Motown's Message

The car companies brought their headquarters back into the city. The Tigers kept their stadium in downtown and the Lions moved back. You would see some PR about new tech start-ups and strip of restaurant and entertainment venues in the heart of the city. But the population continued to hollow out and vast swaths of empty areas literally were turned back to nature or in other words abandoned. City services stopped in many near empty neighborhoods and the police force is able to solve only a small fraction of reported crimes.

Detroit represents the extreme downside of what can happen to a once dominant American industrial city. Over five decades precipitated in part by 1960s race riots, hundreds of thousands of blue-collar jobs left this high-pay/high benefit union bastion in cold weather country for warm weather right to work states, and they have no incentive to return. And now the Motor City crashes into biggest municipal bankruptcy in U.S. history… What real estate investor would venture into these parts?

In contrast to Detroit, a handful of prominent 24-hour cities like New York, San Francisco, Boston and Seattle flourish as diversified, business wealth centers along global pathways. Of course, add Washington DC and even Chicago into the mix as well as Los Angeles, which qualifies as an important global gateway. These are all representative of relative urban ascendency.

But Detroit is a harbinger for all cities and many states all of which face daunting bills to meet liabilities for public employee retiree benefits—pensions and health care. Like Detroit, all these cities will not have the funding capacity to meet these obligations… some sooner than later. For all his considerable accomplishments, Mayor Bloomberg has conveniently delayed dealing with New York City's public employee unions on the growing need to reduce the city's pension obligations, foisting the hard contract negotiating choices to his successor. Detroit has the easy way out now. Bankruptcy will allow the city to rip old contracts and void its pension obligations—tough luck for all these pensioners. Cents on the dollar lump sums and 401Ks here you come.

But other cities will be soon forced in the direction of this bankruptcy path too. Many of these plans are underfunded with looming increases in their number of beneficiaries, and plan sponsors will not be able to augment investment returns without going down some very risky paths, stretching fiduciary temperaments and bounds.

The consequences will be severe and cannot be avoided. Initially, we will experience increasing tensions and conflict between public administrations and public employees akin to the faceoff, which occurred in Wisconsin last year. More cities will be pushed to the brink—first cutting services and numbers of workers. Public employee compensation and benefits will ultimately be slashed to put governments on firmer financial footing, but city services will be worse—police, schools and sanitation will all be impacted. While streets are dirtier and probably less safe, many workers and seniors will be poorer, stressing the economy and potentially other social safety net programs. The deterioration of average worker pay and benefits we are experiencing for the average worker in the private sector will catch up and take hold further in the public sector.

And all those public employee pension funds that invest in real estate won't be… Oh for those Motown Days of Martha Reeves and the Vandellas—Dancing in the Street:

All we need is music, sweet music,
There'll be music everywhere
There'll be swingin' swayin', and records playin,
Dancin' in the street

Well tomorrow, maybe not so sweet….

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A marketing communication strategist who turned to real estate analysis, Jonathan D. Miller is a foremost interpreter of 21st citistate futures – cities and suburbs alike – seen through the lens of lifestyles and market realities. For more than 20 years (1992-2013), Miller authored Emerging Trends in Real Estate, the leading commercial real estate industry outlook report, published annually by PricewaterhouseCoopers and the Urban Land Institute (ULI). He has lectures frequently on trends in real estate, including the future of America's major 24-hour urban centers and sprawling suburbs. He also has been author of ULI’s annual forecasts on infrastructure and its What’s Next? series of forecasts. On a weekly basis, he writes the Trendczar blog for GlobeStreet.com, the real estate news website. Outside his published forecasting work, Miller is a prominent communications/institutional investor-marketing strategist and partner in Miller Ryan LLC, helping corporate clients develop and execute branding and communications programs. He led the re-branding of GMAC Commercial Mortgage to Capmark Financial Group Inc. and he was part of the management team that helped build Equitable Real Estate Investment Management, Inc. (subsequently Lend Lease Real Estate Investments, Inc.) into the leading real estate advisor to pension funds and other real institutional investors. He joined the Equitable Life Assurance Society of the U.S. in 1981, moving to Equitable Real Estate in 1984 as head of Corporate/Marketing Communications. In the 1980's he managed relations for several of the country's most prominent real estate developments including New York's Trump Tower and the Equitable Center. Earlier in his career, Miller was a reporter for Gannett Newspapers. He is a member of the Citistates Group and a board member of NYC Outward Bound Schools and the Center for Employment Opportunities.