Whenever we are trying to accomplish our strategic analysis on an investment, the first step to knowing if it is a worthy investment is to understand the underlying market dynamics. If real estate is “location, location, location”, why bother purchasing in an area that has stagnant or declining employment? Even if it initially looks like a good deal, you may end up with a vacant building or having to lower rents significantly in the future. Therefore understanding the strength of the local economy is an important first step. Similarly, if we dive deeper into the analysis, we will want to know the ratios of basic vs non-basic employment.
Non-basic employment are essentially jobs that service the local community. Jobs such as retail, local banking, and service based sectors (teachers, firefighters, etc.) keep the dollars within the community, but don’t bring in anything from outside. These jobs, although very useful to the community, do not create wealth but simply support basic employment.
Basic employment on the other hand, are jobs that produce more goods and services than can be consumed by the local community and are therefore consumed from outside the community. A great example of this is in the manufacturing sector, which is why manufacturing is so important to both local and national economies. If a company makes widgets that are then purchased across the US and even internationally, then those dollars are brought into a local community from outside resources. These jobs create wealth for local economies and are a healthy indicator of a growing economy. One basic job can create many non-basic jobs to support those services needed locally. This is why cities fight so hard to bring in basic jobs to their locales.
Awareness of a local economy’s basic employment is an extremely important factor in understanding whether that economy is growing or declining. This in turn can be an indicator on the supply/demand side of the commercial real estate market. Forecasting the future demand is imperative to understanding if an investment is right for you.