LS Commercial E-News
August 22, 2007	Volume 1, Number 1
Economic Snapshots: · Unemployment 4.7% (National) · New Jobs for July 92,000 · Unemployment 5.3% (KC Metro) · Housing Permits down this month Quick Facts – KC Metro Area · Air Freight 21 million pounds moved through KCI Airport · Housing Permits in July – 500 units · Help Wanted down 35% compared to same time last year · Passenger Traffic moving through KCI July 2006-1,000,000 people July 2007-1,100,000 people. 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 · Back Log Orders down · New Orders down · Inventories up · Export orders up · Employment down · Production down · Supplier deliveries up · Prices down · Customer inventories up Cost breakdown at the pump for diesel fuel Taxes – 19% Distribution/Marketing – 15% Refining – 14% Crude Oil – 52% DIESEL PRICING U.S. Weekly Average Per Gallon 08-06-07 - $2.898 08-13-07 - $2.847 08-20-07 - $2.868 Wheeler Downtown Airport Number of Flights July 2006 – 71,000 July 2007 – 90,000	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. UP AND DOWN AND ALL AROUND What a month; the credit markets are in a state of chaos, consumer confidence is down, oil continues to rise and on and on and on goes the bad news. These are perfect times for the media, lots of bad news to put out there and hype it up to the average viewer. What should you believe; is the economy at the end of the cliff as many have said? Or, is the economy simply going through a natural slowing process and still on solid ground. I am raising my hand for the latter, a natural slowing process but still on solid ground. As I have always stated, disregard the hype and emotion and look at the facts. Yes, there are issues within the economy. There has been an overall slow down in economic performance but this is not new information, the economy has been slowing at a steady pace for the past 8-10 months. In case you missed the numerous rate increases by the Federal Reserve, this was a designed path to slow the economy. And guess what, it is working. So to see slower economic growth is not a bad thing; it is a planned event which is designed to allow for the economy to slow gradually overtime, allowing for what the economists call a “soft landing”. The Fed is responsible for monetary policy which is designed to maintain our economy in a positive position while limiting inflation. The current movement within the economy; is a result of the Fed’s actions and are in line with their expectations. Now, as I stated above, look at the facts and this will always show you the real picture of what is occurring. The facts are the economy is still on track for growth this year between 2.2% to 2.4% which is right in line with expectations. Monthly new job growth is averaging slightly below expected levels, unemployment remains at historically low levels (4.6%) and the manufacturing sector continues to show expansion month over month. These are the facts, the economy is slowing, new job growth will be lower than expected but none the less we will continue to see new jobs created each month and the manufacturing sector will continue to hang in there with modest expansion each month. Is this a picture of doom and gloom, no and notice I have not interjected any hype into the picture, just the facts as they stand right now. Some comments regarding the credit markets, things could get much worse in this sector before they get better. Initially, the problems in the credit market had been isolated to the residential real estate sector (sub-prime loans) but this problem is like a common cold and is now spreading into other sectors of the credit market. Now, keep in mind, there are real problems in the sub-prime mortgage market but apart from that there is a lot of emotion going on here and much of the imbalance that is occurring as uncertainty spreads across the other credit markets is fear and not fundamentals. Fear is not sustainable and thus the spread of this uncertainty will have a short duration and I do expect most of the credit markets to return to stability soon. Now, get back to business, know that our economy is not on quick sand and get out there and make some money and do your part to support the U.S. economic machine. Fed Watch The Federal Reserve has been flexing its muscle during the last 45 days. As the credit markets nose dived, the Fed entered the market and started to make some very aggressive moves to stabilize the situation. I am always amazed at how much influence the Fed has over the economy and financial markets. The Fed took swift action over the past few weeks to shore up the credit markets by injection over $50 billion in cash into the market. I have talked to a lot of people regarding the actions of the Fed and most of us common people have little understanding of what they are doing, we just know they pumped a ton of money into the economy. In summary, here is what they did, they watched the credit markets start to tail spin, with most of the problems centered in the sub-prime mortgage market. This created some panic within the banking industry which caused the banks to start to tighten credit and increase spreads on loans (higher interest rates and higher requirement for equity) to the borrowers. This action by the banks is not good for the economy, any significant restriction of capital and significant increase in the price of capital (interest rates) will have an immediate negative impact on the overall economy. With limited access to capital coupled with capital that is overpriced, the business sector will become much less active and thus we will see that reflected in a much slower economy and increased unemployment. What the Fed did was to inject money back into the financial system by repurchasing Fed Notes from the banks. The Fed Notes are debt issued by the Fed which the banks purchase and then receive interest payments from the Fed. By repurchasing these notes, the Fed then floods the banking system with fresh cash which the banks then have to redeploy in the form of loans to put that money back to work. This is one of the early steps the Fed takes to try and stabilize the credit markets by increasing the liquidity of the