Best American Cities for Business

As the economy struggles to gain traction, American cities also are hard at work to keep current businesses as well as bring in new ones. According to a report by consulting firm KPMG, some cities are better positioned to attract the headquarters, factories and office space of America’s businesses. 24/7 Wall St. examined the 10 most competitive cities to find out what makes them so attractive. What it generally boils down to is how cheap these cities are for businesses.

Interestingly, the most competitive cities — the least expensive ones for businesses — tend to have the lowest economic production among the cities covered in the report. While, for the most part, the least competitive cities — because they are most expensive — are also the cities with the highest gross domestic product.

But perhaps this is not surprising. The cities with the lowest GDPs work hard at attracting businesses by creating favorable conditions such as lower taxes. At the same time, the less favorable economic conditions naturally depress such cost factors as wages and real estate.

KPMG’s report examined 26 different cost components that can affect the cost of running a business, such as taxes, labor costs, leasing prices and utilities. It also looked at 30 non-cost-related factors, including crime rates and the presence of nearby universities. The report looked at the 27 largest metropolitan statistical areas in the country, measuring these expenses across 19 different major industries. The cities that performed the best had the highest scores of the 19 industries.

Of the cities that ranked the highest in competitiveness, the primary driver varied. In the case of Orlando, Tampa and Phoenix, low labor costs were the main cause for their high score. In the case of Baltimore, Cincinnati, Atlanta and Pittsburgh, low taxes were among the primary drivers. Dallas and St. Louis had among the lowest utilities costs.

Low labor costs appear to be related to a number of factors, but generally, a weak labor market, smaller industry and high unemployment appear to keep wages and other costs down. Tampa, which has the lowest labor costs of any major U.S. city, according to the report, had an unemployment rate of 9.9% in January, 2011 — one of the highest rates in the country. Orlando, which had the second-lowest labor costs, had an unemployment rate of 9.5%.

While most of these cities performed well in the overall rank because of a high level of competitiveness in certain types of cost, sometimes these costs varied substantially for each industry.

For example, Atlanta had the second-lowest overall costs in the country in 10 of the 19 different industries, including metals, plastics, and medical devices. However, the metropolitan region ranked only 11th best in product testing, and 13th best in biotech. These industries cost more because facilities costs were higher in these areas.

In order to review the 10 most competitive cities for business in the United States, 24/7 Wall St. examined the competitiveness ranks of the 27 American cities studied in KPMG’s Competitive Alternatives report. We reviewed the 10 cities that received the best overall cost scores. In addition to KPMG’s cost components, 24/7 examined current unemployment rates, provided by the Bureau of Labor Statistics; GDP, provided by the Bureau of Economic Analysis; median income, provided by the U.S. Census Bureau; and employment decline during the recession and projected recovery, both provided by IHS Global Insight.

These are the best American cities for business.

10. Phoenix, Ariz.
> GDP: $181.59 billion
> Unemployment: 10.4%
> Median Income: $50,393

From its prerecession peak, Phoenix lost nearly a quarter million jobs, or 12.5% of its job market, the fifth-biggest decline among the largest 100 metropolitan areas in the U.S. Through the end of this year, according to IHS Global Insight, the city will recover less than 30% of those jobs. Between 2005 and 2010, regional GDP contracted by 6.2%, among the largest declines in the country. According to the KPMG study, the city ranks 10th among the 27 largest U.S. metropolitan areas for competitiveness. The Phoenix region is fourth-best in the U.S. for electronics manufacturing and third-best for both clinical trials and product testing for biotechnology.

9. Pittsburgh, Pa.
> GDP: $116.42 billion
> Unemployment: 7.6%
> Median Income: $46,709

Employment in Pittsburgh fell just 3.3% during the recession, one of the smallest declines in the country. The city’s labor market has since fully recovered, and the city is one of the few regions to have more employed citizens than it did at its prerecession peak. Pittsburgh is one of the few cities to have median income actually grow during the recession. Between 2009 and 2010, exports grew 13.2% in the area. According to the KPMG study, the city continues to provide opportunities for new business. It has among the 10 lowest costs in 16 of the 19 business categories, largely because of its low income, property and sales taxes.

8. Cleveland, Ohio
> GDP: $98.02 billion
> Unemployment: 8.1%
> Median Income: $46,240

Over the past few decades, the metropolitan area has been in a state of decline, losing a major share of its businesses and jobs. Between 2009 and 2010, the region added 1,120 export production jobs. Over this period, exports increased 11.9%, with growth in manufacturing contributing to 88.7% of the export growth. Exports contributed to 77% of the region’s GDP growth, as well. The city’s strong chemical industry has been the biggest part of this growth. According to the report, Cleveland’s most competitive industries are agri-foods and precision manufacturing. In these sectors in particular, the region distinguishes itself by having low transportation costs and low taxes.

