Commercial real estate investment and economic development in the Northeast region of the United States

COMMERCIAL REAL ESTATE INVESTMENT AND ECONOMIC DEVELOPMENT IN THE NORTHEAST REGION OF THE UNITED STATES TIZITA WASIHUN The U.S. commercial real estate (CRE, henceforth) market was pummeled during the great recession. As the economy sees gradual improvements, investment continues to forge ahead from its worst slump, with fresh opportunities as construction rebounds. The debate on the relationship between real estate investment and economic growth has a long history in the economic development literature. Frequently asked questions are, should real estate investment be part of economic development strategies? Does real estate investment have more economic benefits than other investments? Should real estate investment wait until economic growth is achieved? Does real estate investment spur economic growth or, vice versa? This study tries to revisit earlier debates by attempting to understand the economic role of CRE investments, particularly retail store establishments in the Northeast region of the United States. This study empirically estimates the interdependent relationships between growth in retail store establishments and regional economic growth. Growth in population density, employment density and per capita income are used to represent level of regional economic growth. Theoretically, the neoclassical growth model accounts for the growth effect of CRE investment as a capital injection into the economy. The investment is also considered as a potential economic stimulant since it induces additional economic activities and adds to employment. The cumulative improvements can also have favorable spillover effect to neighboring regions. Because retail establishments’ size differences may influence the magnitude of the economic growth effect, establishment data are classified as being large or small, based on employment size. The study used both spatial and non-spatial analysis. The spatial model used spatial Durbin and spatial autoregressive models while the non-spatial model used a three stage least square (3SLS) simultaneous equation model. The empirical results of this study on the relationship between CRE investment and economic development are an extension that incorporates the simultaneous relationship of retail establishments with other variables in the economic development of the region. The consideration of spatial dependency is also another novel contribution of the study. The study concludes that indeed, growth in retail establishments plays a significant role in the economic growth process of the Northeast region of the United States. Although small retail establishments also contribute in the process of economic development, large retail establishments have a greater economic impact. Small retail establishments have a weak impact that is also statistically insignificant. This somewhat unexpected result is not inconsistent with casual observation and provides useful information for policy recommendations. Overall, the study provides information to policy makers on the economic role of both small and large retail establishments and socio-economic driving factors of the investment in the Northeast region of the U.S.