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Of Domes and Homes

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4 Responses

  1. Jeff Lipshaw says:

    In fairness, I don’t think it’s Michigan that causes the Silverdome problem. The problem with the Silverdome is the Silverdome. It sits on (in better economic times) an attractive and well-located piece of property. But it’s a football stadium without a football team. The true value of the property is not the amount bid, but the amount bid plus the amount it would take to reduce the property to its pristine state – i.e., leveling the building.

  2. Mark Edwards says:

    Quite true. An another way to put that is, the commercial tenant of the Silverdome held all of the power over its value. Interestingly, the new owner of the property says he wants to use it for sports event, although he could level it and build something new.

  3. Jeff Lipshaw says:

    I agree with your point on the power of the tenant, but it strikes me that it arises because of the non-fungible and substantial fixed nature of the asset (which indeed was dictated by the tenant at the outset). You could have a very powerful tenant in an attractive office building in mid-town Manhattan, able to dictate terms versus the owner, and not have the Silverdome problem. You could also have a smaller building and not have the Silverdome problem (I see a lot of restaurants that clearly used to be A&W Root Beer Drive-Ins.)

    If there is something particularly “Michigan” about the Silverdome problem, it’s the problem of dealing with the redeployment of large fixed assets when the forces of creative destruction take down an industry. As a former executive in the chemical industry, I can attest to the dilemma of the rational impulse to continue to operate fixed assets, even when they are not returning their total costs, because, in the short term, there is a marginal return on the marginal cost. It’s Microeconomics 101 – you operate at a loss on total costs until you reach the shutdown point of no marginal profit. If it were just one chemical plant sitting somewhere that has been made non-competitive (somewhere after not returning total costs and extending to shutdown), it would be unsightly, and the owners would have taken the loss, but it wouldn’t be a crisis. It’s a crisis in Michigan because it’s happened to an entire industry at the same time.

    It’s also not the first time it’s happened to an industry in Michigan. Take a drive some time around the Keweenaw Peninsula, the part of the U.P. that juts into Lake Superior. Calumet, Michigan and the surrounding township used to have 25,000 people there, mining copper. I think about a thousand live there now. Copper Harbor, at the very tip of the peninsula, still has street grids laid out.

    Nor is it unique to Michigan – see steel towns in Pennsylvania, mills and factories in Massachusetts. But I’m not sure anything has ever compared to the auto industry in terms of the dependence of whole regions and nations. During the Chrysler bailouts of the 1980s, I remember hearing George Will, supporting the idea, say that something like one-sixth of the U.S. GDP was related to the auto industry.

  4. Mark Edwards says:

    Jeff, thanks very much for the very cogent analysis. Honestly, I think your analysis of the situation is better than mine. My post was written very much in the spirit of being dumbfounded by the contrast between the Silverdome firesale, on the one hand, and the necessity of court intevention to get low income housing built, on the other. In one case, the lack of a commercial tenant kills the property; in the other, the presence of ready and willing residential tenants can’t get the property developed without court intervention. It struck me as a stark illustration of the difference in bargaining power between commercial and residential tenants.

    You are certainly correct that if there is anything uniquely Michigan about the Silverdome sale — and I don’t think there is — it is that the industrial midwest faces the problem of enormous sunk costs in existing commercial properties that are no longer commercially viable. The economic life has left the shell of the buildings that housed it, leaving the buildings behind. In New Orleans, on the other hand, the low income housing is gone, but the lives of those who inhabited it for the most part remain. In each case, the only solution isn’t very satisfactory to those who live there: a firesale on a $55M property in Michigan, and the development of low-income housing in middle class neighborhoods around New Orleans.