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December 2006 |
Volume 1, Number 1 |
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Economic Snapshots
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.
DIESEL PRICING 11-20-06 - $2.553 11-27-06 - $2.567 12-04-06 - $2.618
KC Local Business Owners by Age Under 25 - 1% 25 to 34 - 8% 35 to 44 - 24% 45 to 54 - 32% 55 to 64 - 21% 65 & over – 10%
Snapshot – Manufacturing Sector
Cost breakdown at the pump for diesel fuel
Taxes – 19%
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Paul Licausi, President of LS Commercial Real Estate, is providing this Newsletter to you free of charge.IS THE ECONOMIC SHIP SLOWING TO A HALTIs the U.S. economy heading for a recession, get ready because this is going to something you will hear more and more over the coming months. Forecasts of economic growth for the 4th quarter that has been in the mid 2% range have now been revised downward to 1.4%, otherwise translated; the economy is just about in slow motion. At 1.4% the economy is moving at a snails pace, that is as slow as they can ramp the economy down before it stalls out. Is there a real risk of a recession in 2007, I say yes, but not more than a 20% probability. I have seen over the last 45 days, economist predicting greater than a 70% probability that we will slide into a recession in 2007, this is no more than hype and not supported by any substantive information. The economy is slowing, no doubt about that, but is that really a bad thing, most would agree that yes if the economy slows down that is bad. I say, look at the bigger picture before you form an opinion. In a free market system, the economy must run in cycles, which is the systems way of correcting imbalances within the system. This cycle allows for sectors within the market to correct, not go too high or too low. We are entering a new cycle; there will be corrections in different sectors within the economy. You want proof of my theory; look at the housing sector, the correction in this sector has been bringing housing values back in line with more historical levels and construction material prices have been falling. This sector is nearing the end of the correction cycle, I believe they have hit bottom and now should see more stabile conditions in this sector over the coming months. We will see this same correction move through other sectors of the economy during 2007, some of us will be affected more so than others. Is this otherwise known as a recession; no, because I believe strongly that we will continue to see the economy grow, all be it at a slower pace, but none the less still growing. Based on conversations with several of my clients over the last month, I can already see this trend occurring. Those in the manufacturing sector are reporting a slow down, their sector of the economy has been pretty solid over the last 36 months, and they are seeing some slow down in new orders. This does not mean that their business is in the tank, just slower and they will need to start to make adjustments in their operations to reflect that. Those in the transportation sector are doing very well, business is good and they have effectively minimizing the economic impact on their business resulting from higher fuel pricing, with the effective use of fuel sur-changes. This has allowed them to remove pricing risk for fuel out of their economic equation. Most of my transportation clients have a very positive outlook for 2007. My clients in the distribution sector were less positive. Although business is still solid, they are concerned with the health of their sector in 2007. What should we do given this data on the economy; first of all, do not get emotional. Look at the trends in your business activity; talk with your clients and piers in your industry. What feeling are you getting, does it appear that your sector is in for some correction, you will get a feel for this if you put some effort and research into what is going in your sector. I believe we will still have a solid 2007 from a business perspective. However, this should be the time that you are making contingency plans in the event there is a correction in your sector at some point in the near future. Remember, those companies prepared for a correction when it occurs, are the ones who are best positioned to take advantage of opportunities that arise during these times and there are usually plenty of companies who get caught sleeping so be one of those ready and prepared to jump into action when the opportunity presents itself. Fed Watch Over the last thirty days there has been more Fed speak than in the last six months combined. Chairman Bernanke and former Chairman Greenspan spoke during the month regarding the state of the economy. Additionally, several of the Fed Governor’s (these are Presidents of the Federal Reserve Districts located throughout the country) spoke as well. The problem is they were all making different points. Comments from the Chairman (which I put the most weight on) centered on the economy and the fact that it is slowing but that inflation was still unstable and therefore they were going to stay focused on this and that they would intervene as needed to contain inflation. He did mention that there are some risks to the economy (housing sector), which could have a negative impact on the soft landing he is trying to maneuver. Meanwhile, several of the Fed Governor’s were talking about other parts of the economy and the fact that inflation is still a moving target. They seemed to be more concerned with the economy heating back up too soon and triggering an upward move in inflation than the fact that the economic ship is slowing to a point where it is barely moving. Maybe it is by design, but none of the Fed Governor’s who spoke addressed any of the areas that the Chairman centered