Rust Belt Revival – From Doom to Boom
The locals call it “The Pointes”.
Gross Point was one of the highest renting neighborhoods in the country. It is located between Detroit and Lake St. Clair. Its wooded landscape, mild summer climate, and proximity to industrial areas have made it a popular residential neighborhood for industrial titans for a century.
The Pointes was one of the hottest real estate markets in the 1920s. You had to have a mansion in Gross Pointe if you were an executive in Detroit’s booming auto industry.
Fast forward 90 years and we have a completely different picture. There are “for sale” signs hanging from many houses. As Big Auto shrinks, cuts wages and clings to survival, the rich have left town. In the process, they are creating a great opportunity to break into the bottom.
Thanks in part to big trouble at General Motors (GM:NYSE) and Ford, which got tough at Gross Pointe. But it’s probably worse in Detroit. More than a million residents have fled Detroit since 1950. When jobs went, so did people.
First it was factory automation that eliminated jobs. Now it’s about a sharp drop in demand for SUVs from big automakers and an inability to compete against cheaper (and sometimes more efficient) foreign labor. Detroit’s population is now less than 900,000.
Recently, Home Properties Inc. (NYSE:HME), a residential real estate investment trust (REIT), offloaded 5,000 Detroit apartments at Lightstone Group. Home Properties said the sale was “consistent with our strategy to focus our operations on…higher growth markets.”
Detroit has been left for dead like so many others. The mass exodus has caused the fall in real estate prices. Vacancies have gone up. With the hard sell, there are many great sales. Mansions that originally sold for $2 million just a few years ago are selling for $1 million.
However, it is not only in Detroit. The entire US Midwest, also known as the “Rust Belt,” faces the same challenges. The towns that sprang up around the manufacturing centers have been abandoned in much the same way as Detroit. Slowly but surely, all of that is starting to change.
A renaissance in the Rust Belt seems to be starting slowly but surely and investors could reap a pretty solid payoff.
You see, when industry went out of town, the Rust Belt factories we closed, boarded up, and left for dead. That is… until the next industrial revolution in the US really picks up speed and brings prosperity back to the Midwest.
It may surprise you, but one of the fastest growing manufacturing industries is staying in the United States. They don’t head to the low-cost, labor-intensive factories of Vietnam, Mexico, or China, they stay here.
In fact, the migration has already started. Big Auto is moving out of its factories in the Ohio River Valley and Big Solar is moving out. The way things are going; The United States will become the manufacturing center of the $18 billion solar industry.
Fortune says, “Nearly all of the United States’ current solar manufacturing capacity is in the Midwest.”
And they have all the reason. With the exception of Nanosolar’s thin-film facility under construction in California and Ausra’s Las Vegas facility, all US-made solar panels are built in the Rust Belt.
First Solar (NASDAQ: FSLR) has been one of the first to start taking advantage of the rust belt. The $22 billion maker of solar panels recently announced expansion plans for its Ohio factory.
Germany’s Flaberg is slated to build a new solar panel manufacturing facility in Pittsburgh, Pennsylvania.
The original US developer of solar panels, Energy Conversion Devices (NASDAQ:ENER), operates three manufacturing facilities in Michigan. On top of that, Energy Conversion Devices has also submitted a plan to almost double the production capacity in one of them.
These solar powerhouses have spotted the value in the rust belt and are making the most of it. The CEO of Energy Conversion Devices says, “Our processes really require high productivity, so what makes it competitive here in the Midwest is that we have a great workforce that is eager to work and already well-trained.” .
Frankly, there aren’t many other places in the world that offer a willing, ready, and capable manufacturing workforce. Given Big Auto’s financial woes and scheduled closures, there will be much more space and skilled labor available for the solar industry. And if any industry needs more capacity, Big Solar needs it.
Last year 2,800 megawatts (MW) of solar power capacity was installed. Only 1,700 MW of new solar power was brought online in the previous year. That’s a lot more than a 21 MW mother in 1985.
The solar industry is growing… fast. They need more capacity. The rust belt will help fill that gap.
The rust belt will return to prominence with the help of the solar industry. Let’s face the facts. Oil is not going back to $20 a barrel any time soon. Midwestern labor is becoming cheaper to remain competitive. The US dollar is not going to regain its strength for a long time (if ever) by making US goods cheaper on the world market.
In the long run, the rust belt problems will be resolved. The US may not have been one of the first to push the development of a solar energy industry, but they are cutting big checks to get caught up. There are billions of dollars of investment flowing into the solar industry and the industrial belt will get a big chunk of that investment.
The rust belt is not doomed to economic oblivion. It just has to change with the times as all of us have to.
The rust belt will be back to life soon. Investors willing to buy shares of companies that are taking advantage of the situation or willing to buy real estate assets at dirt cheap prices will be well rewarded in the next five to ten years.
Companies like the Lightstone Group, which bought all those Detroit apartments, see the potential here. Although they have an advantage. As a private firm, Lightstone has the luxury of a genuine long-term perspective. A publicly traded company like Home Properties does not. He has to report to a myopic Wall Street every three months.
Investing in the rust belt is a long-term proposition, but all the fundamentals are there. At the moment, I still haven’t found any easy and highly liquid pure play this time around. But the situation reminds us how to be good investors.
There aren’t too many people willing to invest a lot of money in the region right now, prices are depressed and now is the time to buy low. And it’s that kind of “buy low” opportunity, which creates the low risk/big upside odds, that makes the team at Prosperity Dispatch very interested. As everything plays out, there will probably be an opportunity to sell high. In the end, that’s what investing is all about.