If you own two identical buildings, what makes them different? In real estate, the answer is always location.
One of the crucial location metrics in the first rule of real estate is what the local economy is doing at that location. Understanding what the economy is doing and how it relates to your real estate investment is what we’re diving into this week – the location quotient.
What is a location quotient?
A location quotient (LQ) is an analytical statistic that measures a region’s industry specialization relative to a larger geographic unit, usually the nation as a whole. The LQ is computer as an industry’s share of a regional total for some economic statistic (earnings, GDP by metropolitan area, employment, etc.) divided by the industry’s share of the national total for the same statistic. For example, an LQ of 1.0 in mining means that the region and the nation are equally specialized in mining, while an LQ of 1.8 means that the region has a higher concentration in mining than the nation as a whole.
The formula for calculating the location quotient is straightforward:
Example 1: Farming – In Lancaster County, a heavily agricultural county, the 6,108 employees in agriculture represent 2.1% of the total employees in the region versus 1.1% across the United States. This provides an LQ of 1.91.
A location quotient greater than 1 indicated that the industry is more concentrated in the local area compared to the broader region or nation, suggesting a comparative advantage. Conversely, an LQ greater than 1 implies a lower concentration, indicating a potential weakness in that industry within the local economy.
How to use location quotients
- Identifying Economic Strengths and Weaknesses:
A high location quotient in a specific industry within a region signifies a strong economic base in that sector. Real estate investors can capitalize on this information by focusing on properties in proximity to thriving industries, as these areas are more likely to experience sustained growth.
Example 2: Warehousing – Anyone driving up and down our highways in Central PA knows there are warehouses popping up like groundhogs in July. If you wanted to understand how much of a bearing this large industry has on the market as a whole, it can be viewed through an LQ. In this case, transportation & warehousing in Cumberland County has a location quotient of 1.44%. This means that the 11,359 jobs in the industry in Cumberland County is 7.9% of the workforce, versus the 5.5% nationwide.
- Targeting Niche Markets:
Location quotient analysis enables investors to identify niche markets with specialized economic activities. Investing in areas with high LQs for niche industries can yield lucrative returns, as these markets often have limited competition and a dedicated consumer base.
Example 3: Government – In Dauphin County, the 13,823 employees represent 9% of the county’s workforce, versus 4.8% in the US, which is a 1.91 location quotient. This is a strong example of an industry that is much higher in this county than many places throughout the state, would would be obvious as the Capitol is located in Dauphin County. Understanding the LQ helps you understand how much of an effect this has on the local economy.
Niche markets can also present opportunities for property development catering to the specific needs of the workforce in those industries, such as tailored housing solutions or commercial spaces.
Where to find the location quotient
As CCIMs and Commercial Realtors, we use Site to do Business for the data to provide location quotients. This is a paid program; however, the data is also freely available through the US Bureau of Labor Statistics.
Conclusion
Regularly assessing LQs allows investors to stay informed about changes in the economic landscape. Shifts in location quotients may indicate emerging industries or declining sectors, providing valuable insights for proactive investment decisions.
Whether targeting thriving industries, exploring niche markets, or ensuring a diversified portfolio, incorporating location quotient analysis into your real estate investment strategy can by a game-changer for maximizing returns and minimizing risks.
We are always happy to consult with you on the ways these metrics affect your real estate investment. Contact us with any questions or to schedule your consultation.
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