on. That leads me to believe that much of the comments were scripted and designed to keep everyone off balance and unclear of really where the Fed stands and what they will do next respective to interest rates. Here is my take; the economy is most certainly slowing which is the desired affect from the Fed’s perspective, so they have achieved that goal. The term for this is a “soft landing”. However, the trick is for the Fed to be ready to move quickly to lower rates in the event the economic slowdown they have engineered goes too far and the economy trickles to a halt, which is otherwise known as a recession. Here is the challenge for them; they are walking a tight rope here, any action by them to stimulate the economy will take time. Keep in mind, they increased interest rates over a 24-month period that slowly adjusted economic conditions over that time period, it is logical to assume that in order to stimulate the economy it would take roughly the same time frame. Given this theory, the Fed cannot turn the ship around overnight. Should we worry, I would say a little at this point. Historically, the “soft landing” the Fed strives for, has only been really executed successfully once in the history of the Federal Reserve. The odds are not in our favor that they can repeat this, I do think that the economy will continue to slow and will likely come dangerously close to stalling. However, I do think Chairman Bernanke is not one to sit on his hands, I feel strongly that he will move much quicker than the former Chairman to intervene and start lowing interest rates. Here is the challenge, it will take some time for the economic ship to change course so there will most likely be some lean times ahead for us. Will there be a recession, I think that is a low probability, I see more of a slower period followed by a long period of ramping back up the economy (say 24 months). What should you do respective to making decisions regarding capital. In the next 12 months, we will be entering a declining interest rate market. As I have mentioned in the past, reduce debt in an increasing rate market, increase debt in a declining interest rate market. Capital will become less expensive during the coming 12-24 months, as your cost of capital goes down this will allow you to complete needed additions to your equipment base or fleet to enhance your operations. Put some effort into researching this, you should find that the bankers will be much more aggressive over the next year to put their capital to work so this will be favorable for you. Industry Alert Corner Industry in the spotlight this month, Retail Sector. I wanted to highlight the retail sector this month because I have been viewing some very interesting trends occurring in this sector over the last 90 days. The retail sector is knee deep in the heart of the holiday shopping season, month end sales numbers for November have coming out with some real surprises. The retail industry kingpin Wal-Mart which accounts for over 8% of all retail sales reported month end November same store sales of -0.1% which was a complete surprise to the retail world. It has been forever since Wal-Mart has reported a decrease in same store sales so this was a shock to many. Same store sales are sales reported on retail stores that have been open for over 1 year. What does this mean, Wal-Mart the retail giant and one of the largest corporations in the U.S. reports declining sales, is this a signal that the overall retail sector is starting to show some cracks and can we expect more of the same from other retailers. I am not convinced that this will be the case, I believe that the problems Wal-Mart is having are the product of their own fruition. They have been adding new stores for many years at a breakneck pace, it is typical for them to add over 10% of new store square footage to their portfolio each year, this is mammoth; this is millions of square feet of new retail space each year. The question has been for some time if this rapid expansion would cannibalize their existing store sales. I develop retail real estate as well as industrial real estate; I have always followed Wal-Mart’s expansion with an interest of attracting them to one of my projects. No such luck so far, but I am one who believes that their rapid expansion would one day start to have an adverse affect own their existing stores. To support my belief that Wal-Mart’s problems are self induced, I have been watching other retailers, the mid to upper end retailers are doing very well; JC Penney, Kohl’s, Dillard’s and Macy’s are all reporting significant increases in same store sales. Even Target (who is a fierce competitor of Wal-mart) reported an increase in same store sales during November, so this really goes far to support my belief that Wal-Mart has created their own problems here. However, this may bleed over to other lower cost retailers such as; Dollar General, Dollar Tree and Family Dollar. These retailers are all competing in the lower cost sector of the retail market and they could start to see the same declining trend in their sales. I think overall the retail sector will do very well over this holiday shopping season, the electronics and other specialty retailers have done exceptionally well so I have no worry respective to any softness in the retail sector apart from the deep discount retailers. For those of you providing service to the discount retailer sector, here is where you should be concerned. Wal-Mart has already started a deep discounting program in an attempt to bolster sales, be advised that they will certainly be looking to their service providers to help in this endeavor. Those doing business with Wal-Mart work on razor thin margins and have to be able to manage their supply chain flawlessly. Be careful on the go forward basis, I am sure that Wal-Mart will start