Detroit Goes For Broke

In the largest bankruptcy filing by a city ever, Detroit filed Chapter 9. The effect of bankruptcy could be devastating on the public sector. The man at the center emergency manager for the city, Kevyn Orr, who has since been negotiating with Detroit’s many bondholders and other creditors about restructuring the city’s debt. Those negotiations were at an impasse this week, with the fate of about $11 billion in unsecured debt proving especially contentious. One area that could be adversely affected is pensions for the city’s 21,000 public-sector retirees which could be slashed since the municipal shortfall accounts for about $3.5 billion of the city’s $18 billion in debts. The unions have shot back that pensions are protected by Michigan’s Constitution.

The filing is a new arc in a narrative of decline that has come to symbolize the Rust Belt the and the deindustrialization of America. The facts are striking  – the 5th most populated state in 1950 that now ranks 18th as people have left; unemployment that has doubled since 2000; and an unemployment rate of 16%.

So where do we find some good news? In the private sector. The three major publicly-traded companies based in Detroit — General Motors,  Ally Financial and DTE Energy all  released statements saying there will be no impact on their operations, while venture capitalists say innovation will continue to thrive. Over the last 5 years,  more than $10 billion and some 12,000 jobs have been added by the private sector in Downtown Detroit.

While the effect on the real estate industry has been severe — the metro area  has a 26% office vacancy, 78,000 abandoned buildings and 66,000 vacant lots– the CBD has also seen positive shifts.  According to Newmark Grubb Knight Frank, the Central Business District “has been the dominant submarket in Southeast Michigan with large and small tenants alike migrating downtown”.  The trend began with Blue Cross Blue Shield, DTE Energy and Quicken Loans in 2011 leasing a combined 750,000 square feet. Then in 2012, companies like Title Source, Chrysler, PricewaterhouseCoopers, Metro-West Appraisal Co and Agency 720 leased just under a half million square feet combined.” Acording to Newmark the vacancy rate could hit its lowest level since 2002 by end of year. It’s cold comfort for the city’s municipal workers but it does prove the private sector might show the way out.