Reversing the Real-Estate Doom Loop Is Possible. Just Look at Detroit.

Dan Gilbert, a Detroit native and the billionaire co-founder of home lender Rocket Mortgage, is leading the city’s revitalization. His new skyscraper, still under construction, recently topped out at 681 feet, making it the city’s second-tallest tower. It sits across the street from downtown Detroit’s first Gucci store. 

The city’s residential market is also taking off. Home prices in the area are up 40% since 2020, and last fall had the steepest rise among major U.S. metropolitan areas. The number of apartments downtown has more than doubled to 5,903 since 2010, according to the Downtown Detroit Partnership. 

Detroit’s business-district transformation offers lessons to other cities that are struggling to revive their empty downtowns and avoid being sucked into a debilitating doom loop. 

Cities across the country are racing to convert commercial buildings into apartments. They are also adding bars, restaurants and entertainment venues to make up for the missing foot traffic. 

GM is shrinking its office space 

In Detroit, not everything is going right. Office vacancy rates are still high and foot traffic hasn’t fully rebounded to prepandemic levels. General Motors made headlines last week when it said it is staying in downtown Detroit, moving its headquarters to the Gilbert development. But GM will be taking up significantly less space, a sign of the challenge of filling up offices as more employees work remotely. 

Even so, Detroit’s downtown recovery is already ahead of schedule. Its abundance of once-empty buildings offered opportunity. Many are nearly a century old, with small floors and beautiful architecture, said Eric Larson, CEO of the Downtown Detroit Partnership. These are exactly the types of buildings that work well as apartment conversions. 

Before and after Dan Gilbert’s real-estate venture, Bedrock Detroit, renovated the Book Building and Book Tower.

BEDROCK (2)

In more robust markets, such as Midtown Manhattan, these buildings would have been torn down and replaced by characterless glass office towers with cavernous floors. But in Detroit, they remained as ruins, waiting for someone with money and local pride to come and convert them.

That person turned out to be Gilbert, who moved his mortgage company’s headquarters downtown from the suburbs in 2010. 

“We really had three options,” he said. “Extend the leases, go to some farmland and build a campus—which wasn’t really attractive to us—or come downtown and fill up some of these beautiful old buildings that we really loved.” 

Safety was an initial concern. The company built its own security apparatus with guards and cameras to make employees feel safe, but soon found that they needed little convincing to go downtown, Gilbert said. He began buying up nearby buildings in part to make sure they wouldn’t fall to speculators and decay.

He calls his real-estate development strategy the “big bang approach.” Downtown needed apartments, retail and modern office space. “Well, what do you do first?” he asked. “We thought, you really have to do it all at the same time to make it work.”

Gilbert’s companies bought more than 130 properties downtown, spending billions. His real-estate venture, Bedrock Detroit, converted the Book Tower, a century-old, 38-story Italian Renaissance Style skyscraper, into apartments, a hotel, offices, retail, event space, bars and restaurants. The $400 million project opened last year. 

Before and after of a studio unit in Book Tower.

Bedrock is building its 681-foot skyscraper on the site of the former Hudson’s department store. It will include luxury condominiums and a hotel. And the neighboring office building that GM is moving into is part of the project.

For much of the previous century and the start of this one, downtown Detroit was more closely associated with urban decay than renewal. Between 1950 and 2020, Detroit’s population shrank by two-thirds, from more than 1.8 million to around 640,000. Suburbanization and the decline of car manufacturing left the office district with lots of empty and abandoned buildings. 

The hulking ruin of Michigan Central, Detroit’s former train station, became a symbol of urban decay. Dwindling tax revenue helped bankrupt the city in 2013. 

Ford reinvests in downtown

But spurred by Gilbert’s commitment, others began pouring money into downtown real-estate projects. Carmaker Ford is spending more than $900 million to redevelop Michigan Central and surrounding properties. Part of the project, a former mail-processing facility, opened last year and is now home to more than 90 startups, said Michigan Central CEO Josh Sirefman. 

The train-station building is scheduled to open in June. Related chairman and Detroit native Stephen Ross is partnering with the local Ilitch family, owners of Little Caesars Pizza, on a $1.5 billion development at the northern edge of downtown that will include apartments, a hotel, offices and retail. Ross also donated $100 million to a University of Michigan research and education center downtown that is under construction. 

“One thing people forget is Detroit has a lot of old and new money,” said Richard Florida, an urban-studies professor at the University of Toronto.

Rock-bottom office rents long ago forced developers to come up with other things to build. They added casinos and sports venues and restored aging theaters. That made downtown less office-dependent, an advantage in the age of remote work. 

“An allegedly smart urbanist would have probably said don’t do that—billions of dollars on stadiums and casinos,” Florida said. “It sounds odd to say this, but in a way their downtown looks more like a Miami or Las Vegas.”

The bankruptcy and headlines of Detroit’s decay also created more urgency in the city and state to shower developers with tax breaks. These are often controversial but are important because rents in Detroit are too low for projects to pay off otherwise. The Michigan Central project, for example, is set to receive more than $200 million in tax incentives. 

“You’ve got a postbankruptcy kind of energy,” said Sirefman, the Michigan Central CEO. 

Sirefman worked as chief of staff to New York’s deputy mayor, Dan Doctoroff, in the mid-2000s, when the city spent big to rebuild lower Manhattan and turn it into a thriving neighborhood with apartments, shops and restaurants. 

“9/11 in New York was a terrible thing,” he said. “It also created licenses to think big and do big things. And I do think there’s something about coming out of a crisis that creates focus.”

Big developments have drawn small businesses downtown. Nathan Hamood, founder of Dessert Oasis Coffee Roasters, opened a cafe on the ground floor of a converted apartment building in 2015. At the time, the area around the shop was mostly vacant. Hamood didn’t have the money to do market research, but figured the real-estate developers building nearby had done their homework. 

“There was a lot of development happening, and we felt like it was a relatively safe bet,” he said. For a few years, business was lean. But as more apartment buildings opened, customers came. 

More work to do 

Downtown still has challenges. Foot traffic is down from 2019, largely because of remote work. That means fewer customers for local businesses. Rising interest rates and skittish banks have made it harder to pay for development. The joint venture between Related and the Ilitch family’s Olympia Development was scheduled to start building the first offices at their $1.5 billion project last year, but pushed that back. 

“We all feel the broader market,” said Andrew Cantor, who heads Related’s Detroit business.

GM’s move will leave its old home at the southern edge of downtown, the Renaissance Center, with an uncertain future. The automaker owns the property, and Chief Executive Mary Barra told reporters the company is working on finding alternative uses for the building, according to local news reports. 

“We don’t need another hulking ruin, reminding us all over again that in Detroit, we can never climb up quite far enough,” Nancy Kaffer, the Detroit Free Press’s editorial page editor, wrote in a recent opinion piece.

As in other downtowns, people without housing who have mental-health or addiction problems can present a challenge for business owners.

Dessert Oasis hired a security firm after aggressive individuals kept coming into the cafe. “My team isn’t trained in social work,” said founder Hamood, adding that the situation has improved recently.

Still, there is little doubt that downtown Detroit is turning around when many other office districts are heading in the opposite direction. 

“If somebody would have told you there was going to be a Gucci store in Detroit 10 years ago, I mean, I would have laughed at them,” Gilbert said.

Write to Konrad Putzier at konrad.putzier@wsj.com