to flex their already massive muscles with all of their suppliers in an attempt to squeeze additional savings anywhere they can to boost the bottom line. Given the fact their stock has been flat for the last several years and their sales are trending downward, this is a recipe for difficult times ahead for those doing business with them. Be proactive; be attentive to make sure you understand how they will be operating from here forward. Better to be prepared here in advance. Manufacturing SectorThe manufacturing sector reversed course this month and contracted for the first time in 41 months ending over 3.5 years of growth. The sector reading dipped below 50 during November to 49.5 that is 1.7 points below the October reading. Is this the start of a real slowdown in the manufacturing sector, as much as I hate to say yes, I think we are in for slower times in this sector. Now, as you know, in the last few months of this newsletter, I have been predicting that the PMI number would be hovering just above 50 (which is neutral no expansion or contraction), I did not think the reading would drop below 50. In reviewing the data over the last 30 days, I believe we will see readings below 50 for the next few months. I do not believe that we will dip below 45, but remain in a range from 45 to 49. Why the slowdown, if you look at the larger economic picture, the economy is slowing. You can see a direct relationship between GDP output and the PMI reading. If you have GDP running above 3% annualized, the PMI reading will remain above 50 that reflect an expansion mode. If GDP falls below that 3% threshold, then PMI will fall accordingly and most like will reflect a contraction mode. Latest GDP forecasts for 4th quarter are 2.4%, so as GDP output falls so follows the PMI reading. However, this is not the only factor involved here, but it is certainly an easy gauge for you to look at to see what the GDP forecast is projected to be and use that as a measure of future PMI readings and to anticipate the health of the manufacturing sector. One key factor for the manufacturing sector remains the consumer. We can look at numerous reams of data, but at the end of the day, the level of consumer spending has the greatest affect on the health of the manufacturing sector and the overall economy. Now having said that, I have been watching closely the data on consumer spending since the start of the holiday shopping season, the consumer is off to a good start. I reviewed a recent survey on consumer holiday shopping and less than 50% of the consumers in the survey had completed their shopping for the season. This is welcome news; we should see a nice spike in retail sales during the first half of December. Many of the consumers responding to the survey indicated that they were waiting on deeper discounts and aggressive sales that they felt would come just before Christmas. If any of you have been out shopping lately, I am sure you have noticed that there is no lack of consumer traffic in the retail stores and frankly I hear more about the lack of available of products (especially in the electronics products) more so than pricing. I am using this simple observation to predict that the sales numbers at the end of the holiday shopping season will be good. A quick review of the key indicators in the report; most of the key indicators were down this month, as always I look closely at New Orders, Production, Inventories and Backlog Orders. All of these indicators were down with the exception of Inventories, which increased slightly this month. Again, as I have said before, I never like to see decreases in these key indicators, they were much lower compared to last month which is concerning but before I get worried about this I want to wait and see the readings over the next two months. We will see how consumer spending affects the sector that will be a sign of what we can expect over the first half of 2007. Reviewing the ISM report this month, New orders, Production, Employment, Customers’ Inventories, Exports and Imports were down for the month. Pricing increased significantly; Inventories were up slightly. ENERGY SECTOR SPOTLIGHT No change in this sector from last month. Inventor numbers for Crude are still on the higher end of the range and forecasts are for a mild winter in the northeast so that should work in our favor to keep oil prices trending downward. I thought we would see gasoline pricing come down more than they have, but it appears pricing has settled into a range from $1.95 to $2.25 per gallon and this should continue throughout the remainder of this year. Interesting news coming out of OPEC, the Saudi Arabian oil minister made some general comments that he wanted to further cut production. This was coupled with the announcement that OPEC was still trying to get their members to honor the first production cut which came out of their last meeting. As I mentioned in this newsletter last month, I thought the ability for OPEC to institute actual production cuts was wishful thinking at best, many of the members are pumping out the crude as fast as possible to capture sales and feed their own economies at home. I believe this will continue to be the case during the remainder of the year. I do expect oil to remain in a range from $58 to $63 per barrel. I do not see pricing dropping below $55 per barrel until possible late first quarter of 2007. One concern I do have is diesel prices over the next 12 months. Given the government’s push to lower sulfur levels in diesel fuel, this will increase the cost due to much higher production costs to make lower sulfur diesel fuel. I am watching activity regarding this and will keep you posted on the activity as the new diesel products roll out early next year. Increased costs for diesel will result in an immediate increase in transportation costs. |
