Regional Economic Impact of a Commercial Project: A RIMS II Approach

Regional Economic Impact of a Commercial Project: A RIMS II Approach William Green, Sam Houston State University Edward Blackburne, Sam Houston State University Robert Stretcher, Sam Houston State University April 10, 2013 Summary Regency Industries, LLC is developing a regional center in Mecklenburg County, North Carolina that will be known as Center Gate which, if approved, will be comprised of a hotel with a restaurant and two five-story office buildings with dedicated retail space. The purpose of this study is to analyze the economic impact of the construction and ongoing operation of Center Gate and to demonstrate how this project will promote economic growth through improved regional productivity, job creation, and increased domestic capital investment in Mecklenburg County, North Carolina and the adjacent counties that will be impacted by this project. Commercial real estate development is a vital component of local and regional economic development, supporting construction, architectural planning, engineering, banking, and many other sectors of the economy. The actual development period, however, only considers the one-time short-term effect of construction. The more lasting effect on the economy is the ongoing, long-term business operations phase that will last for decades. When evaluating the economic impact of commercial developments, both the construction and on-going phases of the project should be considered when measuring the total value of a project. 1

Methodology This study utilizes the Regional Industrial Multiplier System II (RIMS II) economic input-output model, developed by the Bureau of Economic Analysis (BEA), to estimate the impact on the region s economy of the Center Gate project. RIMS II allows economic impact to be measured in a variety of ways final demand changes, household earnings, value added, total industry earnings, and job creation. RIMS II is based on an accounting framework called an I-O table. For each industry, an I-O table shows the distribution of the inputs purchased and the outputs sold. A typical I-O table in RIMS II is derived mainly from two data sources: BEA s national I-O table, which shows the input and output structure of nearly 500 U.S. industries, and BEA s regional economic accounts, which are used to adjust the national I-O table in order to reflect a region s industrial structure and trading patterns. Economic impacts must be determined using information provided by the developers of Center Gate; RIMS II multipliers supplied by the Bureau of Economic Analysis; industry sales data; and information gathered from businesses in Mecklenburg County, North Carolina, near the site of the Center Gate project. Regional Industrial Multiplier System II RIMS II multipliers can be estimated for any region composed of one or more counties and for any industry or group of industries in the national I-O table. Use of RIMS II multipliers requires information on the initial changes in output, earnings, or employment that are associated with the project. This information, used in conjunction with the multipliers, can be used to estimate the total economic impact of the project on regional output, earnings, or employment. RIMS II is widely used in both the public and private sector. In the public sector, for example, the Department of Defense uses RIMS II to estimate the regional impacts of military base closings, and State departments of transportation use RIMS II to estimate the regional impacts of airport construction and expansion. In the private sector, analysts, consultants, and economic development practitioners use RIMS II to estimate the regional impacts of a variety of projects, such as the development of theme parks and shopping malls. RIMS II consists of five types of multipliers. Three of the multipliers are final demand multipliers: for output, for earnings, and for employment. Two additional multipliers are direct-effect multipliers: for earnings and for employment. These multipliers can be used to calculate the economic impact of a change in final demand, in earnings, or in employment on a region s economy. The diagram in Figure 1 graphically depicts the RIMS II Multiplier relationship. 2

Movement through the diagram in the direction of the arrows requires multiplication. Moving in the direction against the arrows requires a division operation. RIMS II Data for Mecklenburg County, North Carolina Output Multipliers The RIMS II data for Mecklenburg County, North Carolina is listed in Table 1 as aggregated into 60 industry categories. The Output, Earnings, Employment, and Value Added multipliers are used in conjunction with an estimate of Final Demand to calculate their respective Total Impact factors. For example, suppose a project within the Forestry, fishing, and related activities sector has an estimated Final Demand of $7,597,000.00. The Additional Output for the project is calculated as $7,597,000.00 1.3533 = $10,281,020.10. The project s Additional Household Earnings is similarly calculated as $5,519,980.20. Employment Multipliers The calculation of Jobs also depends on a multiplier and the Final Demand estimate, but with two caveats: 1. The jobs multiplier is interpreted as the number of jobs per million dollars of final demand. 2. The jobs multiplier is valid for base year data only. As such, all jobs calculations must use final demand estimates that have been converted to the base year for the particular RIMS II data. In other words, the Employment Multiplier is the number of jobs created per million dollars of real final demand. For this project, the final demand estimate is denominated in 2010 dollars and the RIMS II Multipliers in Table 1 were calculated using data from 2006. Before calculating employment effects, the final demand estimate must be translated to 2006 dollars. Project Data Center Gate is a three-phase project consisting of the construction of three detached buildings. Phase I is a five story building housing retail on the first floor and professional office space on the other four floors. Phase II is to be a four story franchise hotel with an 3

