Guest Commentary, by Peter Fugiel, Ph.D.

Business publications and real estate organizations release dozens of “top ten” lists every year, naming their top picks for cities in a plethora of categories.  Recent trends in population and job growth indicate that some U.S. Sunbelt markets may return to favor, while some “Frostbelt” cities will continue to suffer from job and population losses. The real estate recession has shown that certain markets still suffer from overpriced housing, and a glut of empty units. Investors continue to sort out what they think of old favorites.

This article identifies the top ten cities that appear to offer the best prospects for business relocation in the upcoming decade.  "Political competence” is an often-overlooked factor that can play a significant role in a city and state’s ability to provide a supportive environment for business.

Three sets of factors were considered in the selection process analysis:

  • the credit reputation of the city, as well as its state’s governmental system;
  • long-term population and job growth projections for the area; and
  • the general tax & lifestyle reputation of the local area in the press – and among affluent entrepreneurs.

Perhaps the biggest story of the past year is how many state governments are in financial trouble. Although state budgets traditionally suffer in recessionary economies, the credit story of the state governments in this recession is a much more serious one. Long-term credit trends are very negative for most of the big states. Years of deficit borrowing and chaotic state-local fiscal relations have caught up with at least half of the nation’s biggest states. 

In addition, the last national election showed some new political and policy diversity among the big states that can be expected to continue on into the future. Continued U.S. population growth and the local market consequences of the real estate crash are also creating new disparities among the states. Going forward, all of these differences will offer investors a unique set of new investment choices.

Just as international investors have learned to make informed decisions in part, based on political risk, American investors will have to learn how to make decisions based on state government political competence. It doesn’t matter whether a state is a red state or blue state.  What does matter is that the state government has a good credit record and that its local governments share the burden of providing quality public services.  In other words, competence in governance is what counts over time. Political fads come and go.

American investors of every stripe, from commercial real estate to the municipal bond market, need to take advantage of their new choices.  In the U.S., at least, the private sector location choice matters. That is one thing that makes this country such a fascinating place. Over time, it may be the major reason why the U.S. will continue to attract more than its share of the world’s migrating entrepreneurs, professionals, and the just plain ambitious. Here are the choices and rationale for each pick.

HONOLULU: Among all the housing real estate markets favored by investors in the past decade, Honolulu is virtually the only ’fantasy island’ market that did not experience a gigantic price adjustment. A scarcity of land, the relatively smaller supply of new units, and a political culture that is cohesive and careful, each contributes to the political stability of this ’gateway to Asia.’  Honolulu is one of seven state capitals on this list, indicating how important state employment and state policy-making is becoming in the new millennium’s ’mixed economy’.  If the national government is going to handle the vast array of public sector responsibilities facing the nation, it is certain that the state governments are going to play an increasingly important role in executing federal policy.

PORTLAND: By all standards, Portland is one of the most ’progressive’ cities in the country. Opinion aside, both the city and the state of Oregon enjoy a positive government reputation. Strict land controls have reduced the amount of real estate speculation in this popular Pacific Rim market. In addition, the state has long attracted a young, well-educated work force that is also oriented towards entrepreneurial start-ups. Portland is America’s most ’European’ city. And in an economy that is always looking for valuable real estate, the Oregon ’green’ model, of using choice urban land sparingly, is one for the textbooks.

DENVER: As the city and Colorado have continued to attract economic growth, local interest in preserving the quality of life in the state has also grown. As a result, Denver is an important crossroad, where economic growth and quality-of-life trends intersect.   So Colorado is a bellwether state. Denver, as the state’s capital city, and an important regional center in its own right, will remain a national market favorite. The affluent suburban areas of Denver are unusually attractive for national business relocation.

AUSTIN: What Denver is to the mountain west, Austin is to the mega-state of Texas. This state capital market has a remarkably stable home real estate profile, an enviable white-collar/public-sector employment mix, and an unrivalled location in the San Antonio/Houston/Austin growth triangle. The Texas style of governance has been to allow local governments to carry out the majority of functions in the public sector. This seems appropriate in a state as large as Texas. And unlike California, the Texas state government is in significantly better financial shape than is its much wealthier west coast super-state cousin. Certain of Austin’s surrounding suburban counties will enjoy the kind of diversified employment and entrepreneurship last seen only in the San Francisco Bay Area.