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Paul Licausi
LS Commercial
8301 W 125th St.
Suite 210
Overland Park, KS 66213
(P)913-681-5888 (F)913-681-7869
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KC INDUSTRIAL REAL ESTATE UPDATEWe are nearing the end of the year and as always November and December are two of the less active months throughout the year. For a service provider like me, this is a time for me to talk with clients and discuss strategy for the coming year. Most of the corporate world is busy doing the same with their clients and little decision-making is done during the last two months of the year. This creates a natural slowdown in the market as we approach the end of the year. It is unusual to see any major transactions occur during this time frame; major facility moves are pushed back until after the first of the year. As we near the end of the year the industrial market, the KC industrial real estate continues to remain solid. I just completed an article for the Heartland Real Estate Business publication, which is a trade publication focused on commercial real estate in the Midwest. The topic of my article was the state of the industrial real estate market in KC. I highlighted the vacancy level of both bulk warehouse (8%) and flex warehouse (9%) and the fact that this was a good indicator that our local industrial real estate market was very stable. A key factor in the stability of the market is the fact that speculative warehouse development in both of these product types have been very conservative over the past 36 months, the local development community has not gone wild in creating new product, rather has brought on new buildings at a controlled pace which has allowed the market to absorb the space without creating an imbalance between supply and demand. This has also created a stable environment for rental rates. Yes, there has been some upward movement in lease rates, but nothing drastic and this has helped keep vacancies low and rents consistent for the user base. One key topic in the article I discussed was the big box distribution center market in KC. What constitutes a big box distribution center; typically it is a warehouse exceeding 300,000 square feet with 30+ ceiling height and a cross-dock loading design. KC has only seen this type of product in a few select buildings; the question is why, given the fact that other smaller markets (Memphis, Indianapolis) have several facilities of this size or larger. The answer, our market is very conservative in nature; a typical bulk warehouse building constructed in KC is typically 100,000 square feet with 26 to 28 foot ceiling height and dock hi loading on only one side of the building. The building is designed to be divided into sections of 20,000 to 25,000 square feet that is right in line with the typical tenant size in this market. Large big box distribution centers have been prevalent in other markets throughout the U.S. (Chicago, L.A., Dallas, Memphis and Atlanta just to name a few) largely due to the existence of established projects in this size range. Indianapolis is a good example of this, they are a smaller market than KC, yet the average size of building being built in their market exceeds 300,000 square feet. They have large big box space that attracts corporate users to locate distribution operations in the Indianapolis market due in part to the fact that they have available product in this size range. KC is now on the radar screen for these large big box distribution facilities, the question you may have is why? There is not one specific reason but a combination of things; centrally located in the U.S., great highway infrastructure, second largest rail hub in the nation, extensive air cargo services, river transportation via barge service, large transportation base and central time zone. These are just some of the amenities KC can offer corporate users and this is why KC is on the short list for many distribution center location searches. This is a trend that will continue, over the next five years, the industrial real estate landscape will change and it will not be uncommon to see big box distribution facilities of over 300,000 square feet located throughout the KC metro area. A major influence on this trend will be the new BNSF rail hub that will be constructed in Gardner, Kansas. This facility will handle inbound overseas container traffic from the west coast. This will draw big box distribution center development to this area; corporate users will want to be as close to the BNSF facility as possible to cut down on transportation costs and time getting the product into their buildings. This is certainly exciting and I am sure will create more business opportunities for all of us. Exciting news for the KC market, these are all positives for the industrial real estate market and as we see more incoming corporate users into our market it will create business opportunities for all of us here in the KC market. 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. |
