By Ketan Patel
Date February 28, 2018

The Key to Predicting Demand for Real Estate : Employment

Supply and demand determines the price of real estate, just as it does for everything else. But what determines demand? It would be wonderful to have a crystal ball to forecast demand for industrial and residential real estate in order to evaluate investment opportunities. While no one knows for sure what the future holds, successful real estate investors know that employment is the number one factor driving real estate demand. Let’s understand the employment and real estate demand model.

1. Economic Base Analysis

Economic Base Analysis (EBA) identifies local industry sectors that will produce goods and services beyond the needs of local market, bringing money into the community, creating jobs and increasing demand for real estate. The basic economy is a key indicator of current and future commercial real estate demand. Employment is the main reason why people choose to live in a geographic location. For the most part, people live in a specific place because a particular job type is available close by and they expect the job to continue into the future. A good job enables people to acquire goods and services, including housing. Employment is such an important determining factor that economic growth is measured by the increase in jobs and earnings.

2. Types of Employment

Basic employment is the export sector and consists of all the activities that produce more goods and services than are consumed in a local area, driving the local economy. Excess production from basic employment allows money to be imported back to the local economy. An example of basic employment is the production of automobiles in Detroit or governmental services in Washington. Non-basic employment refers to the activities that produce goods and services for the local economy, like retail, utilities and banking.

3. The Real Estate Demand Model

A simple Real Estate Demand Model demonstrates that increased employment leads to increased demand for real estate. Basic employment impacts demand for office and industrial space. As people gravitate to the area to take advantage of employment opportunities, the number of households increase. This rise in population leads to increased demand for the residential real estate as well as industrial real estate to serve the community. Employment produces disposable income, which in turn leads to a demand for retail.

Tips for Using Employment to Forecast Demand

Economic Base Analysis dates back to the beginning of the 20th century when sociologist Werner Sombart used it to forecast local growth. EBA analyzes how export activities and subsequent inflow of income stimulate the growth of a local economy. While the best-known measure of the US labor market is the national unemployment rate, another useful tool is the employment-population ratio that tells what proportion of the working age population is employed. The Employment-Population Ratio is calculated by a simple formula: Total Population / Labor Force Employed. It is a good practice to use this ratio along with unemployment data while conducting your research.

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