Neighborhood Characteristics Matter: When Businesses Look for a Location

When businesses look for a place to locate, they not only choose a city, they choose a specific neighborhood. Federal Reserve Bank of St. Louis senior economist Christopher Wheeler set out to discover why businesses choose one neighborhood over another in his most recent study, Neighborhood Characteristics Matter: When Businesses Look for a Location. He presented his findings July 19, 2006, to a luncheon crowd of more than 200 St. Louis-area community leaders and residents.

Gathering data from neighborhoods is not always possible, so Wheeler turned to the next best thing: ZIP codes, geographic areas created by the U.S. Postal Service. The broad array of economic and demographic data available for ZIP codes allowed him to look at areas that are relatively smaller than counties and closer to the neighborhood level.

Wheeler collected data from more than 15,000 ZIP codes in 361 metropolitan areas across the United States for the sample period 1998 to 2002. The study also specifically analyzes data for the major cities in the Fed’s Eighth District: St. Louis; Memphis, Tenn.; Little Rock, Ark.; and Louisville, Ky.

One interesting finding was that government expenditures for housing and community development have a negative impact on business growth. This may be because neighborhoods that receive large amounts of spending for development also have characteristics that deter the growth of business establishments: high rates of unemployment and crime, low levels of per capita income and education.

General trends the study identified are:

• ZIP codes with fewer residents, workers and businesses per square mile attracted greater numbers of business establishments.
• ZIP codes with higher per capital income tend to grow faster.
• ZIP codes with larger percentages of highly educated residents (bachelor’s degree or more) tend to attract greater numbers of businesses.
• There is more business growth in areas with higher numbers of residents between the ages of 25 and 44.
• High crime and unemployment strongly deter business expansion.
• Per capita local government expenditures show mixed correlations with business establishment growth.
• Per capita property and sales tax revenue is positively associated with overall business establishment growth.
• When the analysis is applied to 16 different types of industries, all of the above conclusions can change. For instance, manufacturing and construction employers seek different neighborhoods than do arts, entertainment and recreation employers.

Overall, there is an uneven pattern of economic growth within metropolitan areas. Even if a metropolitan area as a whole is thriving, some individual neighborhoods may be in a serious state of decline. Local governments need to be concerned about the level of economic development in their neighborhoods because it affects their ability to serve the community, Wheeler says.