To assess the growth potential of a city, an analysis of its economic base is employed. What does this entail?
The economic base of a city is divided into two parts: export-oriented industries and local services. If a city produces surplus goods and “exports” them, it attracts a workforce to the corresponding export industries, which naturally leads to population growth. Consequently, the stronger the export potential, the greater the growth expectations for the city (or region).
How Are Export-Oriented Industries Identified?
To distinguish export industries in an economic base, employment levels in a given industry are evaluated both locally and nationally. A quantitative parameter known as the Location Quotient (LQ) is used, calculated as follows: LQ=(Nmi/Nm)(Ni/N)LQ = \frac{\left( N_{mi} / N_m \right)}{\left( N_i / N \right)}
Where:
- NmN_m = Total employment in city mm
- NmiN_{mi} = Employment in industry ii within city mm
- NiN_i = National employment in industry ii
- NN = Total national employment
If LQ>1LQ > 1, the industry can be considered export-oriented. However, in practice, to confirm export status, the LQ must significantly exceed 1 and demonstrate long-term consistency.
The Multiplier Effect of the Export Base
It’s important to understand that employment growth in export-oriented industries influences the growth of local service industries. Such employment attracts professionals from outside the region, bringing in family members and increasing local consumption, which supports local industries.
Two types of multipliers are calculated:
- Employment Multiplier = Total employment growth / Growth in export-industry employment
- Population Multiplier = Total population growth / Growth in export-industry employment
Statistically, the employment multiplier is often between 2 and 4, while the population multiplier can range from 3 to 9.
Classification of Cities by Export Base
Cities can be classified by their export base. For example, Glenn Mueller (1993) grouped U.S. cities as follows:
- Agricultural
- Financial, insurance, and real estate
- Government
- Manufacturing
- Military
- Mining
- Service
- Transportation
- Diversified
Real Estate Investment Considerations
The above analysis focuses on a city’s growth potential, but a city with a higher growth rate compared to another does not necessarily yield better returns on real estate investments. Assessing the supply side is equally critical. Rapidly growing cities may experience oversupply, which can negatively impact financial performance.
Thus, when making real estate investment decisions, it is essential to correctly evaluate the long-term equilibrium between supply and demand at stable price levels.
Source:
Commercial Real Estate Analysis and Investments by D. M. Geltner, N. G. Miller, J. Clayton, P. Eichholtz