Hot Cities 2006

Whether you're looking to expand, relocate or simply stay put, our 12th annual Hot Cities report will give you the lowdown on the nation's most dynamic cities for entrepreneurs.

Phoenix boasts some of the hottest temperatures around, but that's not all--it's also a hotbed of entrepreneurial activity. For the second year running, Phoenix has captured the top spot in Entrepreneur and NPRC's Annual Entrepreneurial Hot Cities rankings of the nation's best places to start and grow a business.

In the rest of the West, outside high-tech powerhouse San Diego, the high-cost Golden State is losing a bit of its luster these days. But an influx of house-rich California migrants has boosted the entrepreneurial energy level in surrounding states and cities, including top-ranked Phoenix.

Overall, Southern locales really stand out this year. In fact, seven of the top 10 states are in the South, according to data from the National Policy Research Council, a Washington, DC, think tank that calculated the Hot Cities rankings with Entrepreneur. With affordable home prices and lower-cost labor, many large and small Southern cities are drawing entrepreneurs. The South also bounced back from the downturn of 2001 and 2002 faster than other parts of the country--thanks to well-diversified economies that didn't rely too much on the high-tech sector.

The Midwest has fewer bright spots; manufacturing declines and auto-industry woes kept this region from returning to its pre-recession highs. The lagging Northeast, meanwhile, continues to struggle to rebuild its post-crash economy, hobbled by stagnant population growth and a dearth of available land.

There's more to the story, however. Read on for a region-by-region breakdown that highlights the hot spots, uncovers regional challenges and examines the economic trends every entrepreneur should know about--whether you're looking to expand, relocate or simply stay put.

In the West, the song has remained the same for decades. Californians continue to cash out their fat real estate profits and relocate to more affordable western states, says Lee McPheters, an Arizona State University business school dean and economist who contributes to the highly regarded Western Blue Chip Economic Forecast.

The California exodus is a major factor in the continued strength of the business climate in top-ranked Phoenix and number-four Las Vegas, McPheters says. Other cities in the West also continue to benefit, with Seattle and Portland both moving up the rankings this year, from 40th to 31st and 41st to 36th, respectively.

Meanwhile, back in the slightly tarnished Golden State, the Los Angeles metropolitan area, which includes Riverside and Orange Counties; San Francisco; and Sacramento all moved down the rankings, though none fell more than three places. Of California's major markets, only San Diego, with its booming and well-diversified high-tech sector, rose up the ranks this year. At 20th overall, San Diego was the highest-ranked big city in the state.

The study found six western states were better suited than California to sustain growing businesses, including top-ranked Arizona, Hawaii (15th) and Alaska (17th). Job growth in Idaho (34th), Nevada (10th) and Arizona averaged 5 percent in the past year, McPheters says, while in California, it's 1.5 per-cent, more on par with the national average.

Contrary to popular myth, Arizona's California migrants are not primarily retirees, McPheters says. Most are between 20 and 39 years old--prime entrepreneurial years. "There's a lot of opportunity for new businesses because of the population growth, especially in sectors [such as] real estate, food service, tourism, relocation businesses," he says. People are drawn by Arizona's vast tracts of available land and low-priced homes. But the California influx is changing that rapidly--home prices in the greater Phoenix area, where 75 percent of Arizona's new residents settle, shot up 50 percent in the past year.

In the meantime, the California government is focused on improving the business climate in the state. At the Milken Institute in Santa Monica, director of regional economics Ross DeVol notes improvements such as cuts in workers' compensation insurance rates. Tech-focused regions such as San Francisco and San Jose/Silicon Valley continue to recover from the dotcom crash of the early 2000s. With big-city home prices through the roof, DeVol says more residents are commuting to jobs in Los Angeles' outlying northwestern valleys from cheaper but far-off Bakersfield and beyond, bringing new business opportunities to these towns.

One promising sign: As of June, the state's revenue was running $7 billion over forecast. "Jobs are being created, and they're higher-paying jobs," DeVol says. "[California] is still a great place to start a business."

Growing in the Sun
Brenda McCaffrey, 52, worked in Southern California for years. But she returned to Phoenix--where she'd attended Arizona State University--to start her circuit-testing company, White Mountain Labs. The 7-year-old business projects $3 million in sales this year.

Aside from the sunny, outdoorsy lifestyle Phoenix offers, McCaffrey says the city's advantages include low commercial rents and housing prices. There's also an easily accessible international airport for White Mountain's overseas clients. With major technology powerhouses such as Intel Corp. nearby, skilled workers abound.

"There's fantastic infrastructure here to run an international business," McCaffrey says. Another plus: The local banking community is highly receptive to loan pitches from growing businesses. The city of Phoenix even helped guarantee her first SBA loan through its Expansion Assistance and Development, or EXPAND, program.


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The author is an Entrepreneur contributor. The opinions expressed are those of the writer.

Carol Tice, a freelance writer, is chief executive of TiceWrites Inc. in Bainbridge Island, Wash. She blogs about freelance writing at Make a Living Writing. Email her at

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This article was originally published in the September 2006 print edition of Entrepreneur with the headline: The Right Spot.

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