Rust Belt Revival – From Doom to Boom

Locals call it “The Pointes”.

Gross Point was one of the highest rent 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 downsizes, slashes wages and clings to survival, the rich have left town. In the process, they are creating a huge 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 the jobs went, the people went too.

First it was the automation of factories that eliminated jobs. Now it’s about a sharp drop in demand for the big automakers’ SUVs and the 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 to Lightstone Group. Home Properties said the sale was “consistent with our strategy of focusing our operations on…higher-growth markets.”

They have left Detroit for dead like many others. The mass exodus has caused real estate prices to fall. Vacancies have gone up. With hard selling, 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 just in Detroit. The entire US Midwest, also known as the “Rust Belt,” faces the same challenges. The towns that sprung up around the manufacturing centers have been abandoned in 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 moved out of town, the Rust Belt factories we closed, boarded up, and left for dead. That is…until America’s next industrial revolution really kicks into high gear 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 go 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 hub of the $18 billion solar industry.

Fortune says, “Nearly all of the current solar manufacturing capacity in the United States 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 facility in Las Vegas, all US-made solar panels are built in the rust belt.

First Solar (NASDAQ: FSLR) has been one of the first to start tapping into the rust belt. The $22 billion solar panel maker recently announced expansion plans for its Ohio factory.

Germany’s Flaberg is slated to build a new solar panel manufacturing plant in Pittsburgh, Pennsylvania.

The original US solar panel developer, Energy Conversion Devices (NASDAQ:ENER), operates three manufacturing facilities in Michigan. On top of that, Energy Conversion Devices has also come up with a plan to nearly double the production capacity at 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 is already well-trained.” .

Frankly, there aren’t many other places in the world that offer a willing, ready, and capable manufacturing workforce. Considering Big Auto’s financial troubles 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 came online 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 void.

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 getting cheaper to stay competitive. The US dollar is not going to regain its strength for a long time (if ever) making US goods cheaper on the world market.

In the long run, the rust belt problems will be fixed. 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. 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 come 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 very 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 have yet to find any highly liquid, easy pure play this time around. But the situation reminds us how to be good investors.

There are not too many people willing to invest a lot of money in the region right now, prices are depressed and this is the time to buy low. And it’s that kind of “buy low” opportunity, which creates the low risk/high upside odds, that the Prosperity Dispatch team is very interested in. As everything unfolds, there will probably be an opportunity to sell high. Ultimately, that’s what investing is all about.