How Commercial Real Estate Factors Into Top States for Business

Editor’s note:Office and industrial rents are among the metrics we use to score the all-important Cost of Doing Business category in CNBC’s annual rankings of America’s Top States for Business. The state-by-state figures are compiled for us every year by CoStar Group , a leading provider of commercial real estate analysis. We asked CoStar Senior Commercial Real Estate Strategist Mark Berry to tell us what’s driving the trends.

Are you a company looking for bargain office rents? Forget about Washington, D.C., or San Francisco, where asking prices for rents have increased over the past three years, making other pricey markets like New York and Boston look attractive, following double-digit rent declines.

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But drive a half hour outside any of these cities and you’ll find submarkets with twice the vacancies and landlords eager to negotiate. Since 2008, only a handful of larger markets have seen office-rent increases, including San Francisco, Pittsburgh, New Orleans and Columbus, Ohio.

Rents in the major Sunbelt markets, which remain far more affordable than those on either coast and moderately higher than in the Midwest, have been relatively stable, including Dallas, Houston, Austin, Texas, and Charlotte and Raleigh, N.C.

Atlanta has slightly trailed the 6 percent asking rent decline for the nation’s largest 54 markets over the past three years. The most heavily discounted office and industrial (warehouse) rents can be found in those markets hit hardest by the housing downturn — central and southern California, Las Vegas, Phoenix, and much of Florida — with declines ranging from 15 percent to 30 percent.

If you’re looking for space within the industrial (warehouse) sector, many of the top performing markets, both small and large, have close ties to the energy sectorincluding Corpus Christi, Texas, Monroe, La., Oklahoma City and New Orleans.

North and South Dakota may not rank among the most expensive warehouse markets in the country — those are Anchorage, Alaska, Honolulu, Northern California and the New York region — but they rank conspicuously high for warehouse versus office rents.

It likely will come as a surprise that Pittsburgh and Indianapolis rank among the relatively few U.S. cities with warehouse rent growth over the past three years, potentially reflecting demand from new energy-related companies in those regions as well.

From a national level, the market remains a renters’ and buyers’ market. Office and industrial availability remain elevated at 15.8 percent and 14.8 percent, respectively, and have improved only slightly from peak 2010 peak levels.

America's Top States For Business
America's Top States For Business

An abundance of leasing alternatives has dampened rent growth at the national level, with asking rents falling each quarter since 2008 — and to late-1990s levels — before stabilizing in the first quarter of this year. Valuation trends have been somewhat more favorable owing to lower investor return expectations.

The CoStar Commercial Repeat Sale Index indicates that office and industrial values have recovered 11 percent and 2 percent, respectively, from their trough in early 2011, but remain more than 30 percent below pre-recession peaks.

A closer look reveals sharply divergent valuation trends across markets and the spectrum of property quality. Institutional investors have dominated transaction activity, flocking to the perceived safety of major coastal markets and national distribution hubs.

The result is record price premiums for Class A versus Class B properties, for central business district versus suburban office buildings, and for larger/modern warehouses. For companies weighing the own versus rent decision, and with the wherewithal to obtain mortgage financing, low interest rates provide the opportunity to at considerable cost savings.