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April 2006 |
Volume 1, Number 1 |
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Economic Snapshots:
Leveling off
Quick Facts – KC Metro Area
Meetings and Presentations – I am happy to speak on the state of the real estate industry and business economics to any group or organization that you may be a part of. All this knowledge free of charge, happy to share my thoughts and insights. If you would like to book a time with me please contact me via e-mail or phone and let me know the date and time of your event. I will make myself available schedule permitting.
Snapshot – Manufacturing Sector
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This Newsletter is being provided to you free of charge by Paul Licausi, President of LS Commercial Real Estate. If you do not wish to receive this newsletter please hit reply and write “please remove” and I will remove your name from the monthly distribution list.STEADY AND STRONGThe President was out during the month talking about the strength of the U.S. economy, and for good reason. New job creation during February was outstanding and unemployment hit the lowest level in 40 years. My question as always, given the good news regarding the national economy is your business activity tracking on par with the national economy. My guess would be everyone has a different answer. In my conversations throughout the last month with many of my clients, I heard mostly good news. Many, reported business activity was up and they expected that to continue. I asked about any concerns; fuel, energy and transportation topped the list of unknowns regarding the remainder of the year. Overall, most felt that 2006 would be a good year. Most economists agree with this assessment as predictions for the national economy are for strong output during 2006, close to 4% GDP growth, continued record low unemployment levels and inflation held in check. Am I on board with all the good feelings, I am not as committed to this line of thinking as most, one wild card that everyone seems to overlook is the Federal Reserve which could continue tightening the financial noose and chock off this expansion (as they have done so many times in the past). The other issue will be employment, everyone is feeling good about low unemployment levels which I do agree is good but in an expanding economy this can put stress on industry as they battle for good employees, the risk here is wage costs which could start going up as the labor pool dries up. I think there is less risk from a smaller labor pool then the Fed, all of the information I have is that the Fed will take a break mid 2nd quarter of this year, if not, they will start to create some cracks in this current economic expansion. Otherwise, feel good about 2006 we should all see some needed pick up in business activity. Fed Watch One rate increase in the books at the March meeting, next increase coming at the May meeting. With one on the books and another on deck the Fed is on path to push the discount rate to 5% at the May meeting. Write this one down it is a sure bet. I communicated this month with an economist that I feel is one of the best in the business, I asked a question regarding future monetary policy for the Fed, will they continue to raise rates or take a break. His take was that the Fed would raise the discount rate to 5% and that was certain, he did feel there is some certainty that the Fed will hit us with another increase mid summer but that should be about it until 4th quarter of this year. I asked if there was any possibility of the Fed lowering rates, he said slim to none during 2006, and that the crystal ball was fuzzy beyond that. The recent move by the Fed has moved the prime lending rate to 7.75% which is now close to historic highs given a comparison over the last 15 years. I think the economy is strong enough to ride through this, as I have always said you should pay very close attention to what the Fed does, they have a significant influence over the economy and their activities move the markets quickly. Industry Alert Corner Industry in the spot light this month, Railroads. The comments all of us have heard over the years regarding the rail industry were “who uses rail anymore, that industry is a dinosaur”. Well don’t count this industry out just yet; high fuel costs, truck shortages, driver shortages, and a whole host of other issues have brought the rail industry back into favor with the market. Rail is now picking up major market share in the transportation of goods, part of this push has been the tremendous growth in imports into the U.S., and most of this product is being shipped in containers, which is easily transferred directly from ship to rail then on to the customer. In studying this industry, I found that most of the major rail operators have oversold their lines and are struggling to keep up with demand. Additionally, the rail industry is making record investments in new rail lines and rail hubs throughout the country. There are several major projects the rail companies are planning that would create rail super hubs that will encompass large land tracts. These super hubs will allow the rail carriers to consolidate traffic into one location allowing them to increase the traffic they can handle and decrease the time to get the product to the customer. The rail companies certainly lost ground in the past and I believe most