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February 2006 |
Volume 1, Number 1 |
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Quick Facts – KC Metro Area · Air Freight 20 million pounds moved through KCI Airport · Housing Permits in December – 850 units · Help Wanted down .75% compared to same time last year · Passenger Traffic moving through KCI November 2004-750,000 people November 2005-800,000 people.
Snapshot – Manufacturing Sector
· Back Log Orders up · New Orders down · Inventories down · Export orders up · Employment down · Production down · Supplier deliveries up · Prices down · Customer inventories down
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.
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This Newsletter is being provided to you free of charge by Paul Licausi, President of LS Commercial Real Estate.2006 WHAT CAN WE EXPECTThe start to the new year has been strong so far, all indications are that we will have a solid year of growth in the economy and record low unemployment. Now, given this is what we are being fed by the media, as always, I went to the street and conducted my own survey with several clients respective to their thoughts on the up coming year. All responses were positive, business has been good coming out of the shoot and most (not all) expected consistent growth throughout the year. There were some who noted caution, given the cost of capital and energy prices, but they did not feel these factors would be enough of a drag on the economy to adversely affect their business at least through the first half of the year. I do agree with the consensus of the group, I do believe we will have a good year in 2006, the activity level since the start of the new year has been up and I feel strongly that this will be sustainable throughout the first half of the year. However, I want to add some caution into my positive outlook. I am concerned with the cost of capital; interest rates are approaching a dangerous level. I believe this is the one key factor that could put a kink in the economic chain. If the Fed moves the discount rate to 5% pushing prime to 8%, this will affect the economy adversely. Keep a close eye on the movement in interest rates and remember the economy is reactionary so any adverse conditions that may occur within the economy resulting from increased interest rates will lag those rate increases giving you time to be proactive to adjust your business in anticipation of a possible economic slow patch. Fed Watch Mr. Greenspan left as expected by convincing the other puppets on the Fed board to raise rates yet again. The latest increase raised the Fed Funds rate to 4.5%, pushing prime to 7.5%. What will the new chairman do on a go forward basis; my hope is to take a break. All indications at this point are that the consensus of the Fed is for two more rate hikes one each at the next two meetings. It appears the magic number for the Fed is to get the discount rate to 5%; this would adjust the prime rate to 8% and push interest rates to 10% for most of the small business sector. Historically, when interest rates hit this level, the small business sector substantially reduces borrowing activity which is an early stage indication of a slow down in the overall economy. We will know much more by the end of 1st quarter as to what we can expect for interest rates for the remainder of the year. As I have always stated, in a period of increasing interest rates, reduce operating debt as much as possible. Maintaining large balances on revolving short term debt that has an interest rate tied to prime is costly. Industry Alert Corner Industry in the spot light this month, same as last month; food, but focused on the snack line of products. Forget about the push by the consumer to eat healthy, snack food products are moving off the shelves at a record pace. Now, is a move towards healthier eating going away, no, but do not kid yourself and think that snack food products are going away anytime soon. I just caught some recent press on Pepsi which reported record earnings, can you guess where the lions share of their growth came from…Frito Lay products and their other snack food lines and not their drink products. Yes, they did well with their Pepsi lines and other drink products, but the growth was most evident from their potato chips. Next time you are shopping for groceries take a good look at just the chip selection, it occupies an entire half an isle, and they can be found in two or three other places within the store with dedicated displays. That is only the chip selection; take a look at the cracker and other snack food products spread out throughout the store and my guess is that these products represent 15%-20% of the overall space within the store. Now having said that, I watch these types of things closely as an indicator of movement within the supply chain. I know as these products continue to become more prevalent within the food stores, there is a growing back end to keep product on the shelves. Transportation, warehousing, production, etc. will all see increased activity to support these products and that is where I see the opportunities. We have several local, regional and national companies operating in our market, Frito Lay is the big boy, but there are numerous other companies who are operating in our market and who represent possible opportunities for you. I strongly believe that this sector of the food industry will continue to grow at leaps and bounds, the consumer may be concerned with a healthy diet, but they also have a strong affection for food products that