ULI SPRING CONFERENCE
Detroit, Michigan / May 2018
“The intersection of Depression and Inspiration”
Having heard about Dan Gilbert, Quicken Loans and the Renaissance in Detroit, I was excited to see it all firsthand. Truth is I only knew there was something special happening there but I didn’t know much of the story. I do now. The opening of the conference featured a welcome speech first from Dan Gilbert and second from Chris Ilitch. Gilbert is a Detroit native who sold his mortgage company to Intuit and then bought it back and is now known as Quicken Loans. He decided to move his company from Cleveland to Detroit as he was planning for growth. And growth he achieved. Moving their headquarters and 1,700 employees to downtown Detroit in 2010, Quicken Loans now employees more than 17,000 people there and 30,000 companywide. The transformational effect on both the city of Detroit and his company is impossible to overstate. In fact, it is the transformation of the city that actually had me feeling depressed. I will explain in a minute.
Chris Ilitch spoke next. He is an heir to the original founders of Little Caesars Pizza and is carrying on a family tradition of investing substantially in downtown Detroit. Between these two, they have made so much happen, from a new arena for the Pistons and Red Wings, to the baseball park for the Tigers and Ford Field all in a downtown sports/arena district. Both of them have been prolific real estate developers and investors and have absolutely changed the trajectory of this city. Gilbert has renovated or built over 3.2M square feet so far investing more than $5.6 billion! Ilitch is investing over a billion in one project alone. And this is why I was depressed after day one at the conference. I literally felt as if all the efforts of our company and those of my colleagues in San Antonio are somewhat in vain. We simply do not have corporate executives and companies with the might to make such an impact. In fact, just thinking about Valero and NuStar being located in the burbs and Andeavor being sold to an out of town company made me think we just won’t have the catalyst to see the kind of development and energy in the core of the city that Detroit has right now. The energy and vibe happening there is nothing short of energizing. But as I said in the title I wrote above, I will share my inspiration at the end of this summary.
One of the first nuggets that Dan Gilbert shared included a recollection of his upbringing in Detroit. Detroit had been in decline for the 60 years leading up to 2010. The city shrunk from more than 2,000,000 people to 670,000. The amount of blight and disrepair was unfathomable. The city even filed bankruptcy. Dan coined a phrase “Usta” (pronounced you-sta). His grandfather drove him around as a young kid and told him where all the cool places, businesses, etc… “Usta” be. He talked about what would be the chicken or egg for revitalization. Some people would say “fix the schools…that’s the problem”, others would say “build new buildings and they will come” while others said “clear the blight first.” Gilbert concluded all of the above needed to be done first. And that is what they are doing. They are working on it all. Now he says “Gonna” instead of “Usta” because everywhere he looks he talks about what is “gonna” happen soon.
One of the coolest things he said and I plan to follow his lead, was to engrave a brick on one of their new projects with the name of each and every craftsman working on the project. I will do this at Hemisfair. The reason is he wants the craft folks to be able to bring their sons and daughters downtown and point to their name on the building and be able to show the pride they have in having built that particular building. This is a guy who really gets the bigger picture. In fact, he even says a company mantra is “For More Than Profit.”
Ilitch had nuggets of wisdom as well. One thing was how they built the arena. They lowered the bowl 40’ in the ground in order to have the building fit right in to the scale of the neighborhood. He encouraged us to engage all stakeholders. This piece of advice reminds me of the advice from the main developer of downtown Bellevue across from Seattle, to conduct real serious market research rather than simply rely upon an epiphany in the shower! I will put this reminder into action next week when I organize a visit with a variety of downtown residents to really listen to their feedback regarding needs and wants. Additional advice is to make innovation systematic, have great partners (both public and private), and try to change lives by keeping it local. The way both Gilbert and Ilitch invest in small local businesses was definitely inspirational.
I attended an interesting panel regarding the “flexible office space revolution”. It was particularly interesting because one of the panelists, head of asset management at Morgan Stanley was the original cynic. He was not listening to other panelists whatsoever which included a Deloitte consultant, IBM facilities guy, and a technology solution CEO from Liquidspace. His contention is all millennials will want to move to the suburbs and work in the suburbs and that capital will not support shorter more flexible leases. He was really critical of the WeWork model as well. The alternative view was increasing densification by office users, more and more flexible leasing and outsourcing of office needs. I agree with the latter. The IBM guy said more important than lower rental rates is the ability to flex the office space needs quickly to the needs of the business unit. I believe at some point landlords will figure this out and more leasing by the desk will occur. Liquidspace is just one of many technology platforms that will accelerate this change. Take a look at Convene and Equiem to see more innovations in this space as well.
As always, we have a discussion about the “cycle” and how long can it last??? Many folks say that things such as bountiful capital, very high prices (or low cap rates) with steady but not overwhelming fundaments feels much like 2007/2007 preceding the crisis. The big difference, however, is now there is literally no over-leveraging. There is so much equity in deals, nobody can predict the future very well. My feeling is we will see a fairly long period of flattening of appreciation, but no real value dip. In some markets and product types, however, I do feel like there will be significant rent growth and appreciation. Particularly in the urban core. A combination of two drivers will be the influencers here. One is the continued desire by the younger workforce for walkable amenities and shorter commutes. And the second is the wildcard…self driving cars. The day will come sooner than most people think when it really happens. Check out Chandler, Arizona to see how they are implementing a zone of legalized autonomous vehicles. Once the dam breaks, it will be a flood of communities trying to be early adopters in order to attract more businesses and people to their communities.
We had an interesting presentation from Katerra. They are using a traditional technology based “manufacturing “ model to perform general contracting. They are starting with the majority of their projects being multifamily. They are essentially pre-building offsite in a factory and assembling the building with a “kit of parts” in the field. They intend to be vertically integrated. The bad news for them is they have already burned through $1B dollars. They believe they have a sound financial plan and will raise more cash to take them to profitability. If they can actually remove upwards of 20% of hard costs as they believe, I think many of us are rooting for their success!
Good news on the tax front. The Tax Bill passed by Congress is overall positive for our industry. One challenge is the “carried interest” on the typical promote structure will require a three year hold period in order to qualify for capital gains treatment. However, it appears that if you consider real estate as a Section 1231 gain, the one year still applies. There is some question about the intent of Congress so it is up to your tax consultant to determine for now. A small pick up it appears is property management income looks like it will qualify for a 20% reduction in the tax rate…so a 38% rate will look more like 30%. Lastly, personal property and land improvements are now eligible for a 100% bonus depreciation. The presenter felt strongly that this new tax policy will be in place for at least the next five years because any material change would likely need a complete party change in both the Congress and the White House…not likely.
So why am I inspired and where did my depression go??? Day 2 included an amazing tour of the Bedrock projects including their offices, a Quicken Loans trading floor, and various buildings from offices to alleys. Their work is simply OUTSTANDING! Many thanks to Jim Ketai one of our own Small Scale members who was an early development partner with Dan Gilbert to bring the strategy to life. Bedrock is now a company of 250 people. They are young, talented, energetic and most of all inspired! It is worth a trip to Detroit to see it all. Having now seen it myself, I have renewed inspiration and actually believe that we can do this in San Antonio. It will be our way and our pace, but it will happen. We will all chip in and make it happen. From Hemisfair and Southtown to the Pearl and from the Eastside to the Westside we will all do our part and the total result will be nothing short of AMAZING. I look forward to hosting a ULI conference in 5 years (let’s do it) and showing off our accomplishments!