of that was caused by their own unwillingness to address customer needs. However, I sense that this is changing and this industry is coming on strong and making major investments that will allow them to continue to be strong competitors in the freight business. They seem to be one industry that has the financial capacity to make things happen. If you have any product or service that could benefit the rail operators, you should be looking hard at getting in front of them. The resurgence of this industry is real and is happening right now. I anticipate that their revenues will continue to increase and they will need plenty of support services to keep their businesses running and up to the challenge of increased business activity. Manufacturing SectorThe manufacturing sector reported a 34th month of continued growth. The sector improved in March but at a much slower pace comparative to February. The March index reading was 55.2 which was slightly lower than last month’s reading. The media continued cheering the sector throughout the month. I do think there is reason to cheer but let’s not get too excited given the fact the sector is hovering just above the expansion level. Now, the report contained good news overall for the manufacturing sector, most of the key indicators were reported up for the month, but I want to caution everyone that although the industry has shown strength (34 consecutive months of positive growth) you should keep in mind that the readings have been averaging just above the breakeven line of 50. For most of the reporting months the index readings have been running from the low to mid 50’s with a couple of months getting above 60. Remember that an index reading of 50 is the center line between expansion and contraction so we have been just above that line for most of the expansion period. What is the relevance of my comments here, nothing more than just a word of caution and for you (as always) to keep a close eye on economic news regarding the manufacturing sector. Do I see something occurring that might negatively impact this sector, not at this time, but I always look inside the report to see what is really happening within the sector. One interesting thing that has not happened is inventory levels have not returned to what I would consider normal historic levels. What are normal historic levels, inventory levels (which is product produced by the manufacturing and held in inventory for customer delivery) in the past average 90 days, during this manufacturing sector recovery the inventory levels have not returned to those levels, rather they remain at less than 30 days which in my opinion is too low. Additionally, customer inventory levels (finished goods received from the manufacturer) have followed that same path and have not returned to levels seen prior to 2001. During this growth period, I really thought inventory levels would increase at both the manufacturing level and the customer inventory level but I feel now that we should not expect this to change any time soon. I have no explanation for why the inventory levels remain dangerously low but at this point I am not expecting them to change. I have felt a direct effect of this as the pace at which large block warehouse space leases has slowed dramatically. Pricing of raw materials and energy costs continue to be factors in keeping the index reading at the lower end of the expansion scale. What can we expect on a go forward basis, more of the same, expansion but index readings in the lower to mid 50’s. ENERGY SECTOR SPOTLIGHT Expect to pay in the mid $2.00 per gallon range for gas until fall of this year. I see no relief in sight for gas prices. The oil companies continue propping up the cost of oil so do not figure on any decrease in costs here. The amazing thing about this sector is that we now have a surging inventory of oil yet the price per barrel continues to go up. As I have said in the past, this market is being artificially influenced by the commodity buyers so forget about normal supply and demand variables. Where will the costs go, I have to believe lower, but everything I read and hear is that we should be prepared for oil prices remaining in the $60 per barrel range for the foreseeable future. When I have talked about this with other business people, some tell me that gas prices in Europe has been over $3.00 per gallon for a long time and why should we expect prices to be lower than they pay. Maybe they are right, but we should all keep in mind that the consumer is king, if prices remain above $2.00 per gallon, this will eat into consumer spending and we will start to see the retailers affected by this and this will move on down the line affecting all industries and the overall economy. If you do not think the government is keyed into this, look at the recent moves the President has made in quickening the pace at which we explore alternative fuels. He just unleashed a number of incentives for companies to move quickly to research and produce alternative fuel sources. Additionally, government incentives have jumped way up for the car companies to increase the production of hybrid cars and there are tax incentives for the consumer to buy hybrid vehicles. This is all good news, but nothing will happen in the near term so we will have to absorb higher fuel prices for now. |
