LS Commercial E-News
December 28, 2007	Volume 1, Number 1
Economic Snapshots: · Unemployment 4.7% (National) · New Jobs for November 94,000 · Unemployment 5.1% (KC Metro) · Housing Permits KC Metro area down 40% compared to this time last year Quick Facts – KC Metro Area · Air Freight 22 million pounds moved through KCI Airport during November · Housing Permits in November – 400 units · Help Wanted down 30% compared to same time last year · Passenger Traffic moving through KCI November 2006-880,000 people November 2007-980,000 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 up · Inventories down · Export orders up · Employment down · Production up · Supplier deliveries up · Prices up · Customer inventories down 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 12-10-07 - $3.325 12-17-07 - $3.309 12-24-07 - $3.308 Wheeler Downtown Airport – KC Number of Flights September 2006 – 8,000 September 2007 – 9,500	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. HAPPY HOLIDAYS!!!!!! CLOSING OUT 2007 Closing out 2007 the economy is holding its own. Although we continued to struggle through the housing and credit market softness the overall economy continued to grow. I know it is difficult to get a good feel as to the status of the economy. The media reports are not consistent, there are calls for an increasing likelihood of a recession and others are toasting the resilience of the U.S. economy and our ability to weather any storm. It is easy to get caught up in this merry go round of opinion. I have reviewed lots of data this month, and have talked with several clients about how their business finishes up the year. Here are my thoughts to close out 2007. We will see the economy close out 2007 on a positive note. Growth of the overall economy will be slower than previous years; GDP growth will be right at or just below 2% and inflation will end up between 2.2% and 2.4%. A survey of several of my clients over the past month revealed a higher percentage of growth than softness as they end out the year. I was concerned about how my clients felt about 2007 and more importantly what they expected for 2008. Most felt that 2007 was generally slower than pervious years and business activity was up and down with no real consistency. The outlook for 2008 was generally favorable, many expected to see some increase in activity compared to 2007, but most were still cautious. I did get comments regarding concerns about costs heading into 2008. Health care and fuel were tops on the list as costs that many felt would impact their bottom line during the coming year. The results of my discussions with clients over the last 45 days were encouraging. I really felt their comments were very representative of the true health of the economy. In reviewing lots of data during the month, their comments were tracking with the data points for the overall economy. Yes, the economy has had some challenges over the last 12 months. The housing and credit markets have been in disarray; manufacturing has lost some of the steam it had earlier in the year. These factors have had an impact on the growth of the overall economy. However, I view this as a positive. Keep in mind, aggressive economic growth will ultimately result in increased inflation. It seems to be popular thinking that we should push growth within economy as much as possible. Yes, this sounds good on the surface and makes for great media but the reality is that rapid growth will create problems and result in a self imposed correction by the Federal Reserve. I have always been a proponent of slow steady economic growth. What is wrong with the economy growing between 2% to 2.5% per year, employment growth averaging 50,000 to 75,000 monthly and inflation raging between 2% to 2.4%. The answer is nothing; in fact if we focused on this we would achieve much more economic stability. The basis for my opinion is simple, I am fortunate to have the opportunity to work with companies in a variety of different industries and my clients experience the greatest stability when economic factors are consistent with what I have presented above. Those are my thoughts, you can agree or disagree, time will be determining factor if I am right on or all wet on this. Heading into 2008, what can we expect; based upon my review of the forward looking data, we will see slower economic growth for the first half of the year. So far, it appears the prospect for increased growth looks good for the second half of the year. The consensus is we will shake out the sub-prime loan issues by mid year. The big boys will complete the write downs associated with the sub-prime loans they are holding. The government will have initiated a “bail out plan” for sub-prime mortgage holders and that will stop the free fall in the residential real estate market. We should see stabilization of the housing sector by mid year 2008 which will take that stress off the overall economy allowing for things to get much better. Credit markets should start to operate again, I do anticipate that the Federal Reserve will take action during the year to encourage the banking industry to get money moving back into the economy. This will be done in the form of lifting some of regulations they imposed over the last 2 years which were designed to tighten credit. This will allow small to mid size businesses to gain access to credit again and will do wonders in bolstering the economy. Keep your head up and have a positive attitude, 2008 is going to be a better year so start the new year off right and do your part to grow the economy. Fed Watch The Federal Reserve cut the Fed Discount Rate another ¼ point at their Federal Open Markets Committee meeting this month. The Fed Discount Rate now stands at 4.25% with prime at 7.25%. The Federal Reserve has been busy; in addition to cutting interest rates, the Fed has been pumping money into the financial