I left the transit station and entered the core area of East Liberty, I was struck by the contrasts in the types of businesses and development. Across from the transit station stood the new Target, but as I walked down Penn Ave. away from Target, I encountered a mix of new construction along with blighted storefronts. A similar mix of buildings greeted me when I turned north on Highland Ave., which is also home to the iconic East Liberty Presbyterian Church that dominates the core area’s landscape. East Liberty was truly diverse in that within blocks, I saw signs of a neighborhood on the rise, including trendy restaurants and boutique hotels, while symbols of struggle—such as run-down apartments, check cashing outlets and discount stores—remained. This dichotomy reminded me greatly of Detroit.

Redefining Pittsburgh
During the summit’s panel on redefining Pittsburgh, Bill Flanagan, chief corporate relations officer, Allegheny Conference on Community Development, said that city leaders and stakeholders looking to revitalize their cities must learn to listen, must craft public policy with much forethought, and must be patient because civic engineering takes time to implement. Leaders and stakeholders in East Liberty have learned those lessons, as evidenced by their increasingly providing opportunities for lifelong residents to stay in the neighborhood, thanks to more mixed-income, affordable housing projects. Kendall Pelling, director of land recycling, East Liberty Development, Inc., shared how ELDI is buying up vacant properties, as well as properties home to crime, in order to lower crime rates and make East Liberty an even more attractive place to live. In the Larimer neighborhood, which borders East Liberty’s east side, assisting lifelong residents in their effort to stay was a central piece of their neighborhood development plan. It seems safe to say that leaders in Pittsburgh are following their own advice, especially the listening part.

In a separate panel, Bill Peduto, mayor, City of Pittsburgh, shared some of the policies and programs he’s participated in or promoted during his tenure on the Pittsburgh City Council and now as the mayor. Mayor Peduto’s comments focused on social mobility and neighborhood investment. Mayor Peduto argued the most important factors to social mobility are the chance to earn a quality education and the ability to get to work. According to Peduto, another avenue for greater social mobility is his policy in granting tax increment financing (TIFs)(7) to developers. Mayor Peduto said his administration only grants TIFs if developers agree to pay their workers prevailing wages. Moreover, the Mayor said he sees a lack of investment in a particular neighborhood as sending a negative message to its residents. As a way to circumvent that potential problem, Mayor Peduto shared that his office assists in writing each neighborhood’s master development plan.

Pittsburgh: A Model for Detroit?
It’s easy to draw a comparison between Pittsburgh and Detroit because both cities saw a majority of their respective fortunes rise and fall with labor-intensive durable goods manufacturing industries. The cities’ and industries’ heydays came in the first half of the twentieth century. To the common observer, it may seem that Pittsburgh’s turnaround happened rather quickly and therefore is attainable for Detroit.
What the common observer may not realize is the forethought and diligence Pittsburgh leaders and stakeholders had regarding their city’s future. In the 1940s, the Allegheny Conference on Community Development—along with David Lawrence, then-mayor of Pittsburgh, and Andrew Mellon, the well-known banker and industrialist—started planning and implementing their idea for Pittsburgh’s future.(8)

In contrast, Detroit has lagged behind other cities in its revitalization efforts. For example, the Detroit Riverwalk Conservancy was formed in 2003 to help make the Detroit Riverfront more visitor-friendly. Impressed by what the Allegheny Conference did in Pittsburgh, the Greater Baltimore Committee began implementing its plan to improve Baltimore’s downtown in the 1950s, which eventually encompassed the city’s Inner Harbor in the 1960s.(9) The planning of Chicago’s Lakefront Trail provides an even starker contrast with the city planning for Detroit. Daniel Burnham’s 1909 Plan of Chicago included plans for a continuous lakefront park with a trail that became the Chicago Lakefront Trail, which was resurfaced in 1979. (10) Detroit unveiled its most recent plan, the Detroit Future City plan, in 2010. This plan is the latest attempt at envisioning the path forward for Detroit. Will the Detroit Future City plan come to fruition? Time will tell if it matches the results already realized in places like Pittsburgh.

Bill Flanagan’s advice for cities and their stakeholders most definitely applies to Detroit, especially the two pertaining to listening and public policy. I associate listening in a Detroit context with regional collaboration—which Detroit and its neighbors have improved upon in recent years. For example, regional authorities were created for entities such as Cobo Hall (our convention center), and regional leaders came up with the “grand bargain,”(11) which helped lift Detroit out of bankruptcy (and save the Detroit Institute of Arts’ collection). More regional collaboration will be needed for other solutions, especially public transportation, which has the potential to increase labor mobility and help better match employers with employees. With regard to public policy, Detroit must continue to improve its delivery of police and fire service in order to ensure the safety of its citizens.