1 1,000,000 FINAL DEMAND ESTIMATE Inflation Deflator Earnings Multiplier Output Multiplier Value Added Multiplier Employment Multiplier Total Earnings Total Output Total Value Added Total Employment Direct Earnings Multiplier Direct Employment Multiplier Industry Earnings Industry Employment Figure 1: RIMS II Methodology 4

attached restaurant. Phase III is a duplicate of Phase I consisting of another five story building housing retail and professional office space. Each construction phase is expected to last two years; therefore construction should be completed in six years. Construction When measuring the total impact of commercial development, actual construction costs and resulting job creation and value added must be included. The construction cost estimates for each phase of construction is listed in Table 2. The only value needed to use the RIMS II Multipliers in calculating the economic impact of construction is the (real) construction costs since construction is a final good. Professional Office Space Phases I and III will consist of the construction of two identical buildings. The top floors of each building will be dedicated to professional office space. According to project specifications, each building constructed during Phases I and III will contain 30,000 sq. ft. of dedicated office space. Current estimates indicate an average density of 300 sq. ft. per employee based on 100% occupancy. This implies 100 professionals will be employed in each building, if fully occupied. Discussions with local commercial real estate agents suggest that each office space will be 50% occupied the first year after completion and 90% occupied thereafter. Retail Space Each of the two buildings constructed in Phases I and III will also contain retail space. Based on architectural plans, there will be 11,750 sq. ft. of usable retail space in each building. Similar retailers in Mecklenburg County, North Carolina generate sales of $350 per sq. ft. Assume 60% of the retail space will be rented the year after completion and 100% will be rented in each year afterwards. Hotel Space Phase II consists of the construction of a franchise hotel. Current plans call for the hotel to be 56,000 sq. ft., with an average room size of 400 sq. ft. per room. Market data reveal an average nightly room rate of $145.00 and an average occupancy rate of 60% for other similar hotels in the county. Assume the proposed hotel will have the the same nightly rate and occupancy rate. 5

Restaurant Space Also included in Phase II is a 6,000 sq. ft. restaurant. Similar restaurants in the county generate annual sales of $500.00 per sq. ft. The Task You are tasked with estimating the total impact on output, earnings, employment, and value added from Center Gate. Specifically, you are to complete an economic analysis using RIMS II data for each phase of the project and for the project in its entirety. Additionally, it is important to recognize the impact of employment from Center Gate for each year of the project. Also, as part of the required analysis, you must create a stacked bar graph of actual employment for each industrial sector by year. As calculated, the Employment Impact using RIMS II Multipliers reflects maximal employment effects. Where available, adjustments should be made to these estimates to allow for occupancy rate assumptions in the Office and Retail Spaces. 6