markets in an effort to increase liquidity. For all of commoners, it is really difficult to understand what the Fed is doing. When you hear the Chairman or one of the Fed Governors speak it sounds like a foreign language. Their comments are intended to be vague and encoded with hidden meaning. I have always wondered; why doesn’t the Fed just be direct and say what it mean’s. The simple answer is; they do not feel the market can handle it and more directly they do not want anyone to really know what they are thinking. To support my statement here, look no farther than former Chairman Greenspan. I caught an interview he did after he left the Fed. The reporter asked that very question, “why the need for all the complicated statements”. Greenspan responded; he developed what he called “Fed Speak” in order to shroud the public from what the Fed was really thinking. It was a way to provide comments to the public in a form that was too complicated to understand and had no real meaning. In a follow up question, the reporter asked Greenspan why the Fed felt this was necessary, Greenspan responded that the Fed did not feel the public could effectively process the information and react rationally. While this position may have some validity, I believe it does more harm than good. The Fed issues a statement, the financial markets and the media attempt to decipher the meaning. The result, lots of opinion, not much fact. The problem is that the markets will move on this information so getting it right is key. The markets and the media seldom get it right case and when the markets finally figure out what the Fed is thinking that is usually followed by a market correction creating instability. Not much we can do here; this strategy by the Fed will not change soon no matter what you hear. What can we expect for the coming year, I think the Fed is moving in the right direction. The recent moves they have taken over the last half of this year have had a positive impact on economic conditions. It is likely the Fed will lower interest rates again at their January meeting. The consensus is that the Fed will cut interest rates another ¼ point lowering the Fed Discount Rate to 4% which will decrease prime to 7%. In addition to lowering interest rates, the Fed will continue to push liquidity into the financial markets. The Fed is making billions of dollars available to the financial markets right now. This is an effort to bolster the balance sheets of banks that have exposure to sub-prime loans. The Fed is committed to supporting the financial markets and will continue to provide that liquidity as needed. Additionally, I do expect that the Fed will start pushing the commercial banking community to extend credit again. Based upon the comments of many of the bankers I have talked to over the last several months indicate that they been put in a trick box by the Fed. The Fed has been especially hard on the banking communities underwriting standards and has chided many of them for being too lax in lending policy. The result is a tightening of credit for the business community. I feel strongly that the Fed will start to encourage the bankers to start lending money again and will loosen the headlock they have had on the banking sector. This will create access to credit at reasonable terms for small to mid sized companies. I do expect to see further reductions in interest rates throughout 2008. At this point, my thought is we will see another 1% to 1.25% reduction in interest rates by year end 2008. This will be dependent on economic performance throughout the year. All in all, this is a positive outlook for 2008, we will continue in a lower interest rate trend and credit will become much more available as well. This will allow all of us to address business opportunities that we have been sitting on the side lines with waiting for money to become available. Industry Alert Corner Industry in the spot light this month: Healthcare Industry If you have seen a snap shot of the U.S. demographics lately you will have seen one trend that stands out, the 55 years and older populace is growing at a larger percentage than any other age category. You may have heard about the Baby Boomer generation, this is the generation that started after WWII. This generation shows up in the demographic make up of the U.S. as a large bubble. This generation is large, and families in this demographic were typically larger than in any other demographic group in U.S. history. The fact that this demographic group is now turning 55 or older at a rapid pace represents a large concentration of people entering the period of life where they will be increasing the use of healthcare. If you want evidence of this, just look at the KC metro area healthcare market. When was the last time anyone could remember the building boom for hospitals in our area or the number of specialty practices popping up. This same explosion of healthcare providers is happening all over the country. The reason is simple, the customer base is growing at a rapid pace and the healthcare providers are rushing to meet the demand. This growth trend will not slow anytime soon, expect to see additional hospitals going up and a continuation of the explosion of specialty care practices. The demand is projected to increase over the next several years as this Baby Boomer generation moves through the next phase of their lives. With this information in mind, you should be looking into this sector for service opportunities. Many might look at this industry and feel that their service is not something this industry will need. Do not follow that path of thinking; this industry is in need of every service across the spectrum. Information Technology, Transportation, Construction, Financial Services, Building Services, Landscaping and on and on and on. There are just too many services to mention but you get my