The importance of social mobility and neighborhood investment that Mayor Peduto underscored at the summit is shared by Detroit Mayor Mike Duggan, as demonstrated in his 2015 state of the city address. (12) The magnitude of Detroit’s turnaround will be determined by how far it can reach outside of Detroit’s Downtown and Midtown neighborhoods and into other areas of the city. Just as in Pittsburgh, a strong correlation between neighborhood investment and neighborhood condition exists in Detroit. Mayor Duggan has looked to increase neighborhood investment through programs such as the Detroit Blight Task Force and Detroit Land Bank. One of Detroit’s challenges is to better coordinate activity between city government and city neighborhoods as Pittsburgh has done. Mayor Duggan is in the middle of implementing his neighborhood plan, which included the creation of a Department of Neighborhoods, placing neighborhood managers within each City Council District.(13) Plans to improve social mobility, which in Detroit means reforming Detroit Public Schools have been presented by a task force and Michigan Governor Rick Snyder.

Conclusion
Detroit faces the same obstacles Pittsburgh faced and continues to face, though the magnitude of those obstacles appears larger in Detroit. Most of the obstacles will require greater collaboration among community developers, city leaders, and regional stakeholders so that as many Detroiters as possible can experience the city’s rebound. In many ways Pittsburgh’s redevelopment can serve as a model for Detroit’s, but in other ways it cannot. When the Pittsburgh model doesn’t apply to Detroit, Detroit can look to other cities for ideas. Arguably, the biggest take-aways from the policy summit were the many different plans and strategies other cities have executed that are available to help cities such as Detroit return to prosperity.

Footnotes
(1) Those publications are The Economist, Forbes, and Places Rated Almanac; see https://www.clevelandfed.org/~/media/Files/Events/2015/2015PolicySummit/presentations/PechaKucha_Andrews.pdf?la=en.
(2) See http://www.pbs.org/wnet/need-to-know/economy/shrinking-cities-detroit-pays-its-residents-to-move/8819/
(3) See https://www.itdp.org/library/standards-and-guides/the-bus-rapid-transit-standard/what-is-brt/.
(4) See http://www.eastliberty.org/sites/default/files/plan/files/1999%20Communityplan.pdf.
(5) See http://mosites.net/portfolio/eastside-iii/.
(6) See http://www.post-gazette.com/local/city/2013/11/04/New-era-in-E-Liberty-housing/stories/201311040065
(7) TIF is a financial mechanism used by municipalities and other governments to promote economic (re)development. TIF is intended to generate economic (re)development activity that would not otherwise occur. It works by establishing a specifically defined district, using incremental growth in revenues over a frozen baseline amount to pay for (re)development costs. TIF may utilize property, sales, or utility tax revenues.
(8) See p.3 of https://upress.pitt.edu/htmlSourceFiles/pdfs/9780822942825exr.pdf.
(9) See http://gbc.org/about-us/gbc-history/.“>gbc.org/about-us/gbc-history/.
(10) See http://www.northlakeshoredrive.org/about_history.html.
(11) See http://www.pbs.org/newshour/bb/behind-detroits-grand-bargain-emerge-bankruptcy/.
(12) See https://www.youtube.com/watch?v=GYj9h8i5_60.
(13) See http://www.dugganfordetroit.com/wp-content/themes/duggan/DugganNeighborhoodPlan.pdf.

Economic Development in Detroit

By Rick Mattoon

Detroit is the focus of this blog examining economic development issues in the five largest cities in the Chicago Fed’s District. (For a complete profile of all five cities see “Industrial clusters and economic development in the Seventh District’s largest cities”. Relative to the other large cities, Detroit faces some special challenges. Home to the domestic auto industry, Detroit grew and flourished until increased foreign auto competition began to erode the dominant position of Detroit-based auto producers. With a challenged industrial base and increasing racial strife culminating in the 1967 riots, Detroit began a long process of population out-migration. The city’s population fell from a high of 1.8 million in 1950(1) to the most recent estimate of just under 700,000(2). This combination of industrial and population decline severely challenged the fiscal condition of the city. The city’s large geographic footprint (140 square miles) and declining tax base made it increasingly difficult to provide city services, culminating in a 2013 Chapter 9 bankruptcy filing, which is still being resolved. Not surprisingly, the city’s immediate economic development plans aim to stabilize its population, restore government services, and attract new businesses that should find its relatively low property prices attractive.
Detroit’s Industry Structure

Figure 1 shows Detroit’s employment structure and industry concentrations (location quotients or LQs) relative to the U.S. Detroit has five industries with above U.S. average employment shares and location quotients above 1. These industries are manufacturing (LQ of 1.29 or 29% above the U.S. average), professional and technical services (LQ 1.45), management of companies (LQ of 1.34), administrative and waste services (1.15), and health care and social assistance (1.09). This reflects recent efforts by the city to develop business and professional services in the downtown business district, which has led to investments by Quicken Loans and Compuware.

Figure 1
Notes: ND indicates nondisclosure rules prevent reporting of the data. * Denotes employment shares above the U.S. average.
Source: U.S. Bureau of Labor Statistics.

