MARKET WATCH MINUTE – brought to you by Sterling CRE Advisors
Why do communities compete for companies to move to their area?
Ever wonder why there was so much media coverage surrounding the Amazon HQ2 location decision? There’s no question that large companies expanding or relocating to certain areas brings job growth and hopefully a rise in median income levels – but what about the ripple effect it has on the local real estate market? How does one measure the impact of basic job growth in a community?
WHAT IS EBM?
A tool called the Economic Base Multiplier (EBM) provides a rough estimate of how changes in basic employment will affect total employment in a given region. The goal is to calculate the ratio of total employment to basic employment in an attempt to understand the direct impact of growth or decline on a market as well as the overflow into support industries within that market.
Basic employment is defined as jobs or industries which fulfill the needs of us here in Missoula but then also have excess to export elsewhere. By exporting goods, these jobs bring outside money into the local economy and therefore fuel other “support” jobs such as service industries. Total employment can be derived from adding the total number of basic jobs plus all of the support jobs. By dividing the basic employment for one year by the total employment in the same given year you can find your EBM number. In 2017, Missoula’s EBM was 8.05.
WHAT IS PER?
The Population Employment Ratio (PER) is another useful tool in understanding how the addition of basic jobs can trickle down and impact not only housing but retail demand as well. Population employment ratio is calculated by dividing the total population in a given year by the total employment in the same given year. In 2017, Missoula’s PER figure was 1.97.
Let’s apply Missoula’s 2017 EBM figure of 8.05 and PER score of 1.97 and see what happens when a local company adds one new basic job to the community:
A further explanation of this can be found in the Market Watch Minute video above. In summary, one new basic job in Missoula brings along over 7 additional support jobs which creates demand for office and warehouse space. This one additional basic job also creates almost over 15 new residents which impacts housing demand along with the need for retail and self-storage.
Keep in mind that EBM does not take into account the quality of employment being created in an area. The economic impact of low-skilled or minimum wage jobs is significantly different from those of highly skilled and higher paying jobs. However, the EBM is a useful tool when analyzing the overall future demand for real estate in the attempt to meet the needs of growing industries along with support industries.
This demonstrates why you, as a commercial property owner or investor, can benefit from staying aware of what’s happening in our job market. With Amazon HQ2 promising over 50,000 high paying new jobs – imagine what those commercial and residential demand figures look like when you apply an EBM or PER score. This is the reason communities compete for companies to move to their area and the reason investors and developers should watch job growth closely.
These tools can assist in making more informed decisions in the development of adequate office or warehouse space along with retail and residential projects in Missoula and surrounding areas.