The Economic Impact Study for a Big Box Retailer

Rabianski, Joseph S., Real Estate Issues

INTRODUCTION

THE DIRECT ECONOMIC IMPACT OF A BIG BOX RETAIL FACILITY occurs in two parts--the construction phase and the operation phase of the subject property. The construction phase provides a short-term effect while the operation phase generates a long-term effect on the local economy. The direct economic impact consists of the:

* Employment involved in the construction and the operation phases of the facility.

* Wages paid to on-site employees during both the construction and the operation phases of the facility.

* Retail purchases from establishments in the local economy made in association with the construction and the operation of the facility.

THE RESEARCH DESIGN

The research design requires primary data gathered for the construction and operation phases of the facility. Construction data for the analysis comes from both the general contractor and the Marshall & Swift Cost Manual. Data for the operation of the facility comes from the operations manager of the corporate chain of the retail establishments under the assumption of normal business operational circumstances. These costs of operation are evaluated for reasonableness by considering the operational and sales data identified in Dollars and Cents of Shopping Centers published by the Urban Land Institute and the data from the International Council of Shopping Centers. To the extent possible, all information from the client needs to be independently supported and verified.

The second phase of the analysis is the allocation of the array of expenditures by the Big Box facility within Alpha County. These expenditures are:

* wages and salaries during the construction phase;

* construction material purchases;

* wages and salaries during the operations phase;

* services required during operation of the facility; and

* retail purchases during the operations phase.

The third part of the research design is the estimation and the application of the relevant economic impact multiplier for the Alpha County local economy. This multiplier translates the direct effect of the expenditures into the total effect of the expenditures by estimating the indirect and induced effects of these direct expenditures. The wages generated by the facility that remain in the local economy provide for increased consumer spending that in turn generates a need for additional workers to service the needs of the facility. This is the indirect effect. The induced effect is the increase in employment associated with the general spending for consumer goods and services by the workers associated with the direct and indirect effects and the subsequent increase in employment caused by this spending. This is the iterative process that underlies all multipliers used by economists since the outset of Keynesian economics.

DIRECT ECONOMIC IMPACT DURING CONSTRUCTION

The information that describes the construction phase of the analysis consists of the data for direct property-related expenditures. To determine the direct impact on a local economy such as Alpha County, the portion of these direct construction-related expenditures made on the property need to be allocated between the portion made for the property that remain in the county and the portion made that are paid to personnel and establishments outside the local economy.

The direct construction expenditures fall into the categories presented in Exhibit 1. The best estimates of the allocation of those expenditures also appear in Exhibit 1. The gross building size of approximately 150,000 square feet is estimated at a total construction cost of $8.25 million. This translates into a square foot construction cost of $55. These figures were provided by the Big Box Company. An independent verification of the square foot value was performed using data from the Marshall and Swift Cost Service. The cost per square foot estimate for the major structure from this source is $56.92. The on-site improvements are also verified in this manner and estimated to be approximately $10,500,000. The lower square foot construction cost figure is used in the analysis.

Total cost of construction and development are estimated at approximately $18,750,000 for the main structure and the necessary supporting site work in Exhibit 1. The construction process, in simplified terms, will require labor and material; some portion of these construction resources will come from the local economic area. For the construction phase of the project, the local economic area was the array of counties that were adjacent to Alpha County including Alpha County itself. In simplified terms this area is approximated by a radius of 20 to 30 miles and an estimated rush hour drive time of 45 to 60 minutes.

The allocation estimates for labor and materials appear in Exhibit 2. Labor cost was estimated at 30% of total construction costs with construction materials in the most general sense being 70%. Care must be taken at this point in the analysis to make certain that both "hard" and "soft" costs of construction are included in the analysis.

A reasonable allocation of construction labor between workers from the local economic area and workers who migrate to the area for the job is 80% from the local economic area. This allocation is supported by data from the County about the geographic dispersion of employees in Alpha County. Application of these percentages generates the estimate for a local wage bill of $4,500,000 ($18,750,000 * 30% * 80%) and a local construction materials purchase of $6,562,500 ($18,750,000 * 70% * 50%). As shown in Exhibit 2, the local area contribution to the total construction cost is $11,062,500 of the total construction cost of $18,750,000. This is 59% of total construction resources coming from the local economy.

The construction process will certainly take at least one year and may well take two years until the property can be occupied and placed in service. The analysis in this study assumes that the construction process will take two years so that the $4,500,000 wage bill and the $6,562,500 materials cost will be allocated over the two year period.

DIRECT ECONOMIC EFFECT DURING OPERATION

The information sought in the analysis consists of the data for direct property-related expenditures. These direct expenditures fall into the sets of data displayed in Exhibit 3.

DIRECT IMPACT FROM EMPLOYMENT AND SALARIES

The typical Big Box retail store operates with the personnel and the relevant wage and salary levels presented in Exhibit 4. Total employment for the subject property at full capacity operation will be 273 employees with a total wage bill for such a retail operation of $8,145,000.

DIRECT IMPACT FROM SERVICE EXPENDITURES AND RETAIL EXPENDITURES

The typical Big Box retail store also purchases retail products and services from the local market area. This data typically comes from the records of the corporate offices of the Big Box operator and interviews with store managers of close by same chain facilities as well as interviews with close by competing facilities. These purchases from local firms are displayed in Exhibit 5.

SUMMARY OF THE DIRECT IMPACTS OF THE BIG BOX FACILITY

The summary of the direct monetary impacts of the Big Box Facility appears in Exhibit 6 which carries forward the information provided in Exhibits 4 and 5. The total value of the direct impact for both construction and operation phases for both labor and materials are arrayed for the two year construction period and the operation period which is depicted in the "Year 3 and beyond" column.

THE DIRECT IMPACT OF THE BIG BOX RETAIL FACILITY IN ALPHA COUNTY

Introduction -- The State Department of Labor provides employment data for Alpha County. As shown in Exhibit 6, the economic impact is $5,531,250 in years 1 and …

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Publication information: Article title: The Economic Impact Study for a Big Box Retailer. Contributors: Rabianski, Joseph S. - Author. Magazine title: Real Estate Issues. Volume: 30. Issue: 2 Publication date: Winter 2005. Page number: 1+. © 2009 The Counselors of Real Estate. COPYRIGHT 2005 Gale Group.

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