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KC INDUSTRIAL REAL ESTATE UPDATEIs the KC industrial real estate market changing? That has been a topic of conversation I have had with many of my piers and clients over the first part of the year. The focus of the discussion has been on the influx of larger users into our market and the substantial increase in looks that KC gets from major corporations considering new facility locations. KC is considered a 2nd tier market, we are a pebble compared to Chicago or Dallas which is where most of the larger corporations choose to locate major facilities because of the dynamics of their markets and the fact that they are considered 1st tier markets. However, KC is now on the radar for most major facility searches which should result in more companies locating facilities in KC. My answer to this question has more than one response; first KC has never attracted significant attention because of the size of our industrial real estate inventory in our market, but more importantly the average size of facility that is built in this market. The average size tenant in KC occupies less than 25,000 square feet; this is the case because we have sized buildings to fit this tenant size profile. The question has always been what has dictated the average size tenant, the companies who chose to locate in our market or the size buildings we provide. I am of the belief that the size facilities we have provided has dictated the average size tenant in our market. One interesting aspect of the KC market is that we have all of the key ingredients of a 1st tier market; excellent highway infrastructure, abundant land zoned for industrial use, rail (2nd largest rail hub in the nation), air cargo, barge service, attractive freight rates and a large affordable skilled and non-skilled labor pool. Add these up and this is a big reason why KC is quickly becoming a preferred market for many of these large corporations looking for facilities. Now having said all that, what does this mean for the industrial real estate market locally. You will continue to see more large building activity, buildings averaging in size of 300,000 square feet and up which were once thought to be impossible to fill in KC will soon become reality. This will help bolster the overall market with the influx of these larger users it will spur development of buildings more in line with what we have seen historically in our market (100,000 square feet of less) which will provide smaller blocks of space for companies who are providing service to these large users. This will help the market in total because it will broaden the base of inventory which continues to tighten. When will all this happen, sooner rather than later. I want to mention that KC did not just appear on the map, we have a great organization that has been on the street singing the praises of metro KC and pitching our city to these large corporations. The group is the Kansas City Area Development Council (KCADC) these folks are out there everyday pitching KC and bringing industry into our market that represents new business opportunities for all of us, they are an aggressive group and we are lucky to have them out everyday selling KC. Current inventory levels for lease space will continue to be lower than normal during 2nd quarter, there will be some new inventory in existing buildings come on the market and a couple of new speculative warehouse buildings come on line during 2nd quarter. However, more space will come off the market than will come on the market so we will see a decrease in the overall inventory level. I do see some pressure on lease rates, for bulk warehouse space (building size over 50,000 square feet and ceiling height exceeding 28 feet) rates should increase slightly, for flex warehouse space (building size below 25,000 square feet and ceiling height 18 feet or lower) lease rates will increase much higher in this product type. Inventory levels for Flex warehouse space have been coming down quickly over the last 6 months and this is pushing rates up much quicker in this product type. There are several new buildings coming on line in the flex product type and most of the new space is now being quoted on a NNN lease type. The NNN lease structure is quoted as a base rental amount plus the NNN charges (real estate tax, building insurance and common area maintenance). It is more common to see lease structure quoted on a modified gross lease structure which includes those items listed in the NNN charges. In using a NNN lease structure the landlord has shifted the burden of those costs listed in the NNN to the tenant and can recapture them much quicker under a NNN lease structure. My outlook for the remainder of the year, increase in lease rates (slight to moderate), tighter inventory levels through 2nd and 3rd quarter, should see increase in inventory levels in mid to late 4th quarter. If you are considering purchasing a building there are some options out there, sale prices continue trending upward and interest rates will continue to increase through mid 2006. COMPANIES MOVING IN THE MARKET
If you are interested in buying, selling a building or need to lease space call me and I will provide detailed market information to you and assist you in completing the transaction. Also, if you are interested in selling your building now is a good time and I can assist you in establishing market value for your building and selling your building for you. Thank you for your time and I hope this information has been helpful. |