Economic Development Strategy in Detroit

In December 2012, the Detroit Strategic Framework Plan was released.(3) The long-term planning aspect of the report was produced by a mayor-appointed, 12-member steering committee drawn from the business, community, faith-based, government, and philanthropic communities. The Detroit Economic Growth Corporation managed the project. The plan is designed to recognize core assets that the city has and to examine ways to leverage those assets to restore and stabilize the Detroit economy. The plan creates four benchmark goals for the city to achieve by 2030.

• Stabilize the residential population at between 600,000 and 800,000.
• Increase the number of jobs available per city resident from the current level of 27 per 100 people to 50 per 100 people.
• Enhance the regional transportation network to better integrate Detroit and the rest of the MSA and develop land-reuse plans that will repurpose existing vacant tracks for new types of development.
• Establish an ongoing framework for civic involvement.
The plan also has specific economic development elements that are captured by five implementation strategies.
• Emphasize support for four key sectors with highest potential growth—education and medical, industrial, digital/creative, and local entrepreneurship. To support growth in these sectors, the plan calls for aligning private and civic investments. This includes having work force development strategies specific to these four industry clusters.
• Use a place-based strategy for growth. In practice, this would target “employment districts” where resources would be channeled to promote growth. The plan establishes seven of these districts and assumes these geographic areas have the greatest ability to bring job growth to scale. This would be complimented by growth in industrial business improvement districts and developing capacity for green business.
• Encourage local entrepreneurship and minority business participation. The strategy here is to develop local business clusters that serve the Detroit market—for example, using local suppliers to feed existing businesses as well as seeking to diversify the economic base of the city. This strategy assumes the provision of low-cost shared space and improvements in other local services that are currently being underprovided in Detroit.
• Improve skills and support education reform. Much of this focuses on improving existing work force training by linking it more closely to the private sector and aligning training to local industry needs. It also calls for better integrating work force development with transportation, encourages hiring of Detroit natives, and calls for a study designed to improve city-wide graduation rates.
• Review land regulations, transactions, and environmental actions. This is a broad land-reuse program that focuses on land banking for industrial and commercial property as well as improving development outcomes by speeding permitting in employment districts and identifying alternative sources of capital for development.

It is clear that much of Detroit’s plan emphasizes stabilizing the current economic base as a necessary step to attract new investment. The plan also emphasizes the creation of home-grown businesses, which is likely necessary to fill in declines in retail and other services found in many Detroit neighborhoods.

If we look at Detroit’s recent history of employment growth over the recent business cycle (figure 2), we see that for almost the entire 2000s, Detroit had negative year-over-year employment growth and performed significantly below the average for the Seventh District. However, emerging from the Great Recession, Detroit’s employment growth is above the Seventh District average up until late 2013 and early 2014, which happens to coincide with the bankruptcy filing. The rise coming out of the recession likely reflects the rebound in the domestic auto industry, which still exerts a heavy influence on Detroit’s economy.

Figure 2

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1 http://www.freep.com/interactive/article/20130723/NEWS01/130721003/detroit-city-population
2 http://www.detroitnews.com/article/20140521/METRO08/305210136
3 http://detroitworksproject.com/the-framework/

Industrial Cities Initiative Profiled in New Report

By Emily Engel and Jere Boyle

Community Development and Policy Studies at the Chicago Fed recently published profiles of a group of 10 cities that experienced significant manufacturing job loss in recent decades.
The Industrial Cities Initiative (ICI) includes, Aurora and Joliet in Illinois; Fort Wayne and Gary in Indiana; Cedar Rapids and Waterloo in Iowa; Grand Rapids and Pontiac in Michigan; and, Green Bay and Racine in Wisconsin. While each city has been blogged about before (see the “BLOG” tab), a complete set of more detailed profiles are now compiled into one report.

Collectively, the profiles provide insights from local economic development leaders on the cities’ actions in the wake of the job loss that have either helped or hindered redevelopment efforts.
The authors and contributors to the ICI do not pass judgment on individual cities. So, while we understand the temptation to simply link directly to just one city’s profile, we encourage readers to start their exploration of the ICI with the Summary.

The ICI looked at cities’ conditions, trends and experiences and concluded that efforts to improve their economic and social well-being are shaped by:

1) Macroeconomic forces: Regardless of their size or location, these cities are impacted by globalization, immigration, education, job training needs, demographic trends including an aging population, and the benefits and burdens of wealth, wages, and poverty;
2) State and national policies: State and national policies pit one city against another in a zero-sum competition for job- and wealth-generated firms; and
3) The dynamic relationship between the city and the region in which it is located: Regional strengths and weaknesses to a large extent determine the fate of the respective cities.

The ICI homepage provides access to the full ICI report, individual ICI city profiles and related research, and blogs from around the country about cities that share a manufacturing legacy.