Table 1: Multipliers for Mecklenburg County, North Carolina Output Earnings Employment Value Added Direct Earnings Direct Employment Crop and animal production 2.1611 0.5270 23.1815 0.9405 2.3006 1.1289 Forestry, fishing, and related activities 1.3533 0.7266 16.6349 0.7742 1.6816 1.1102 Oil and gas extraction 2.0674 0.6652 6.0864 1.3054 1.4768 2.8614 Mining, except oil and gas 1.5597 0.5094 9.1977 0.9809 1.4167 2.6255 Support activities for mining 2.0843 0.4688 6.8088 0.7292 2.7071 2.6474 Utilities 1.6186 0.7361 3.6386 0.9843 2.7316 4.8641 Construction 1.7593 0.6587 11.9048 1.3431 1.6422 2.3887 Wood product manufacturing 1.7443 0.4277 12.2384 0.8786 2.1203 1.7244 Nonmetallic mineral product manufacturing 2.2844 0.4816 8.1326 0.9549 1.7390 3.1384 Primary metal manufacturing 1.3583 0.4125 5.2839 0.7951 2.4544 2.6505 Fabricated metal product manufacturing 2.1040 0.6654 11.8640 1.0643 2.4583 2.4576 Machinery manufacturing 1.6435 0.7471 9.8052 0.8992 1.7025 3.3514 Computer and electronic product manufacturing 1.7263 0.6148 7.3943 1.1275 1.7187 5.0411 Electrical equipment and appliance manufacturing 2.2989 0.4963 8.4674 1.0188 1.7312 1.8276 Motor vehicle, body, trailer, and parts manufacturing 1.9209 0.6863 7.2333 0.6410 3.0543 3.2975 Other transportation equipment manufacturing 1.7210 0.4567 10.9683 1.0569 1.9272 2.5271 Furniture and related product manufacturing 2.1952 0.6047 11.6026 1.0889 2.3459 1.7056 Miscellaneous manufacturing 1.7512 0.6164 9.3690 1.1424 2.0551 1.7673 Food, beverage, and tobacco product manufacturing 2.5250 0.4840 7.5966 0.6452 3.1861 2.6668 Textile and textile product mills 1.5188 0.6769 10.9867 0.5702 2.5329 1.5057 Apparel, leather, and allied product manufacturing 2.0481 0.5061 16.4760 1.1162 1.5537 1.5891 Paper manufacturing 2.1970 0.6014 9.3824 0.6307 2.3405 3.1249 Printing and related support activities 1.9807 0.5674 9.5851 1.1694 1.6181 1.7251 Petroleum and coal products manufacturing 1.7325 0.4743 4.9402 0.5856 2.2048 4.9570 Chemical manufacturing 2.3981 0.7280 5.6763 0.9982 3.7391 7.8633 Plastics and rubber products manufacturing 2.2918 0.7363 7.6776 0.7295 2.6831 2.6843 Wholesale trade 2.0623 0.4350 12.0581 0.9589 1.7947 2.0817 Retail trade 1.6636 0.7165 20.0131 1.3653 2.0823 1.5369 Air transportation 2.6368 0.6467 8.7905 1.0056 2.4166 3.0457 Rail transportation 1.8781 0.4976 9.4359 1.0333 1.7691 2.5886 Water transportation 1.9010 0.4167 10.0981 0.7894 4.6210 5.5399 Truck transportation 1.6684 0.6146 16.5496 1.0842 2.2829 1.7214 Transit and ground passenger transportation 2.5415 0.5877 26.0122 1.3158 1.9703 1.4432 Pipeline transportation 2.4107 0.6480 7.5581 1.1286 4.3730 8.2181 Other transportation and support activities 1.5857 0.4621 17.5114 1.0337 1.8358 1.7855 Warehousing and storage 2.0066 0.4752 21.2006 1.2343 1.6769 1.4914 Publishing including software 1.6175 0.6070 11.0166 0.9045 1.6512 3.2240 Motion picture and sound recording industries 1.4546 0.5947 13.6107 1.0412 2.5518 1.8791 Broadcasting and telecommunications 1.6654 0.5131 8.0339 1.1297 2.9349 4.6930 Information and data processing services 2.4160 0.7184 8.2659 0.9459 2.5864 2.9822 Federal Reserve banks, credit intermediation and related services 1.5503 0.4539 9.3048 1.2211 1.7787 2.6233 Securities, commodity contracts, investments 2.2257 0.3910 16.4377 1.2595 1.7777 2.2030 Insurance carriers and related activities 1.7291 0.6041 10.6262 0.9359 1.9333 3.1637 Funds, trusts, and other financial vehicles 2.1076 0.7158 15.4056 1.0592 3.4338 4.5390 Real estate 1.7088 0.5271 6.7679 1.2368 2.9374 2.8599 Rental and leasing services and lessors of intangible assets 2.2536 0.4544 11.3232 0.9735 3.2838 3.6534 Professional, scientific, and technical services 1.9316 0.4929 12.7646 1.3301 1.4817 2.0926 Management of companies and enterprises 1.9669 0.5512 9.2118 1.5125 1.3617 2.8245 Administrative and support services 1.6734 0.4325 20.7836 0.9833 2.0809 1.2070 Waste management and remediation services 2.2944 0.6503 13.5347 1.0190 2.0695 2.0652 Educational services 2.1069 0.7122 21.3147 1.2039 1.5126 1.2002 Ambulatory health care services 1.9727 0.6195 19.9840 1.1551 1.7920 1.5063 Hospitals and nursing and residential care facilities 2.2597 0.7078 20.1778 1.3838 1.4186 2.2284 Social assistance 2.0500 0.6305 44.3525 0.9886 1.7383 1.4038 Performing arts, museums, and related activities 2.3184 0.7146 29.0191 1.0311 1.6708 1.2974 Amusements, gambling, and recreation 2.1059 0.5223 29.3245 1.0749 1.9890 1.1179 Accommodation 1.5291 0.4422 18.4628 0.9643 1.4954 1.3637 Food services and drinking places 1.8213 0.5140 29.1967 0.8250 1.8853 1.1843 Other services 2.1799 0.4121 20.5860 1.3508 1.7725 1.5340 Households 1.3227 0.5693 8.4996 0.7595 0.0000 0.0000 7

Table 2: Estimated Construction Costs Scheduled Time Project Estimated Construction Cost (2010 Dollars) Years 1 2 Phase I $4,614,921.05 Years 3 4 Phase II $5,205,407.70 Years 5 6 Phase III $4,614,921.05 8

