Multifamily’s Economic Impact: New Numbers on Local Jobs, Income, and Taxes Generated
Multifamily construction often faces opposition from local groups who are only too anxious to point out real or imagined negative impacts (strain on local budgets to provide additional school services, downward pressure on nearby property values, etc.) But new apartment buildings have a real, positive effect on local economies—including income and jobs for local residents, and increased revenue for local governments. NAHB has developed a model to estimate these local economic benefits.
The local impact model is comprehensive, in that it captures the effect of the construction activity itself (Phase I), the ripple impact that occurs when income earned from construction activity is spent and recycles in the local economy (Phase II), and the ongoing impact that results from new apartments becoming occupied by residents who pay taxes and buy locally produced goods and services (Phase III). In order to fully understand the impact of multifamily development on a community, it’s important to consider ripple effects and ongoing benefits. This means that the model must be applied to a local area large enough to include the places where construction workers live and spend their money.
In practice, the appropriate area for a local impact analysis will usually be a metropolitan area (defined by the U.S. Office of Management and Budget based on commuting patterns), a non-metropolitan county, or an entire state. The multifamily construction analyzed may be confined to a smaller area (in many cases, the construction analyzed has been an individual project, but the impact will then be spread over a larger local area. Since the local impact model was initially developed in 1996, it has been successfully applied to over 325 metropolitan areas, non-metropolitan counties, and states across the country. Approximately two-thirds of the applications included an analysis of multifamily construction (shown by the darker shaded areas in Figure 1).
Figure 1. Areas Where the Local Impact Model Has Been Applied to Multifamily Construction
NAHB Housing Policy economists have updated NAHB’s local impact estimates for 100 multifamily units in a typical U.S. metropolitan area. The last time similar estimates were published was in 2002.1 Not only have the key inputs (national average value of the units and raw land, construction-related fees, and property taxes) been updated, but the model itself has been recalibrated with newer data. The most important of these come from the National Income and Product Accounts (U.S. Bureau of Economic Analysis), the Consumer Expenditure Survey (U.S. Bureau of Labor Statistics) and the Census of Governments (U.S. Census Bureau). These are the same sources used to generate the official estimates of statistics like GDP and the overall rate of inflation.
The estimated local one-year impacts of building 100 multifamily units in a typical U.S. metropolitan area include $7.0 million in local income, $710,000 in taxes and other revenue for local governments, and 133 local jobs (a much greater effect than NAHB first calculated in 2002, when data showed local income generated at $5,315,000, local tax income at $630,000 and local jobs at 112). These impacts represent income and jobs for residents of the typical metropolitan area, and taxes (and other sources of revenue, including permit and hook-up fees) for all local jurisdictions within the area. They include both the direct impact of the construction activity (Phase I), and the impact of local residents who earn money from the construction activity spending part of it within the metro area (Phase II).
The additional, recurring impacts (Phase III) of building the 100 multifamily units include $3.2 million in local income, $461,000 in taxes and other revenue for local governments, and 52 local jobs. These are ongoing, annual local impacts that result from the new homes being occupied, and the occupants paying taxes and otherwise participating in the local economy year after year. The impacts are summarized in Figure 2.
The key assumptions underlying the estimates are an average market value of $112,277 per housing unit; an average raw land value of $17,740; an average of $2,762 in impact, permit, and other fees per unit paid to local governments; and an average annual property tax of $1,266. These numbers are based on national averages. More detail is available in a longer report posted on NAHB’s web site. In addition to a more lengthy description of the methodology, the report shows employment impacts in 16 industries plus the government, and impacts on 13 categories of local government taxes and fees.
When to Use Which Numbers
Last month, NAHB Multifamily Market Outlook presented a different set of numbers that estimated the national impacts of home building. The format of the estimates was similar, in that it showed categories of income, jobs, and taxes generated by multifamily construction. The national jobs estimate was even fairly close to the one-year estimate reported here for the local impact, but this is a coincidence. There are many important differences between the two sets of estimates. The most important ones are listed below.
National estimates: Do not include the equivalent of Phase II (ripple of effect of construction workers spending the money), or Phase III (ongoing effect that occurs when the units are occupied). But do include impacts in all U.S. industries.
Local estimates: Include both Phase II and Phase III. But only include impacts in 95 of the roughly 600 U.S. industries tracked in the most detailed accounting system employed the Bureau of Economic Analysis (virtually the entire manufacturing sector, for example, is excluded).
The national model excludes ripple effects, because at the national level these are linked to macroeconomic assumptions about how much slack there is in the U.S. economy. At the national level, there are always disagreements and competing assumptions about this, and bringing this disagreement into a discussion of the benefits of residential construction will most often be counterproductive. Substantial ripple effects are built into the local impact model in both Phase II and Phase. At the local level, controversies about slack in the U.S. economy are less relevant, and the ripple effects are larger in proportion to the direct impacts.
The direct impacts tend to be smaller in the local model, because the model excludes a substantial number of U.S. industries. Markets for many products and services are simply not local in nature. A large number of manufactured products, for example, are routinely shipped across the county. So even if a resident of an apartment building in Seattle uses software manufactured in Seattle, this does not necessarily cause more of the software to be manufactured. That resident could easily end up using the same software, produced by the same company, if he or she instead lived in Portland. The exclusion of many industries because they are not local in nature is a conservative feature of NAHB’s local impact model that avoids overstating the economic benefits and makes it easier to defend the model when it’s challenged.
As noted, the national impact estimates exclude an ongoing, occupancy effect, primarily because it would imply that not building a housing unit will cause people to move out of the country. This will often not seem like a reasonable assumption. In Phase III of the local impact model, on the other hand, there is a strong ongoing effect, based on the assumption that building a multifamily housing unit in a particular market area causes some household to live in that market area rather than a different one. For instance, children of current residents may move into the same area when they form new households if they find apartments available, rather than moving further away due to a lack of units that are both suitable and affordable. One way to summarize NAHB’s local impact model is to say that it analyzes the impact of locating new apartment buildings in one market area rather than another.
Although the presence of two sets of impact estimates—national as well as local—may seem confusing at times, a little thought should persuade advocates of multifamily housing that both are really necessary. National impacts are needed when discussing federal programs that subsidize or provide financing for multifamily construction with, for instance, members of Congress. Local impacts are needed when trying to get a particular multifamily project approved or defeat anti-growth ordinances.
The impact estimates in this article show the local income, jobs, and taxes generated by building 100 multifamily units when the key inputs are based on national averages. These “national average” results are readily available and can be used on short notice to demonstrate what apartment construction does for communities in the typical case. When more specific results are needed to get a project approved or otherwise counter NIMBY arguments, given the necessary inputs and a little lead time, a local impact report can be produced for a particular local area. NAHB currently provides this service for a fee. For more information, see NAHB’s Web site. Or e-mail Elliot Eisenberg in NAHB’s Housing Policy Department, or call him at 202-266-8398.
1 See “NAHB’s Local Impact of Multifamily Construction Model Updated” in NAHB Multifamily Market Outlook, February 2002.
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