One Nation: Young, Eager Unleash Rust Belt Economy

Detroit Free Press

Young people are starting to unbuckle the economic promise of Rust Belt cities.

The political and social challenges facing many of America’s former industrial powerhouses like Detroit, Cleveland, Baltimore and Pittsburgh remain enormous. But there are nascent signs of rebound, driven in part by youthful entrepreneurs brimming with new ideas.

Educated workers in their 20s and 30s are moving in or deciding to stay in part to avoid the rising cost of living, taxes and regulations in tech hubs such as New York, Boston and San Francisco. Newcomers increasingly see opportunities to create their own businesses, make their mark and tap underserved markets, thanks to lower barriers to entry.

“Right now in Detroit, it’s cheaper to fail,” says Jay Rayford, who runs Social Sushi Detroit, a networking pop-up connecting people of different backgrounds and social segments together around sushi. He dreams of opening his own restaurant.

City leaders see luring professional, innovative types who drive growth and profits as key to jump-starting a Rust Belt renaissance.

“We can’t do it by imitating the suburbs,” Detroit Mayor Mike Duggan says. “The millennials are coming back in astonishing numbers. Empty nesters are starting to come back. But we have to give them something unique.”

That’s why architect Imani Day and her boyfriend, real estate entrepreneur David Alade, moved from Brooklyn to Detroit last year. “I have never had so many ideas. I have never been stimulated by a place like the city of Detroit,” Day says.

A number of Rust Belt cities saw a dramatic drop in population between 2000 and 2010; Detroit was the most stark, plummeting 25%.

But since 2010, the exodus seems to have slowed, or even reversed in some instances, according to census estimates comparing 2010 to 2015: Indianapolis (+3.8%), Columbus, Ohio (+7.5%), Detroit (-4.8%), Baltimore (-0.1%); Milwaukee (0.8%), Cleveland (-2%), St. Louis (-1.1%) and Pittsburgh (-0.4%).

And a Brookings Institution report shows that in 2009-14, some unexpected cities, including some in the Rust Belt, showed some
high-tech venture capital investment growth and activity or “dynamism,” (albeit on a much smaller scale than traditional venture capital strongholds such as San Francisco and New York.)

Ten metropolitan areas with the greatest losses in economic status in 2000-14 had one thing in common — a greater than average reliance on manufacturing, according to the Pew Research Center. And many of them call the Rust Belt home.

The nation’s leading company towns buoyed by autos, tires, steel and iron decayed over decades for many reasons: Industry buffeted by new global competition sought lower costs and more room, fleeing to the suburbs and beyond. As factories emptied, companies shifted new investment to cities west and south.

Bustling blue-collar cities including Buffalo, N.Y., Toledo and Gary, Ind., saw population declines. Incomes fell. Homes emptied out and employment plummeted. The rise and fall of subprime mortgage lending only exacerbated grim neighborhood conditions. Overall, economic decline left many of these cities poorer and facing hard financial choices.

Politics of Rust Belt
Leading presidential candidates see a region under siege.

Presumptive Republican nominee Donald Trump said he plans to focus on 15 states in the general election including a swath of the Rust Belt — Ohio, Michigan, Minnesota, Wisconsin, Iowa, and Pennsylvania — he says has been stripped by ill-conceived free trade pacts that give away American jobs.

Democrat Hillary Clinton promised to punish companies that leave the U.S. after taking taxpayer subsidies, and she pledged to retaliate against China for dumping steel on the international market.

But some experts say that view may be shortchanging an urban upswing already picking up speed across America’s hard-hat heartland.

“When you listen to some of the political candidates on the left and on the right, don’t you get depressed?” Antoine van Agtmael, coauthor of the new book, “The Smartest Places on Earth, Why Rustbelts Are the Emerging Hotspots of Global Innovation,” asked a Washington audience earlier this spring. “I mean, when you listen it sounds like this country has run out of steam on innovation, that our best times are behind us, and that all we have is problems.”

In Detroit, Duggan won election as mayor in the city’s darkest financial days more than two years ago and spent months solely focused on improving basic city services. But now he asks his staff every week: “How do we rebuild Detroit into a vibrant city with a recovery that provides opportunity to everyone?”

Four years ago, the Motor City teetered on the brink of insolvency. The homicide rate was the highest in nearly two decades. Residents were leaving in droves and about one in every five adults had no job.

But after Detroit filed for the nation’s largest municipal bankruptcy in 2013, it hasn’t looked back much.

Today, more than a year out of bankruptcy court, the city’s finances are stable, with a balanced budget relieved of $7 billion in long-term debt. The violent crime rate including homicides fell last year compared with 2014. Unemployment dropped by nearly half, to around 10%. Detroit’s long exodus of population has slowed to its lowest pace in decades. Some predict next year will show the city’s first population growth since the 1950s.

To be sure, high poverty and crime rates, above-average unemployment and poorly performing schools could stymie Detroit and other postindustrial cities’ future growth. The median household income in Detroit is $25,769, less than half the nation’s median, according to the Census Bureau.

The wealthiest also take a hit. Detroit imposes the highest effective property tax rates and one of the highest tax burdens on high earners, according to a 2014 study of 51 cities by the Washington, D.C., Office of Revenue Analysis.

But Kerry Doman, founder and CEO of After 5 Detroit, an organization that helps companies provide nightlife activities for their employees, said the city has already begun to shake off the perception that there were no jobs and nothing for young people to do after walking out of their office buildings.

“Today there is this newfound excitement about the city of Detroit,” Doman said. In fact, she added that her two biggest clients — auto giants Ford and Fiat Chrysler — are headquartered outside Detroit with workers nonetheless deeply interested in the city’s social scene.