banks. Will this work, no way to know initially. My guess here is that it will take another month of so to see if the Fed can settle down the markets. If increasing the money supply within the banking system does not do the trick, there becomes a real possibility that the Fed will have to start reducing interest rates. Everything that I have heard over the past 60 days indicates the Fed will only reduce interest rates as a last resort. A Fed interest rate cut has not been expected until early 2008 so I assume they will be resistive unless they absolutely have to cut interest rates to support the economy. Now, having just said that I am hearing that there is a 50% probability that the Fed will reduce the Fed Funds rate by .25% at the September Fed Open Markets meeting, keep your fingers crossed for this one. Lots of data and opinion out there right now regarding the credit markets. What really matters is what your banker is telling you right now. My advice here is to be very cautious right now if you are going to take on more debt. I do believe that interest rates will be coming down but when that will happen is a guess at best right now. If you are considering an acquisition or purchasing equipment that will require financing, get out early and talk with your banker. The banks are making loans, but the terms and pricing of that capital may be different than what you are used to. I have been advising my clients to go to the bank first and get a feel from their banker respective to what they can expect. Given the emotion in the market, you just do not know how the lenders will respond. Industry Alert Corner Industry in the spot light this month, Residential Construction Materials Suppliers. I usually cover in this section what I consider an emerging industry sector but I felt it was important to cover the residential construction sector and point out some significant concerns I have but also some real opportunities that I feel are there as well. As all of you know, the housing sector has been performing poorly for some time. The slow down in this sector is affecting every industry in this sector from raw material suppliers, contractors, and service providers (mortgage companies). The beating has been spread out across the entire sector and no company has been insulated from the pain. I have several tenants who are serving this sector and they are having a tuff time right now. A word of caution here, you should be very cautious with any clients you serve who are operating in this sector. The slowdown has and will affect the companies operating within this sector and this could create some exposure for you as well. Caution and communication are best in this case. Now, enough about the obvious challenges within this sector. As with any downturn there is opportunity. I really see some positives here respective to future business opportunities. This sector is taking a beating right now and I think it will get worse before it gets better. However, if you look inward within this sector, you will find some real service opportunities. The sector is filled with small, mid and large size companies who are battling to stay alive. This is where I see the real opportunity, many of these companies are being pounded by their service providers and what they need right now is a helping hand to get them through the tuff times. No I am not suggesting anyone do something that is not smart here, but the service provider that can step in and work with companies in this sector during this period of tuff times will be positioned well to take advantage of that relationship when this sector comes back to life. In case anyone was wondering when this might happen, a guess is just a guess right now, but I am well satisfied that the sector will come back. Keep in mind, there are numerous service opportunities for this sector, transportation, financial services, distribution, assembly and the list goes on. This sector is worth some consideration and certainly some research if you are not currently providing service to this sector. Be cautious, but be open to the possibilities that could come out of jumping in here. As I said, I have several tenants who are operating in this sector and I will continue to work with them and will consider further relationships with other companies in this sector. When this sector turns around, and I know it will, I will be there with these companies as their businesses improve and will benefit from their growth. I would be happy to discuss this sector further should you have questions feel free to call me with any questions. Manufacturing Sector Another positive month for the manufacturing sector during July. The PMI index reading for July was 53.8 which was slightly lower than the June reading. The sector has been a bright spot in an economic market filled with challenges. Coming off a strong 2^nd quarter, manufacturers continued to see progress during the month, there was some pull back in activity compared to last month, but that is very normal for this time of year. During July and August we typically see a slow down in the activity level. It is a time of year that families are preparing for back to school and taking end of the season vacations. The index readings are in line with this trend and I do expect to see an increase in the index over the next couple of months. Some interesting comments contained within the ISM report this month. Commodity prices for raw materials are starting to stabilize. This is certainly welcome news for the sector. When commodity prices are in flux it is very difficult for the manufacturers to anticipate price levels of their raw materials and that puts pressure on earnings if the commodity prices move upward too quickly. They cannot incorporate those increased costs into their pricing which is reflected immediately in their bottom line. Oil continues to have an impact on the plastics and the rubber industries, pricing in this sector continues to be in flux and there does not seem to be any end in sight for oil price movement. Looking at the key indexes for July, there were several of the indexes that were slightly down compared to last month. However, the readings