New York tops the rankings with the highest rental rate in the 15 most-populous states, and along with New Jersey, also had the slowest rent growth. This would imply that high rents have undermined competitiveness. But before painting New York state with such a broad brush, consider that New York City—dominated by the borough of Manhattan—is outgaining its intrastate peers with cumulative 6 percent rent growth since 2010, proving that the Big Apple remains quite competitive for business.
The states lumped together in the upper middle of the chart—California, Massachusetts and Washington—have higher-than-average rents, yet are still recording healthy rental rate growth, in part because of their clusters of high-value-added industries, particularly the tech sector. Again,the top-line numbers hide disparity at the market level: San Francisco has notched an incredible 30 percent rent growth since 2010, while some of California's more rural markets have not kept up.
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The third set of states highlighted on the chart offer businesses a different value proposition. Rents in Texas and Arizona are notably lower than rents in the technology states, and as such, make these states compelling lower-cost alternatives as places to do business.
When costs are lower, all else being equal, job growth and the resultant demand for real estate are higher. Yet at the same time, these states' low-cost competitive advantage is being eroded in the short run by a surge in demand.
This threat can be overcome in two ways:The states' economies can evolve to higher-value-added industries in order to justify the higher costs, or development can increase the rentable stock of real estate, easing rent-growth pressures over the long term.
—By Hans G. Nordby, managing director of CoStar Portfolio Strategy