Fed up with California's high cost of living and onerous business taxes, residents and corporations alike are packing up and moving to neighboring Southwestern states. This exodus is feeding an explosion in residential and retail development in Las Vegas and Phoenix and boosting commercial real estate activity throughout the region.

Las Vegas welcomes 5,000 new residents monthly, 60% of which are from California. And of the 300,000-plus new residents moving to the Phoenix area each year, three out of five come from the Golden State.

John McDermott, a national director with brokerage firm Sperry Van Ness in Irvine, Calif., says that investors are moving their capital into states that provide a better return on investments. “In any product type, you can get cap rates as much as to three points higher elsewhere,” he says. “We're going to see a lot more capital move from the state.” A recent survey by the California Business Roundtable found that of 400 businesses surveyed, 20% plan to move or expand out of state — the highest number in the survey's 12-year history.

Meanwhile, Las Vegas is growing so fast brokers say the region could run out of land for industrial development. The federal government owns all of the open land surrounding the city, and auctions off a limited number of parcels each year, says Chris LaBello, managing director in Marcus & Millichap's Las Vegas office. Due to population growth, plenty of land that had been zoned for industrial use has been rezoned residential, he adds.

A New CEO Mindset

“There's a meltdown going on in California,” says Somer Hollingsworth, president and CEO of the Nevada Development Authority, noting that of the 50 out-of-state companies moving operations to Clark County between July 2002 and June 2003, 19 came from California, adding nearly 1,000 jobs to the economy.

“California has made it very easy to do our job,” adds Perry Muscelli, managing director specializing in industrial product at Cushman & Wakefield's Las Vegas office. Still, a significant number of clients prefer to maintain a California presence to be in close proximity to their customer base, Muscelli says. As a result, some companies base their executive offices in California and their labor-intensive operations in Nevada, which boasts no corporate or state income taxes, a speedy entitlement process and comparatively low energy costs.

“We're seeing the start of a ‘showroom’ economy,” according to Larry Kosmont, president of Los Angeles-based Kosmont Cos., which publishes an annual “Cost of Doing Business Survey” for California. “CEOs are living here and moving the bulk of operations outside the state.”

Case in point: Kansas City, Mo.-based Interstate Brands Inc., a large bakery that markets products under the brand names Wonder, Holsum and Home Pride, moved its crouton and stuffing mix operation last year from Montebello, Calif., to a 320,000 sq. ft. facility in Las Vegas formerly occupied by Levi Strauss. Muscelli, who represented Interstate, says the firm chose Las Vegas because of its location: products can be moved quickly to Southern California and executives can make the roundtrip from Los Angeles to Las Vegas in the same day.

Other Southwestern cities are seeing a similar trend. Kinko's moved its headquarters and 500 jobs from Ventura, Calif. to a 125,000 sq. ft. facility in Dallas last year, and Hewlett-Packard moved its Roseville, Calif., manufacturing facility and 475 jobs to Houston earlier this year.

Over the last year, 21 new businesses moved into Phoenix, investing $225 million and absorbing more than 1.5 million sq. ft. of commercial space. The newcomers brought 3,471 new jobs to the region.

Technology Hubs Emerge

While Las Vegas has attracted mostly small manufacturing firms, distribution facilities and back-office operations, Arizona and Texas, with a large pool of well-educated professionals, are attracting tech firms, financial institutions and energy businesses.

Three major biotech research organizations moved into Phoenix last year, including International Genomics Consortium, The Translational Genomics Research Institute and Isotechnika, a Canadian pharmaceutical research firm.

Tucson secured commitments from nine companies, mostly technical and biotech firms, bringing more than 1,000 jobs to the city.

The Dallas-Fort Worth Metroplex, which has established high-tech and aerospace sectors, also is experiencing an upswing in activity. Texas Instruments plans to build a $3 billion semi-conductor manufacturing facility in Richardson that will employ 1,000 workers.

Recently, four California-based companies — Countrywide Financial Corp., Strategic Partners, The Automobile Club of Southern California, and Coaster Co. of America — announced plans to establish or expand operations in the Dallas-Fort Worth area. They will add nearly 4,000 jobs to the region's economy and occupy an additional 1.2 million sq. ft. of office and industrial space.