It was a tough loss for the Nevada Development Authority.

Last month, a major manufacturer came to Las Vegas to meet with authority officials about opening a local factory with 1,500 employees. After scouting the Las Vegas Valley for 150 acres of land, the company scratched the city off its short list.

"They said, 'We simply cannot afford the land here -- there's no sense in even talking to you,'" said Somer Hollingsworth, president and chief executive officer of the Nevada Development Authority. "They told us they loved what they saw here, but that the cost of land made it infeasible for them to build a factory in Southern Nevada."

It's a refrain Hollingsworth said he hears more frequently these days. The authority has lost six or seven deals this year because of real estate prices, he said. Now, a national study provides statistical support for the anecdotal evidence that increasing real estate costs are affecting Nevada's business climate.

The Milken Institute, an economic think tank based in Santa Monica, Calif., released its Cost of Doing Business Index earlier this week, and Nevada ranked as the 12th priciest state in the country for commerce, up from No. 14 in 2004. The Silver State was competitive in wages and taxes, with expenses in both areas falling below national averages. But rising real estate costs helped propel the state's ranking: Industrial rents are now 107.5 percent of the national average, compared with 105.9 percent a year ago, and office rents are 131.5 percent of the national average, compared with 126.9 percent a year ago.

Those percentages remain favorable when compared with California, where industrial and office rates are both around 136 percent of national averages. Measured against other neighboring states, however, Nevada falters.

Arizona's office rents are 105.8 percent of the national average, while its industrial rents are 85.4 percent of the typical nationwide rate. In Utah, office space is 101.3 percent of the national average, and industrial rents cost 80.2 percent of the national average.

Office space rents are 80.5 percent of the national average in New Mexico, while industrial lease rates there are 103.1 percent of the national average.

Brad Peterson, senior vice president of commercial real estate brokerage CB Richard Ellis in Las Vegas, said rental rates on office space in Southern Nevada have risen 30 percent in the last two years. He attributed the increase to two factors: upward pressure on land costs as home builders compete with commercial developers for scarce acreage, and the rising cost of construction materials and labor.

Construction costs are also pinching businesses on the tenant-improvement side, Peterson said. Local companies today are spending $40 to $50 per square foot to build out office interiors, while most landlords provide tenant-improvement allowances of just $30 to $35 per square foot.

"We're still getting our fair share of businesses. It's just that we're up against obstacles we haven't been up against before," Hollingsworth said. "It's nobody's fault. It's just the situation."

That situation is not necessarily negative, said Armen Bedroussian, a senior research analyst from the Milken Institute.

First, rising real estate costs often signal a flourishing economy that is drawing many businesses, thus reducing the supply of commercial space, Bedroussian said.

Peterson pointed to numbers that show such demand is partly behind higher costs. The office market's vacancy rate is 10 percent, its lowest level in a decade and a marked decrease when compared with about 15 percent two years ago, he said.

The market is positioned to address that mild supply crunch in 2007 and 2008, when a host of new office projects could come on line, Peterson said. In addition, he said, lessors could mitigate tenant-improvement costs by eliminating hard walls and using modular workstations instead of individual offices.

Also positive for Nevada, said Bedroussian, was its compensation picture. The state's wage costs were up nearly 1 percent. That's key because wages total half the weight in the institute's ratings, so the noticeable uptick is essential to Nevada's higher rank.

"It's good news that we've raised wages in the state, because really, what we're striving for is to create better jobs. We're not striving to make sure we create $8 and $9 an hour jobs," Hollingsworth said.

Besides, Hollingsworth added, most businesses consider attributes beyond a state's real estate costs.

"We're still competitive if we can sit down with them. They love our work force and our tax base," he said. "We still have a lot of great things to offer."

Executives of two local businesses that moved to the state earlier this year agreed.

"(Southern Nevada's) location to ports in Los Angeles, coupled with a lower tax base, attracted us here," said Tim McCubbin, director of operations at Murray Feiss Import, a New York lighting distributor that will have 250,000 square feet of warehouse space in North Las Vegas by November. "The two biggest things for us were low outbound freight costs and the definite tax advantages over California."

Karl Hielscher, president and chief executive officer of Texas-based Metl-Span, also said location was more important to him than the cost of real estate. Southern Nevada offered the best access to the entire West Coast, Hielscher said, and that offset expensive real estate. The metal-wall fabricator will begin producing goods out of a 126,000-square-foot factory in North Las Vegas next month.

"We've also found a willing and good work force (in Nevada). For us, that and the location were everything."