were still very strong. Manufacturers continued to build inventory during the month, Customer’s inventories were down significantly which was an indication of increased sales on their end. They will be rebuilding their inventory levels which will cause the manufacturers to increase production to meet that demand. Back log orders were slightly down from last month but still very strong as well. Although several of the index readings were slightly down from last month, they are very strong and show a trend of stability which should equate to a strong 3^rd quarter for the sector. The overall report was positive, despite what we are seeing in other parts of the economy, the manufacturing sector continues to be a bright spot. I was at a conference recently and one of the discussion points was on the U.S. manufacturing sector and the effect of globalization. I am sure all of you have heard one of these presentations and they all seem to be playing the same record, U.S. jobs continue to leave our country and head to Asia or other parts of the world. The speaker was giving the audience a play-by-play of his recent trip to China and how their economy is on fire and the amount of development going on the throughout the country. He was very impressed with the progress, how they can build a bridge in ½ the time it takes in the U.S. and how they are out ahead of the industrial development of plants and distribution centers with the construction of infrastructure and roads. This is the same old story and right before I turned the guy off (having heard this same story for the 2,000^th time) he took a breath and said; you know this is the same thing we saw years ago with Japan and people were saying the same thing back then about our economy and manufacturing base, that all of the good jobs were heading overseas to Japan. He commented further, look back at what really happened; yes, lots of manufacturing ended up in Japan and they had a great run, followed by years of dismal economic performance. Meanwhile, the U.S. economy plugged along and continued to expand. Now Japanese companies are locating plants back in the U.S. and the U.S. is where they are expanding their manufacturing capacity not in Japan. He makes a great point, no one is telling that story and there is a reason why Japanese companies are locating plants in the U.S., it is a great place to produce product. He closed with another very good observation about his travels in China, even though he was impressed with their progress, he said the jury is out on their ability to sustain the pace of growth they have experienced. They are a communist country which will complicate the process for them. Further, they have migration of over 30 million people each year relocating from rural parts of the country into their industrialized cities. He said try keeping pace with that influx of people each year (equal to the population base of a large state in the U.S.) just housing alone is a monumental financial challenge. Interesting comments, one other thing that came to mind for me, all the talk about Chinese products and how cost efficient they can manufacture widgets; I am not starting to hear discussions about quality. If you want to know how they can produce products so inexpensively, just review the news clips over the last 6 months and that will give you all the answers on this question you need, lead in toys, plastic residue in wheat based products, and on and on. Next time you hear someone talk about how all the manufacturing jobs are heading to China, remind them about Japan, who by the way can manufacture a toy you did not have to worry about. ENERGY SECTOR SPOTLIGH Oil remains north of $70 per barrel and I do not see any indication that the pricing will change soon. I was talking about energy prices with some clients during the month and heard an interesting take on gasoline pricing. The prediction was that prices would be coming down starting in mid August and moving down throughout 3^rd quarter. I contended this was just a theory and my client responded with “no, this is a fact”. I just had to press this and pushed for supporting data for this fact. The response from my client, the summer season is coming to end and vacations are over as the kids return to school. My client added that the oil companies will now start dropping prices given the end of the summer season anticipating a drop in demand. Pretty compelling position and there is some historical data out there that would support this. Nonetheless, I still contend his position is more of a guess but he could be right on the mark, gasoline prices have starting coming down. As a side note, I have been harping about our need to reduce our dependence on oil as quickly as possible. Everyone I talk to about this makes the same comment, have I noticed the revenue numbers coming from the big oil companies recently and how strong their lobbyist are in Washington. Well all that aside, we need to do something. I have been reviewing information on coal industry. You know that other stuff that fuels most of our power plants that you never hear about. I wanted to share some interesting data on the coal industry. Interesting fact; if you combine the energy production level of wind, water, nuclear, oil, natural gas and solar all together they produce a fraction of the energy that coal produces annually. Production costs are also worth noting, the cost to produce 1 million BTU from oil is $8.66; the cost to produce the same equivalent energy from coal is $1.66. What are we missing here, look at the cost difference. Finally, last year in the U.S. producers consumed more than 1 billion tons of coal, that sounds like a massive amount of this mineral, how much more can be left to extract for our use. Based on the latest calculations, how about 243 years. Oh and by the way, all of this resource is located within the U.S. Why is coal such a bad word, we the have technology that allows for a clean burn of this mineral, lets push the use of this energy resource and cut down on the use of oil. This would make good politics as we could reduce the amount of money we are piling into the Middle East. Just a thought here.