7. St. Louis, Mo,
> GDP: $125.22 billion
> Unemployment: 8.4%
> Median Income: $50,913

St. Louis’s competitiveness, according to the KPMG report, arises from its low factory lease costs and cheap electricity. Tax Foundation Ranked St. Louis 14th best among 51 cities for taxes conducive to new businesses. According to KPMG, the city has burgeoning aerospace, biotech and telecom industries. In addition, the metropolitan region is among the five cheapest for green energy, auto manufacturing and agri-foods business, with the lowest electricity costs in each of these sectors across all 27 U.S. metropolitan regions.

6. Baltimore, Md.
> GDP: $144.61 billion
> Unemployment: 7.3%
> Median Income: $64,813

Between 2007 and 2010, median income increased 1.7% in the Baltimore metropolitan statistical area to $64,800 per person, making it the ninth-wealthiest major city in the U.S. The KPMG study ranked the region sixth overall, with some of the biggest factors being low property taxes and low office leasing costs. Baltimore’s cost index is benefiting from the lowest suburban office lease costs among large cities and low property-based taxes. According to the Tax Foundation, Baltimore ranked 14th out of 51 cities for low taxes on mature corporate headquarters. The city scored in the top five in the country for product testing, due primarily to having the lowest office lease costs among the 27 U.S. regions in this sector.

5. Dallas-Fort Worth, Tex.
> GDP: $324.90 billion
> Unemployment: 7.4%
> Median Income: $54,448

The Dallas-Fort Worth metropolitan region is one of the few that remained strong during the worst years of the recession, losing just 5% of total jobs from its peak. It has since gained back those jobs and more. The city has an unemployment rate of just 7.4%, well below the national average of 8.3%. Dallas-Fort Worth has particularly strong cost advantages for utilities and facilities, which contribute to its high competitive ranking. According to the study, the metro region has the lowest business costs in the country in aerospace, electronics, medical devices and pharmaceutical manufacturing, with the biggest causes for this being low transportation and leasing costs in these sectors.

4. Tampa, Fla.
> GDP: $117.23 billion
> Unemployment: 9.9%
> Median Income: $43,546

Like most of the state of Florida, the Tampa metropolitan region was hit hard during the recession. The city lost 11% of its working population, and had only recovered 34% of lost jobs as of the fourth quarter of last year. Home prices fell nearly 50% from their peak and still have a long way to recover. According to KPMG, Tampa’s biggest strengths as a destination for affordable business are its lowest labor costs among the 27 cities as well as its low leasing prices, both of which are the result of declining values during the recession. According to the report, Tampa had the best rating for professional and support services.

3. Orlando, Fla.
> GDP: $104.65 billion
> Unemployment: 9.5%
> Median Income: $46,477

Like Tampa and the majority of Florida’s major cities, Orlando’s housing and job markets were hit hard by the housing crash and recession. Median home value fell 53.5% from peak prices in the first quarter of 2006, the fifth worst of the largest U.S. cities. The metropolitan region ranks has the most attractive location in four of the 19 measured business types, including digital entertainment, software design and biotech. According to the report, Orlando benefits in these sectors from competitive costs for salaries and wages and affordable employee benefit plans.

2. Atlanta, Ga.
> GDP: $249.73 billion
> Unemployment: 9.2%
> Median Income: $53,181

The study ranks the Atlanta metro region fourth or better in 14 of the 19 measured businesses, including second best for automotive and aerospace manufacturing. The city also has emerging biotech, computer parts and telecommunications industries. According to the report, Atlanta’s standing in these industries was improved by low costs for transportation, gas and factory space, and low costs for employee benefits. Atlanta also was rated in the top 50% for corporate tax rates for both mature and new businesses, according to the Tax Foundation.

1. Cincinnati, Ohio
> GDP: $94.73 billion
> Unemployment: 8.4%
> Median Income: $51,576

KPMG ranked Cincinnati as the most competitive city for business among the 27 largest metropolitan regions in the U.S. According to the Tax Foundation’s study of 51 large cities in the U.S., Cincinnati ranks as ninth best for new business and seventh best for established corporations. The city is best for costs in agri-foods, auto manufacturing, plastics and green energy. According to the report, these companies in the city benefit from low transportation costs and affordable prices for facility leasing.

-Michael B. Sauter