Of the available rental units in the city’s downtown and midtown neighborhoods, more than 97% are occupied, according to the latest report from the Detroit-based Hudson-Webber Foundation. As a result, the city’s sidewalks are often blocked off now by construction workers rehabbing long-vacant buildings and developers eyeing new tenants.

Emergence of brainbelts
Van Agtmael and coauthor Fred Bakker argue these cities are becoming brainbelts. Braced by world-class universities, they confront and solve complex expensive challenges that require multidisciplinary approaches in a collaborative environment. They have an infrastructure that attracts and retains talent. They brashly promote affordable housing that has caused some to shy away from Silicon Valley.

“Innovation is no longer limited to places like Silicon Valley and Cambridge,” says van Agtmael, who highlights innovation in Akron, Ohio, and Albany, N.Y. “It has spread all around the country.”

Buying a home — a relative rarity for the millennial generation — is easier here with an estimated four out of five homes within reach of the middle class. Detroit is the fifth most affordable city in the U.S. for real estate, according to HSH.com, a mortgage-information firm. Residents only need to earn $35,538 a year for a median-priced home.

Other Rust Belt cities round out the top five: Pittsburgh ($29,481), Cleveland ($30,498), Cincinnati ($33,784); and St. Louis ($33,899). San Francisco was the least affordable at $144,196.
Universities as urban anchors

Higher education has taken notice.
Anchor institutions like the University of Pennsylvania in Philadelphia, Johns Hopkins in Baltimore and the Cleveland Clinic seek out the top leaders in their fields and help fund ambitious redevelopment projects to persuade their workers to stay and improve their homegrown talent pipeline.

A new report this month found the University of Michigan, Michigan State University and Wayne State University (the only one based in Detroit) contributed $958 million in economic activity to the city last year, equivalent to $1,400 for each resident. About 11,600 jobs in the city are connected to their work.

“One of the things that Pittsburgh did with the crash of steel and when the economy basically overnight fell apart was they really had the foresight to bring together the university leadership, the government, the industry, all together instead of just looking to industry or looking to one sector basically to solve it,” says Rebecca Bagley, Vice Chancellor for Economic Partnerships at the University of Pittsburgh.

Bagley believes the Steel City is now in an accelerated rate of transformation.

“It’s a moment in time where our connectors, our sort of networks are shifting very dramatically, really over the last year and a half, where we’re seeing an influx of young people, we’re seeing Google has the most people outside of Silicon Valley located in Pittsburgh, Uber moved their autonomous vehicle work there,” she says. “So I mean there just was an explosion of companies moving in, of neighborhoods pushing out. So places you could not go into years ago, you know, are the dynamic technology hub.”

The other benefit is a wealth of human capital already in the region. And manufacturing can still be a part of the economic picture.

It’s now driven by new technology, rising wages in competitor countries and the local development of low-cost, abundant domestic energy, economists say. Sales for automakers, for example, topped a 15-year-old peak last year as cheap gas and a stronger economy lifted demand and boosted company profits.

For those striking out on their own into new fields, Detroit has a solid ranking when it comes to starting a business in part because new hires are willing to work for less, according to personal-finance website WalletHub. Tech employment continues to grow, according to the latest survey from Automation Alley, the technology business association in Troy.

Lack of capital still a challenge
Outside investment in new businesses poses a challenge and an opportunity for entrepreneurs.

While some smaller places do well on a per-capita basis, such as Madison, Wis., venture capital still flows largely to densely packed, dynamic global cities. The San Francisco Bay Area and the Boston-New York-Washington corridor remain the significant centers for venture capital-backed high-tech start-ups in the U.S., according to a report this year from the University of Toronto’s Martin Prosperity Institute.

But Ian Hathaway at the Brookings Institution still wanted to gauge the relative impact elsewhere. So he calculated total venture capital investments as a share of GDP in 2009 and charted how that changed over time in various cities and regions over time.

In a report last month, Hathaway found the Rust Belt showed some dynamism. Regions with relatively little overall start-up capital funding — and the Rust Belt had the least — saw some of the largest percentage increases in the growth of early-stage start-up capital funding between 2009-14, according to his analysis.

Many challenges remain for these cities in addition to a relative lack of capital. Young business creators cite antiquated government regulation and a dearth of qualified employees among their hurdles.

In Detroit, Rayford floated an idea of putting a shipping container into a little-used park to build his restaurant, but he said the city balked.

Andy Didorosi, founder of the Detroit Bus Co., a private transit company, says he has 30 openings for skilled drivers he can’t fill. Anchor Bar owner Vaughn Derderian held off fixing a leaky skylight for more than a decade in part because the business had trouble getting a decent loan.

“It’s easier to get money from outside Detroit than from inside Detroit,” says Alade, a Columbia University graduate and former New York investment banker who now invests in Detroit real estate outside its downtown core.

Suburban to urban
Justine Sheu, 28, grew up in Livonia and graduated from the University of Michigan. She became a high school career counselor in Detroit and quickly saw the difference between her suburban privileged upbringing and her students’ meager resources.

And she soon struck on an idea.

“We wanted to match high school students to career pathways and opportunities,” Sheu, CEO of Evolve Lifestyle Group that runs the website pro:up, says while sipping on an iced tea at Detroit’s TechTown, a business incubator at Wayne State University.

She completed a start-up boot camp at TechTown two years ago and launched two companies, including a test prep service for Detroit students that already pays the bills. Her latest career matching site also has won $55,000 in initial investments through entrepreneurial competitions.

“Detroit has been incredibly welcoming,” Sheu says. “I think it’s just on the verge of taking off.”