HOUSTON: Houston has its share of big city and urban problems. Due to a recent tax limit referendum, the City’s bond rating is under pressure. In fact, the city’s bond rating is the lowest on our list of mostly double- and triple-A ratings. Nevertheless, Houston is one of the few “real downtown” cities in the still-growing South. Houston’s metro population growth is expected to continue well into this new century. The City’s suburban ring is vast and diverse. Affluent suburban counties are considered some of the best growth opportunities in the entire country. Self-sufficiency is the key to the conservative Texas fiscal system. And growth is what enhances self-sufficiency.

CHARLOTTE: The State of North Carolina has long been known for its fiscal conservatism and the reliance it has placed on its handful of urban centers to remain well-managed.  As a result, North Carolina’s urban centers have a reputation for being successful magnets for economic growth. Charlotte has one of the most favorable future growth profiles of American big cities. The State’s new bellwether political profile, its East Coast location, and a reputation for public sector competence, all make this city one remarkable prospect. Housing costs are moderate.

RALEIGH: As the capital city of the one of the country’s most popular re-location states, Raleigh is expected to continue to gain a substantial amount of jobs and population. While Florida suffers from a weakened real estate market, a chaotic local government structure, and a state government strapped with more responsibilities than its political caste can manage, North Carolina offers a creditable alternative. North Carolina’s mild climate and its low housing costs are both East Coast phenomena.  While Virginia is currently enjoying the spillover of jobs and high incomes from Washington D.C., North Carolina is next in line.

DES MOINES: For many decades, the gigantic, three-state Chicago metropolitan market has enjoyed continuing moderate growth due, in part, to its central Midwestern location.   Now, as the entire Illinois portion of the Chicago metropolitan area continues to suffer from its under-performing state government, alternatives to the Chicago ’success formula’ will be sought.  Des Moines is the capital city of a traditionally well-managed, but centralized, public finance system. It also enjoys low home prices and ease of access to the vast Chicago market. In addition, Iowa has continued to show its capacity to be the Midwest’s arbiter in national political direction.

INDIANAPOLIS: Indiana state and local government has a long record of fiscal prudence. More recently, the state government has shown a concern for the viability of its long-neglected local government system, including the well-located northwest Indiana ’region.’ As a result, the state’s capital city continues to benefit from years of careful state financial management. Modest home prices and proximity to the Chicago market are both positives. Suburban locations in the Indianapolis market offer a rare combination of high-paying jobs and an enviable suburban setting.

COLUMBUS: This is the third of the Midwest capital cities on our list of most promising American locales. Unlike its more centralized Midwestern state cousins, Ohio has a reputation for blending an enlightened local governmental system with state fiscal restraint. Although the State of Ohio will continue to struggle with a variety of rustbelt economic issues, Columbus itself is a bright spot on the national jobs-attraction scene.  The City should continue to offer an affordable alternative and competent role model to expensive and constrained East Coast metro areas.

American investors of every stripe continue to be offered a tantalizing range of state and local market options. It may well be that the era of political correctness is over. Anti-government conservative principles do not always succeed in local governance situations. Centralizing California’s once enviable local government system has failed the competence test. And on the other hand, credit worries have caught up with many other high-spending state governments, where local government competence has been ignored, in favor of too-ambitious state bureaucracies.

About the Author:

Peter Fugiel, Ph.D., is a realtor with Keller Williams & Fox Associates on Chicago’s north side. His housing research web site, Chicago, provides a detailed look at the Chicago real estate market. For more information about specific properties, visit Peter’s Keller Williams real estate site.

Prior to joining Keller Williams, Peter was a vice president and senior housing analyst with Nuveen Investments for many years. At Nuveen, he specialized in housing development financings and mortgage pools in all regions of the country. Peter holds two advanced degrees in government from Northern Illinois University.