Location remains the golden rule when making real estate investment and development decisions. Buying and developing in a growing, diversified market heightens the likelihood an investor/developer will make a profitable decision that meets discount rate thresholds. Your 401K and SEP IRA advisors have drilled diversification into your brain. While location, including the importance of a diversified market, is a critical driver of real estate success, there is more to making a profitable real estate investment. Determining whether an investment decision will meet an investor’s discount rate (preferred rate of return) can be a tedious, dynamic, and complicated process. Understanding market dynamics is critical to any successful real estate investment or development. This article will provide a crystal ball on how to decipher market stability while having a tool to help project market growth.
What is the single biggest impact on a local economic area? Jobs. But – and that is a big BUT – not all jobs are created equal. “Basic employment” is the queen to driving an economy. Basic employment is made up of industries that rely on external factors (beyond the local economic area) to fuel demand. Basic employment produces and/or supplies more goods and services than can be consumed by the local economic area (Ex: Morgantown MSA) which results in consumption outside of the local community. Examples of basic employers close to BDR’s home base include NIOSH, WVU Medicine and Mitsbuishi. On the other hand, non-basic employment depends almost entirely on local demand. Non-basic employment is defined as goods and services that are solely (or almost solely) consumed by the local economic area. Examples of non-basic employers include dental practices, pediatricians, hair stylists, and restaurants.
The two types work together. Non-basic employment supports the demand created by basic employment. This inflow of dollar (increased purchasing power) comes from outside the local economic area. The Economic Base Multiplier (EBM) is a measure that provides an estimate of how changes in basic employment will affect total employment, number of households and purchasing power within a local economic area.
Site To Do Business is an excellent tool for this type of analysis. The bullet points below provide Economic Base Multiplier data for several Multiple Statistical Areas (MSA) within three hours of Morgantown, WV.
Over the past 12 months, West Virginia has enjoyed significant economic momentum.
Mitsibishi is in the process of bringing an additional 240 jobs to Harrison County. Another deal is in the works for Morgantown Industrial Park which could bring ~150 jobs with scalability for much greater employment. Beyond north central WV, Green Energy recently announced their intent to build electric buses in a new South Charleston manufacturing facility. Green Energy plans to hire 200 jobs initially with potential to scale to 900 WV workers within 24 months. Nucor is constructing a $2.7B, state-of-the-art steel making mill in Mason County, WV. Once fully operational, anticipated employment is 800.
Economic base multiplier theory tells us total job creation is well beyond the job announcements highlighted above. Utilizing the closest MSA’s EBM results in the following jobs created:
Jobs drive an economy. Basic jobs lead to other support jobs, called non-basic, which is calculated via the economic base multiplier.
There are two final steps to fully understand the total impact of these announcements. Our goal is to understand the total dollars flowing into a community as a result of new basic jobs. The next step in the calculation process is to multiply the total jobs by the average household size to get an estimate on total population. The final step is to multiply total households by the average median household income. West Virginia’s state average household contains 2.4 individuals. As of 2019, West Virginia has the following statistics: Average household income is $63,680. Median household income is $46,711. Per capita income is $26,480.
The four announcements highlighted in this article result in guaranteed basic employment (could be more as the business scales) of 1,290. The economic base multiplier calculation provided a total new employment calculation of 4,049 new basic and non-basic jobs. The average household size is 2.4 individuals resulting in 9,718 individuals moving to and or being retained in West Virginia. The purchasing power of these individuals is determined by multiplying per capita income by the number of individuals. These four announcements result in a total increase in purchasing power of $257,332,640. For perspective, West Virginia’s 2020 annual budget was $4.495 billion. The four announcements represent purchasing power equal to 5.7% of West Virginia’s annual budget. These are big announcements for Almost Heaven!
Black Diamond Realty is hopeful this information provides a greater understanding of the dynamic analysis and projections that should be considered when making real estate investment decisions. Economists use many tools, including economic base multiplier, to determine the overall effect on a local economic area. Our team of experts looks forward to working with you on your next project.