Detroit, Michigan
The “Motor City” is Coming Back for More
By Carole VanSickle Ellis
At the end of 2023, Detroit, Michigan, was enjoying some unseasonably warm weather thanks to a “no-snow December” that posted high temperatures in the 40s and about one-tenth of an inch of snow for the Motor City (vs. “normal” December temperatures around 30° Fahrenheit and snowfalls of more than 10 inches). Maybe it was the real estate market. Detroit’s housing prices have been significantly hotter than usual – just like the weather.
“Detroit raced past Miami as the fastest-appreciating housing market,” gushed the New York Post in early January 2024. Miami spent 16 months in the top spot, but fell in November, CoreLogic reported, thanks to Detroit’s 8.7% year-over-year appreciation (vs. 8.3% in Miami). Al Bazzy, Detroit turnkey provider Strategy Properties broker and property specialist, thinks Michigan business and tax policies could have something to do with the Motor City’s “win.”
“Michigan has one of the lower corporate income tax (CIT) rates in the country at just 6% and a flat income tax of just over 4% on taxable income,” Bazzy observed. Detroit is also among the most affordable major metro areas in the country with a cost of living lower than most other cities of its size.
A Downtown Revitalization Continues to Yield Returns a Decade Later
In 1903, when Henry Ford founded the Ford Motor Company in Detroit, he laid the foundation for what would become a booming economic engine that would power much of the state. By 1920, the “Motor City” was the fourth-largest city in the country and hosted General Motors, Ford, Chrysler, Packard, and Studebaker.
When the automotive industry began to decentralize in the 1960s and 1970s, the Motor City and its residents suffered in the fallout. Between 1950 and 2010, the city lost 61.4% of its population and experienced a dramatic increase in poverty. In the wake of the housing crash in the mid-2000s, nearly one-third of Detroit’s 139 square miles were considered abandoned land and the city lacked resources for basic municipal services like streetlights.
Many believed the city had seen its last heyday, but groundwork laid by Dan Gilbert, CEO of Quicken Loans, when he decided to move his company’s headquarters and 4,000 employees to downtown Detroit in 2007, changed the city’s downward trajectory.
Following Quicken’s lead, Blue Cross Blue Shield of Michigan, DTE Energy, and other corporations also moved into the downtown area, acquiring properties and redeveloping vacant land. Beginning in 2014, JPMorgan Chase committed more than $200 million to the downtown revitalization, including putting funds toward reviving real estate, launching small businesses, and jobs training for residents.
Michael Illitch, founder and owner of Little Caesar’s Pizza and longtime supporter of Detroit professional sports, also fulfilled his company’s own $200 million promise of private investment in the downtown area when he opened Little Caesars Arena and “District Detroit,” a commercial, entertainment, and residential district with the arena as its “nucleus.” The development required $2.9 million in workforce training and ultimately cost Illitch companies $539 million.
The arena alone brought in nearly 2,000 jobs, and District Detroit created more than 20,000 construction and construction-related jobs as well as 3,000 other permanent jobs. More recent analyses put that number closer to 9,000.
“Detroit has rebounded to a degree few would have thought possible,” wrote Fortune contributor Matthew Heimer in September 2023. “Thousands of small businesses have helped revitalize neighborhoods. New housing is replacing dilapidated, vacant buildings. Startups are flocking to a rebuilt downtown, and the jobless rate is down to 6.4%,” he continued.
In 2018, Google moved into the District from the suburbs; Microsoft offices followed in 2019, and Tesla announced in late 2022 it would bring a “unique new R&D facility” to the Detroit area.
Bazzy noted the city’s revitalization is still ongoing; investors in the metro area are almost exclusively focused on fix-and-flip strategies that enable them to sell for top dollar to retail buyers. If an investor wants to own single-family rental (SFR) properties, he continued, they must look to more suburban areas.
“So many areas of the city are so hot, we focus on acquiring a couple streets down from the really in-demand sub-divisions where prices have doubled or tripled,” he explained.
“More Competition” Than Ever
As the Detroit housing market heats up and fewer homeowners elect to sell their properties, competition for available assets in the Detroit area is heating up as well. However, median home prices are still much lower, relatively, than in other cities of comparable size; Detroit-area median home prices hover around $250,000 (vs. nearly $400,000 nationally). Prices are still climbing, and local analysts say it is unlikely that the Detroit market will correct to the same degree as other pandemic-boom markets.
High levels of housing demand will keep the value of rental properties high for the foreseeable future, although investors interested in short-term rentals could find themselves in a position where conversion begins to look appealing. According to data from AirDNA and Axios, Detroit hosts are experiencing below-average income despite the state of Michigan’s overall appeal in this space. In fact, Detroit hosts earned about $7,000 in 2022 (the most recent numbers available) compared to a national median of $14,000.
Investors should note, however, Detroit’s long-term rental owners face strict compliance requirements, with the city demanding rental property owners obtain a certificate of registration, pass inspection by the city each time a property gets a new resident, and obtain a lead clearance report. All of these requirements feed into a municipal certificate of compliance, which indicates a Detroit property is safe for occupancy. This process is handled by the Buildings, Safety Engineering & Environmental Development (BSEED) Department on a municipal level.
Bazzy observed that many rental properties in Detroit were built prior to World War II, making them more susceptible to code and health issues, one of the primary reasons for the development of the BSEED programs.
The age of inventory in the city and surrounding areas also means there are a lot of three-bedroom, one-bath homes that represent prime opportunities for investors in SFR rentals. Although retail buyers tend to seek out more modern four-bedroom, two-bathroom homes, renters are often satisfied with the slightly smaller, less modern floor plans in exchange for location and a competitive rental rate.
“People will chase a deal,” Bazzy said. “We are not finding it is necessary to try to add a bath, although of course if you do it may mean you can raise your rental rates.” Similarly, he noted, out-of-state investors should be aware the state of Michigan does not consider centralized air conditioning a necessity. “A lot of metro Detroit still does not have centralized air conditioning,” he said. “Investors should know that this is not necessarily a dealbreaker.”
As competition continues to rise in the area and an increased portion of the population moves into the area from out state, some of these trends could change. Millennial homeowners enticed to the area by the option of living near the city center in “niche neighborhoods,” as US News & World Report described them, may have different demands as their financial wherewithal increases but they find themselves still unable or unwilling to purchase a home.
“Detroit currently sits on the edge of a renaissance,” predicted US News analyst Nicole Jankowski. That renaissance could mean huge opportunities for Motor City investors in 2024.
SIDEBAR
By the Numbers
1 — “Best place to Go in North America & the Caribbean”
Condé Naste Traveler, 2024
18 — “Where to Go in 2024” (global list)
AFAR
1 — “Best Riverwalk in the Country” (Detroit Riverwalk)
USA Today, 2023
65 — “Best Places to Retire” in 2023
US News & World Report
5 — “Best Places to Live in Michigan in 2024”
US News & World Report
3 — 3rd-most affordable populous county (Wayne County) for “local, average workers”
ATTOM Data
4 — 4th-highest potential annual gross rental yields for 2023 (Wayne County, 13%)
ATTOM Data
2 — Ranked second on list of 17 “SFR Growth” counties (Wayne County) where wages grew over past year and potential 2023 annual gross rental yields exceeded 10%