point. The growth prospects for this sector are significant and represent a tremendous service opportunity for a wide variety of service providers. Get with it and get in the game, it will be worth your effort. I would be happy to discuss this sector further should you have questions feel free to call me with any questions. Manufacturing Sector The sector remained steady during the month with a 50.8 index reading which was consistent with the reading last month. The manufacturing sector remained in positive territory during the month. Despite the continued challenges in the housing sector, the overall manufacturing activity remained steady. There were some positive signs coming out of the sector during the month. A return to growth in new orders is a good indication that we should see some continued growth within the sector heading into 2008. As I mentioned in this newsletter last month, a big influence on this sector will be overall consumer spending for the holiday season. So far, the consumer has showed up and done their job. Consumer spending has been consistent with previous years spending level. The expectation is for a late spending rush right before Christmas. We will not see consumer spending numbers until probably early January. I do think there is a lot of goods news here for this sector. As I have mentioned in the past, I think there is a resurgence of the manufacturing industry in the U.S. I may be part of a small crowd who believes this, but I know what I see on the street. I am seeing specialty manufacturers opening up shop all over the place. These operations are doing well and I see lots of growth continuing with more of these operations opening up. Additionally, we are seeing a story every week about the problems in China. Lead paint, tainted raw materials used in dog food and on and on. I noticed the other day, for the first time, an article in a national publication questioning the products coming out of China. The point of the story was that the U.S. consumer is now taking time to check the label of products they are buying (where they are manufactured) and becoming less motivated by price than quality. Could we get to the point where you pick a higher priced product that is made perhaps in the U.S. instead of a less expensive product that is made in China. I do not think we are there yet but this is certainly something to watch for in the future. Here is a summary of the key indicators for the month; New Orders, Production, Supplier Deliveries, Exports and Prices were up. This is certainly positive news and is a strong indictor for strength in the sector for the coming month. Backlog Orders, Employment, Customer Inventories and Manufacturers Inventories were all down. Although I always prefer to see Backlog Orders up, it is not a major impact on the health of the sector. During the month, manufacturers ramped down production and reduced employment. They met demand during the month by pulling out of the current inventory. The same was true on the distribution side; this sector served the end user by pulling out of their current inventories which is why customer inventories were down this month as well. As I have always said, this is a short term move on the part of the manufacturers. It is not sustainable and they will need to ramp up production to replenish inventories. This move by the sector was not a surprise to me; as I mentioned, I felt the manufacturers would take a cautious approach as we headed into 4^th quarter. It was uncertain how holiday sales would far and it was a smart move to ramp down production and pull out of existing inventories until it was clear what kind of holiday sales we would see. Now that holiday sales have generally been good, I do look for the sector to ramp back up and start producing product again. ENERGY SECTOR SPOTLIGH Oil prices took a break during the month. Pricing dropped below $90 per barrel for the first time since mid year. As I mentioned over the past several months, I stopped trying to figure out where fuel pricing was going. Over the last month, I feel like I am starting to get some grasp on what to expect regarding fuel pricing in the coming year. I have been listening to lots of media and have reviewed data on oil and natural gas. I heard a forward looking forecast from one of the top OPEC officials, his comments were directed towards pricing for the coming year. One comment he made was that OPEC wanted to see stability come back into the markets. First I thought this was another talking head throwing out a meaningless comment. But as I listened to this guy talk, he was really focused less on the present fuel costs but showed more concern regarding future demand and future fuel costs. This was the first time I had heard anyone talk about the direction of future energy costs and not about pricing today or next week. He commented that the price target for oil was mid $70’s to $80 per barrel. Normally, I would discount idle talk like this as nothing more than comments to attempt to calm the market. But this time was different, it was really a forecast based upon what the OPEC upper echelon felt about pricing. If this is true (which I really think it is) this is great news. This would do wonders for everyone involved; OPEC, Oil Companies and the American Consumer. Establishing stability in pricing would be a great thing to happen. Think about it, it would take a lot of negative press out of the picture, the consumer would see gasoline prices remain stable, diesel fuel would stop the roller coaster ride and transportation companies could establish a fixed fuel surcharge in addition to many other benefits. Now, there is as great a chance that I am wrong, if so, expect for more of the same during the coming year as we lived with during 2007. Cross your fingers and let’s hope that we see pricing stabilize so we can all rest a little easier in 2008.