Teaching Note Terminology RIMS II multipliers includes six types of multipliers four final-demand multipliers and two direct-effect multipliers. The final-demand multipliers are used as a factor in converting final-demand estimates into total impact estimates. The two direct-effect multipliers are used to convert initial changes in earnings and employment into their respective total impact estimates. According to the BEA, initial changes in earnings and employment should factor in only those employees residing in the region who work in the industry producing the final-demand output. Final Demand Calculations Construction: Construction is a final good, so final demand for Construction will equal the estimated construction costs. Employment: Total Employment is calculated as Final Demand 1,000,000 CP I 2006 CP I 2010 Employment Multiplier. Referring to the Bureau of Labor Statistics 1, the Consumer Price Index for 2006 and 2010 equals 201.6 and 218.056, respectively. As an example, we can calculate the job creation from the Construction of Phase I. The final demand estimate of Phase I Construction is 4,614,921.05. Accordingly, Total Employment = 4,614,921.05 201.6 11.9048 = 50.79. Since fractional jobs 1,000,000.00 218.056 don t really have an interpretation, it is common to round job estimates down to the nearest integer. In this case, total job creation for this project should be reported as 50. Office Space: Normally, the task of economic valuation is first to calculate an estimate of final demand to used to estimate employment. In this case, we have first estimated employment from which we can impute final demand. Recall, the Employment Multiplier is 12.7646 which, by definition, is the number of jobs created in the professional sector for each million dollars of final demand (in real terms). We are, in this case, presented with an industry employment value rather than final demand. The first step is to calculate total employment within the economy. This is calculated as industry employment times the direct employment multiplier: 100 2.0926 = 209. The final demand estimate is then calculated as total employment divided by the employment multiplier times 1,000,000 and then adjusting the 1 The historical CPI tables are maintained at http://www.bls.gov/cpi/. 9

product to current dollars (using the CPI data). This results in an estimated final demand for the office building (when fully occuppied) of 17,731,950.49. Retail Space: Final demand for retail space is the estimated annual sales. Referring to Table 1, this implies a final demand estimate of $4,112,500.00. Accommodation: Final demand is equal to the estimated annual hotel booking revenue. This is calculated as the Number of Rooms Nightly Rate Occupancy Rate 365. Restaurant: Final demand is equal to the estimated annual restaurant sales. This is calculated as Sq. Ft. Sales per sq. ft. Table 3: Phase I Economic Impact Economic Measure Construction Office Retail Phase I Total Additional Output 8,119,031 34,251,037 6,841,555 49,211,623 Additional Household Earnings 3,039,848 8,740,079 2,946,606 14,726,533 Additional Employment 50 209 76 335 Additional Value Added 6,198,300 23,585,268 5,614,796 35,398,364 Additional Industry Earnings 4,992,039 12,950,175 6,135,718 24,077,932 Table 4: Phase II Economic Impact Economic Measure Construction Hotel Restaurant Phase II Total Additional Output 9,157,874 6,797,920 5,463,900 21,419,694 Additional Household Earnings 3,428,802 1,965,889 1,542,000 6,936,691 Additional Employment 57 75 80 212 Additional Value Added 6,991,383 4,286,989 2,475,000 13,753,372 Additional Industry Earnings 5,630,779 2,939,790 2,907,133 11,477,702 10

Table 5: Phase III Economic Impact Economic Measure Construction Office Retail Phase III Total Additional Output 8,119,031 34,251,037 6,841,555 49,211,623 Additional Household Earnings 3,039,848 8,740,079 2,946,606 14,726,533 Additional Employment 50 209 76 335 Additional Value Added 6,198,300 23,585,268 5,614,796 35,398,364 Additional Industry Earnings 4,992,039 12,950,175 6,135,718 24,077,932 Table 6: Total Economic Impact Economic Measure Phase I Phases II Phase III Total for Project Additional Output 49,211,623 21,419,694 49,211,623 119,842,940 Additional Household Earnings 14,726,533 6,936,691 14,726,533 36,389,757 Additional Employment 335 212 335 882 Additional Value Added 35,398,364 13,753,372 35,398,364 84,550,100 Additional Industry Earnings 24,077,932 11,477,702 24,077,932 59,633,566 11

Table 7: Total Job Production By Year Phase I Phase II Phase III Year Construction Office Retail Construction Hotel Restaurant Construction Office Retail Total 1 50 0 0 0 0 0 0 0 0 50 2 50 0 0 0 0 0 0 0 0 50 3 0 104 45 57 0 0 0 0 0 206 4 0 188 76 57 0 0 0 0 0 321 5 0 188 76 0 75 80 50 0 0 469 6 0 188 76 0 75 80 50 0 0 469 7 0 188 76 0 75 80 0 104 45 568 8 0 188 76 0 75 80 0 188 76 683 12

Figure 2: Actual Jobs by Year by Sector Actual Jobs 0 100 200 300 400 500 600 700 Construction Office Retail Hotel Restaurant 1 2 3 4 5 6 7 8 Year 13