If you own two identical buildings, what makes them different? Location is always the answer in real estate.
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 local economy is doing and how it relates to your real estate investment is what we are diving into with a Location Quotient.
What Is a Location Quotient (LQ)?
A location quotient (LQ) is an analytical statistic that measures a region’s industry specialization relative to a larger geographic unit (usually the nation). An LQ is computed 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.
The formula for calculating the Location Quotient is straightforward: a region’s percentage share of an industry, divided by that industry’s national percentage share.
Example: Farming
In Lancaster County, a heavily agricultural county, the 6,108 employers in agriculture represent 2.1% of total employees vs. 1.1% across the US, which provides an LQ of 1.91 (2.1% / 1.1% = 1.91 LQ).
An LQ greater than 1 indicates that the industry is more concentrated in the local area compared to the broader region or nation, suggesting a comparative advantage. Conversely, an LQ less than 1 implies a lower concentration, indicating a potential weakness in that industry within the local economy.
How to Use It
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: Warehousing
Anyone driving up and down our highways in Central PA knows there is warehousing popping up like groundhogs in July. If you wanted to understand how much of a bearing this large industry had on the market as a whole, it can be viewed through a Location Quotient.
In this case, Transportation & Warehousing in Cumberland County has a Location Quotient of 1.44. This means that the 11,359 jobs in this industry in Cumberland County represent 7.9% of the workforce vs. 5.5% nationwide (7.9% / 5.5% = 1.44 LQ).
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: Government
In Dauphin County, the 13,823 employees represent 9% of the county workforce vs. 4.8% in the US, which is a 1.91 Location Quotient (9% / 4.8% = 1.91 LQ). This is a strong example of an industry that is much higher in this county than many places throughout the state, which would be obvious as the Capitol. Understanding the Location Quotient 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 It
As CCIMs and Commercial Realtors, we use Site To Do Business for data to provide Location Quotients. This is a paid program; however, this data is freely available through the US Bureau of Labor Statistics.
Regularly assessing Location Quotients allows investors to stay informed about changes in the economic landscape. Shifts in LQs may indicate emerging industries or declining sectors, providing valuable insights for proactive investment decisions.
Conclusion
Whether targeting thriving industries, exploring niche markets, or ensuring a diversified portfolio, incorporating Location Quotient analysis into real estate investment strategies can be a game-changer in maximizing returns and minimizing risks. We are always happy to consult with our clients on the ways these metrics affect their real estate investment.
