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How the location quotient works
How the location quotient works

How the location quotient works

February 22, 2019

This vital tool can help identify opportunities for industries, commercial real estate

 

The location quotient is a term you may come across when evaluating a specific region for commercial real estate. That’s because the location quotient gives you a picture of the concentration of an industry or demographic in a specified area when compared with national trends. It’s a powerful indicator of potential growth for specific industries and overall economic health in the region. How does this affect the world of commercial real estate? For developers, the location quotient can be an effective tool for determining growth prospects for industries you most want as tenants, as well as the supply and demand of a particular region, to generate a market analysis.


Finding the information you need for location quotient

Location quotient, or LQ data, can be accessed easily through government agencies, such as the U. S. Bureau of Labor Statistics. You’ll be able to examine information at the state, county and even the major metropolitan statistical area sub-categories, enabling you to get a clear picture of the local economy and your potential tenants. The LQ will help you quantify the concentration of an industry in the specified geographical area, compared to the U.S. in its entirety.       

 

Calculating location quotient

Simply put, location quotient is the concentration of industry in a region divided by the national concentration of the same industry.

 

Percent of local employment in an industry / percent of national employment in an industry = LQ

 

A calculated regional location quotient that is more than one indicates it is a base industry for that region, and that the output exceeds local demand and exporting the excess is possible. A location quotient less than one means it is a support industry, and that output does not meet local demand so imports are necessary. An LQ that is equal to one means the employment is the same in the industry sector both for the regional and national economies and that supply is equal to demand, or the economy in that region is self-sufficient.

 

Location quotient caveats

There are several things to keep in mind when considering the LQ for a region. First, it’s important to note that the LQ assumes national worker productivity is the same as regional worker productivity. But consider this: in some industries, it may be necessary to have more workers to meet local needs than is necessary at the national level. In addition, take care to look at detailed levels of data aggregation when analyzing the numbers—the LQ can vary widely depending on that aggregation, giving you an unclear picture if broad industry categories are utilized in the data. In addition, keep in mind that economies are constantly changing, and a national economic indicator may change at a different pace than a local industry.

 

Using LQ to your advantage

Calculating the LQ allows people to see if a region has enough workers in a given industry sector when compared to the national numbers, and gives you a snapshot of industry supply and demand. But it may also indicate whether the types of industries you want as tenants in your buildings have the regional presence you want to capitalize on. Used correctly, the location quotient may be a valuable tool in helping you determine next steps in commercial real estate.