	KC INDUSTRIAL REAL ESTATE UPDATE Temperatures in KC have been hot enough to cook a steak on the sidewalk. We are in the midst of the hottest part of the summer season and we are seeing temperatures averaging in the upper 90’s to low 100’s. The heat along with end of summer vacations has slowed the activity in the market. This is typical but based on how active the market has been, I did not think we would see any real slow down this year. I do expect to see things pick back up during the month of September. I am already seeing movement back in the market, mostly discuss at this point but that will lead to action in the short term. The KC market has been the focus of a lot of press lately. The buzz is about the resilience of the market despite the slowing national economy. I wrote an article for a trade publication that I am a contributing editor for called Heartland Real Estate Journal. The editorial editor wanted me to elaborate on why the KC market is solid amidst softening that has occurred in other parts of the country. In the article, I covered several positive aspects of the KC area that contribute to our stability, which included; central U.S. location, work ethic, affordability, diversification of our local industry base, outstanding logistics (highway system, airport, rail, air cargo, barge), available skilled and unskilled workforce, pro-business municipal environment. All these in addition to several other key aspects that combined make the KC market attractive to outside companies. The interest in KC from corporate America is real; you will continue to see more companies establish locations in the KC area which is great for current business base. This will create further business opportunities for those companies doing business here now. Given the stability of our local industrial real estate market, do more companies locating in the KC area have an affect on the overall real estate market? The answer to that is yes, the real question is, how will we see this affect. As the industry base in the KC area expands, the residual effect will be lower vacancy rates and possible increase in lease rates. I are starting to see some of this now, the vacancy rate has remained at historically low levels (just above 8%) and I do not expect that to move much for the remainder of this year and into early next year. Lease rates have increased slightly. We are seeing more upward movement in lease rates for flex space (smaller bay space sizes with ceiling heights below 18 feet). I am not seeing the same increases in lease rates for bulk warehouse space (larger bay sizes with ceiling heights above 20 feet), but I am seeing inventory levels remain very tight and vacancy rates at 8%. I do think there could be some upward movement in rents for bulk warehouse space but not until later this year. There are some new bulk warehouse buildings being built, this will affect inventory slightly but not enough to move the vacancy rate upward. The market remains weighted towards Landlords at this time. Lease incentives are not common and there is competition for good distribution space that is currently available, from more than one prospect. Having said that, Landlords are still anxious to get the deal so I am still seeing aggressive lease proposal out there so that is good from the Tenant’s perspective. I see no change in this trend for the remainder of the year. The areas in metro KC that are seeing the greatest activity of new building activity are; Lee’s Summit, Blue Springs, KCI, South KC, KC North and Independence on the Missouri side. On the Kansas side; Olathe, Gardner, Shawnee, Edwardsville and Lenexa are seeing the most new building activity. These areas have available industrial land zoned and ready to build on. These areas will continue to see activity for the remainder of this year and into next year. I have not commented much on the “for sale” market in the last two newsletters. The market remains a sellers market; building prices continue to move upward. I am seeing average sale prices for existing buildings less than 100,000 square feet at $45 per square foot and moving upward. Given the state of uncertainty within the credit markets I am finding it hard to understand why so many buyers are active in the market, but there are a lot out there right now. I am not recommending that a company make a move at this time to pursue buying a building. The market is at the top end of the pricing scale and anyone buying right now will be paying a premium. Additionally, the cost of capital and the loan structure banks are requiring are not favorable. Put these two together and you have a receipt for overpaying for a building. I do look for the “for sale” market to improve. Pricing should come down slightly over the next 12 months; however the larger issue will be the trend downward of interest rates which we should see starting in 3^rd quarter of this year. This is a much more significant impact on the cost of ownership and in this case a little patience will pay off in the long run. COMPANIES MOVING IN THE MARKET EVEREST MIDWEST 27,775 SF LENEXA, KS PISTON AUTOMOTIVE 75,000 SF LIBERTY, MO SPC DISTRIBUTORS 41,000 SF LENEXA, KS GH IMPORTED MERCHANDISE 120,000 SF LENEXA, KS 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.