taste good, my guess is taste wins game!! Manufacturing SectorThe manufacturing sector reported a 32nd month of continued growth. January was up from the December 2005 reading indicating a return to increased activity in the manufacturing sector compared to last month. The January index reading was 54.8 which was slightly above the forecasted level. It appears that the manufacturing sector came out of the gate in 2006 with increased activity across the board. The outlook contained within the report was very positive and continued growth is expected throughout the first half of the year. The overall report echoed the view point with many of my clients, activity levels are up and good things are expected throughout the first half of this year. I noticed some very encouraging comments contained within the report, some of the industries that have not fared well over the last year are showing signs of life; one in particular is the machine tool sector. The report highlighted a substantial increase in projects that are out for material quotes. This is significant because it is an indicator of increased activity within these sectors, most notably the machine tool sector. Why is this important? This is typically a precursor for increased overall manufacturing activity. This is a great piece of news, this is a strong indicator that sectors of the manufacturing industry are starting to ramp up production again, and this is positive news for all of us. Key indicators in the report this month; New Orders were down, Production was down, Employment was down, Supplier Deliveries were up and Inventory Levels decreased slightly. One key highlight within the report was the back log orders, they were up significantly, this is great news it is an indicator that production and inventory lagged behind of demand production will have to be increased to meet continued increases in demand. ENERGY SECTOR SPOTLIGHT I have tried to give to you a very reasonable prediction regarding energy pricing. I always base my thoughts on solid market information and comments from well respected economists. I was way off, forget about trying to understand the basis for oil prices, I would have never believed (given the data I have seen over the last 60 days) that oil prices would have trended back up over $60 dollars per barrel. There is just no factual support for prices to remain at the level they are currently at. Recent data on inventory levels for oil worldwide showed an increase in inventory levels, output remains at record levels, there is no plan by OPEC to decrease production output, yet still the price remains above $60 dollars a barrel. I can only say that the current pricing is being sustained by nothing more than hype. The suppliers continue using scare tactics; oil worker strikes, rebel armies attacking oil production facilities, etc. All of these events have no effect on overall oil production worldwide but jack up the price out of fear that they could affect production. How can you predict anything in this sector? The best way is to keep a close eye on the sector and manage your energy costs as best you can. I do not see any relief in sight regarding oil pricing, we all should assume that we will see energy pricing remain high throughout the first half of this year. KC INDUSTRIAL REAL ESTATE UPDATEActivity coming out of the gate for 2006 was strong. Lots of companies who had been sitting on the sidelines have gotten into the game. There are an increased number of companies in the market to lease or purchase industrial property right now and are racing to secure a facility. Here is the challenge, inventory levels are tight, there are options but with a vacancy rate below 9% there is just not a great deal to choose from. Now, there are some larger spaces (over 50,000 square feet) that are currently available, the inventory level in this size range is unusually high right now. However, there are several larger space users in the market right now and space will be coming off the market over 1st and early 2nd quarter of this year so we will see a substantial drop in inventory levels in the larger size range. Inventory levels in the smaller size range (less than 50,000 square feet) remain tight. There will be some space come on the market over the next two quarters so we should see inventory levels in this size range actually increase. Here is the good news for the user; lease rates have remained relatively flat. Our market is defying normal economic behavior, less supply more demand results in higher prices. Not so in the KC industrial market, yes there has been some selective upward movement in lease rates but overall the industrial real estate market rents have remained relatively flat. Now, what do I mean when I say relatively flat, it is typical for a Tenant coming out of a three year lease to see an increase of at least a 6%-9% in their lease rate for a three year renewal period. I am seeing those rates average between 2%-4% which is really considered no increase when you factor in inflation over the initial three year lease term. To keep consistent with inflation the Landlord would need to achieve an increase in the rental rate of at least 6% or more, thus there is no real growth in lease rates within the market. The good news for you is that I do not see this trend changing; I do believe that the increased construction costs and higher interest rates will stunt new development so the inventory levels will continue to be tight for at least 2006. Where we go from there, who knows time will tell. 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. |