	KC INDUSTRIAL REAL ESTATE UPDATE With 2007 coming to a close I wanted to give a year end round up on the state of the industrial real estate market in KC and give my predictions for the coming year. Despite the economic challenges nationally, KC weather the storm just fine. While other areas of the U.S. started to see softness in their industrial real estate sector, KC remained solid. Nationally, vacancy levels have inched upward, meanwhile vacancy levels for the KC industrial real estate market remained near all time historic lows at 8%. This is a testament to the strength and diversity of our local economy. Rental rates for the year in the bulk warehouse sector remained flat to slightly up. Limited new development kept inventory levels in check and demand remained good throughout the year. The flex warehouse sector continued to improve throughout the year. Rental rates edged up slightly, there was new development in this sector during the year, but overall the leasing activity was good and inventory levels remained stable. All in all, 2007 was a good year for the industrial real estate market. Now what to expect for 2008; for the bulk warehouse sector, expect to see more new development of mid size boxes (50,000 sf to 100,000 sf) which will increase the inventory of new product. These buildings will offer great functionality and a great alternative to the older existing inventory. Lease rates for new bulk warehouse space will be slightly higher than the same product that was being offered in 2007. Lease rates for existing bulk warehouse facilities will remain flat to slightly up. New development will continue in the flex warehouse sector, new projects will be going up in western and southern Johnson County (Shawnee, Lenexa and Olathe) and in Lee’s Summit, Independence and at KCI on the Missouri side. I do expect lease rates for the new projects coming on line in 2008 to be up 8% to 12%. However, lease rates for existing flex warehouse space that will be available for lease will remain flat with no real likelihood for an increase during 2008. During 2008, KC will see the first large box distribution warehouses being built on a speculative basis in our market. These facilities will be 350,000 square feet and larger; currently there are 3 new projects that are planned. LS Commercial will kick off the development of their project in southern Johnson County in the Gardner, Kansas area. The project is Midwest Commerce Center which will contain 5 buildings containing a total of over 2,200,000 square feet. The first building will be under construction in April of 2008 and will be a state-of-the-art cross dock large box distribution center containing 520,000 square feet. There other projects planned in the KC metro area are in southern Johnson County in Olathe (600,000 square feet) and in KC North (350,000 square feet). KC will soon become a Mecca for large box distribution center development. This is a coming trend that is here to stay and will change the dynamics of the KC market from a secondary distribution center market to a major distribution center market. Rounding out the summary is the “for sale” sector; pricing for buildings being offered for sale continues to remain on the high side of the market trend line. I had expected to see some decline in building pricing during 2007, but that did not occur. In fact, sale pricing actually increased throughout the year. Given the fact that we have been in an interest rate increase trend during the last two years and access to credit was becoming more difficult, I was fully expecting demand to decrease and with that sale pricing. What actually happened were buyers continued to be active in the market which supported pricing and contributed to the increase throughout the year. As we entered the last half of the year, I did notice the beginnings of some softness on the buyer side. Will this continue into 2008, I tend to think that the buyer’s will return to the market during the coming year as interest rates continue to decline and the availability of credit becomes plentiful once again. Time will tell regarding this sector. Depending on what you needs are for the coming year, there will be some great opportunities in 2008. If you will need bulk warehouse space and can utilize an existing building, you will have sufficient inventory to choose from and you should see lease rates comparative to 2007 pricing. New bulk space will be available and will allow better utilization but be prepared to pay a premium for the space. Flex space will continue to be in good supply, both new and existing space will be available. Expect lease rates to be flat for existing product, new space will be priced higher than 2007 levels but will offer some great efficiency that the older flex product does not. COMPANIES MOVING IN THE MARKET MICHELIN 210,000 SF INDEPENDENCE, MO AGCO CORP. 106,000 SF INDEPENDENCE, MO NEONATAL PRODUCT GROUP 4,686 SF OVERLAND PARK, KS ALPHA OMEGA SIGNS 5,000 SF OLATHE, KS Here’s to a successful 2008!! Have a safe and happy New Year!! 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.