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February 2007 |
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.
Snapshot – Manufacturing Sector
Cost breakdown at the pump for diesel fuel Taxes – 19% Distribution/Marketing – 15% Refining – 14% Crude Oil – 52%
DIESEL PRICING U.S. Weekly Average 1-29-07 = $2.413 2-5-07 = $2.435 2-12-07 = $2.476
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%
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This Newsletter is being provided to you free of charge by Paul Licausi, President of LS Commercial Real Estate.BETTER ECONOMIC NEWS ON THE HORIZONAt the end of 2006, it appeared we were in for much slower economic times ahead for 2007. However, it appears that the economy is regaining momentum and coming out of the slight nosedive we have seen over the last few months. Final December economic results came in during the last part of January and the economy made a great comeback with a surge in consumer spending. The retailers ended the year with respectable sales during holiday season and that seemed to push the economy over the hump in the road. Now, entering 2007 was a different story, could that momentum hold, well at this point, so far so good. I think the combination of lower gasoline prices and a slight recovery in the housing market have been a prime contributor to the economy holding in a respectable position since the start of 07. Will this continue? All the data I have seen since the first of the year has been positive. From a local perspective, in talking with several of my clients over the past month, most of them are starting out the year positive. The activity is good (not great) and most are cautious, but overall the consensus is that the first half of the year will be pretty stable without any major increase or decrease in business. I think this is best explains the performance of the economy correctly; all of the data I have seen over the last month indicates that we will see stable economic conditions over the first half of 07. Unemployment will remain in a range from 4.6% to 4.9%; Oil will be priced in a range from $55 to $59 dollars per barrel and the Federal Reserve will maintain interest rates right where they are today. Not outstanding news, but given the fact that last year many economist had predicted that we would be deep into a recession right now I think we can all breathe a little easier given the current state of the economy. Fed Watch The Federal Reserve had an open market meeting in late January to determine monetary policy over the next couple of months. It is at these meetings where they discuss the reams of data on the economy and other vital statistics, but most importantly they set monetary policy respective to interest rates. Going into the meeting the consensus from the street was, they would leave interest rates where they are with no change. That is exactly what they did, in fact, the comments coming from the meeting indicated they were comfortable with the state of the economy, which for us business people is good. All of the information I have seen over the last 30 days indicates that we should see interest rates hold right where they are for the next 3 to 6 months. Late last year, I was not convinced that the Fed could hold rates at the current level, I really felt that they would need to start pushing rates down to stimulate the economy. However, the fact that the economy is still moving forward given the current rate environment, and inflation remains stable, that is enough for them to keep rates in tack. Can they maintain this position; as long as the economy moves forward at the current pace and inflation stays below 2.5% we should not see any movement in interest rates. Industry Alert Corner Industry in the spotlight this month, Animal Health Sector. For all of us who own pets, you know that none of us take the health of our pet lightly. This is the case for the vast majority of Americans who are pet owners. Given our commitment to our pets’ health, this sector of the market is a fast growing industry and there are no signs of slowing. Most of you may not know that KC is a hot bed of activity the players in the Animal Health industry; of the major players in this sector, 75% of them have a presence in the KC region. When I learned of this, the first question was why KC, I know that we are located in the heart of the country but why not the one of the coasts. After learning more about this industry, I found out that there are several reasons. The KC region is home to some of the leading Veterinary and Animal Health Schools in the nation, thus this is where most of the talent is located which continues to draw these major players in the sector to our area. Additionally, we have a great cost structure and more importantly facilities that can support these operations. Some of the more notable players who have major operations here are Bayer Corporation and Fort Dodge Animal Health. These are just two of the major players, there are many more and all represent a great service opportunity for your company. This is a sector you need to research, these companies are growing and many more are coming to our community, which will be further service opportunities. A great source of information is the Kansas City Area Development Council (KCADC) they have a dedicated team focused on this industry with the task of attracting more corporate users to our community. They have a great web site kcanimalhealth.com, which is full of information on the animal health industry and is an excellent way for you to get informed and find out who the players in our market are and more about the industry itself. If you have questions regarding this industry contact me I am happy to give you input. Manufacturing SectorThe manufacturing sector reversed course again during January moving back to a contraction mode. We got a boost in December as the sector returned to the expansion mode but that was short lived as the January reading indicated the sector moved back into a contraction mode with an index reading of 49.3. Keep in mind, the neutral index reading is 50, an index reading above 50 indicates the manufacturing sector is expanding while an index reading below 50 indicates that the manufacturing sector is contracting. Should you be concerned with this latest reading, no, it is not a precursor to hard economic times ahead. As I mentioned in the January newsletter, I believe we will continue to see the index reading run in a range from 48 to 52. Yes, we will continue to see the manufacturing sector contract, but not to a point that will create problems for the overall economy. Be prepared for slow growth or no growth in this sector over the next 6 months. Is this bad? No, we are entering an economic cycle and certain sectors within the overall manufacturing sector will see less than positive performance while other parts of the manufacturing sector will perform just fine. Results from the key indicators in January highlighted the softness in the sector. New Orders, Production, Supplier Deliveries and Backlog Orders were down. As I always comment, decreases in New Orders and Backlog Orders always concern me. These two key indicators typically set precedent for the next couple of upcoming months. While both of these indicators were down only slightly, we should continue to see softness in the overall manufacturing sector for the next 60 days. One thing that could give the sector a boost is the building of inventories, this key indicator was way down, in fact, it was the largest decrease month over month since 1984. Manufacturers significantly depleted inventories over the last 30 days. Why? My thought here is that they have been anticipating slower growth in the overall sector and have slowed production and pulled from existing inventory to meet demand. Now, can they continue this behavior, no, so based upon activity over the next 60 days we should see an increase in production to build back some level of these depleted inventories? Those of you, who are service providers to this sector, be attentive to what your client base is telling you and plan properly for any possible slow down in that part of the manufacturing sector you serve. ENERGY SECTOR SPOTLIGHT Oil prices are holding steady in the mid to upper $50 dollar per barrel range and I do not expect to see this change anytime soon. It appears that all of the players in the energy market have established a comfort level with oil prices remaining in the $50 dollar per barrel range. I do not expect that we will see prices exceed $60 dollars per barrel or dip below $50 dollars per barrel. Get ready to see prices move upward and downward in the $50 dollar range over the first half of this year. This is not all bad, would I like to see oil prices back down in the $30 dollar per barrel range, yet bet, but at least there appears to be some firm top side and down side price barriers in place which will keep gasoline and diesel pricing fairly stable. I wanted to comment on the push by the government and the media for alternative energy sources. We are seeing all of these alternative energy sources being pumped up; ethanol, wind turbines and solar are just a few of the alternative energy sources being trumpeted. These are all great, and I am on board that we need to move towards energy sources that would allow us to reduce our dependence on oil. However, before you jump on this band wagon and start cheering; one thing that is absent from all of these great pitches for these energy products is the tax revenue the government rakes in from taxes on gasoline, diesel, electricity from the utility companies, etc. What would happen if, as a country, we did move away from the use of oil and you had a wind turbine in your back yard that produced electricity that powered your house and you drove an electric car, which you plugged in at night in your garage. How would the government replace those lost revenues? If you do not think that this discussion has taken place don’t kid yourself, it is a big question. This issue will slow the process from getting away from oil and on to utilizing these other energy sources. Until the government can figure out how and from where to replace this lost revenue it most likely will be a slow process before we see some real progress. |
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KC INDUSTRIAL REAL ESTATE UPDATEThe new year is off to a brisk start for the industrial real estate market in KC. This is pretty typical for the market, in 4th quarter; most companies push back any major space moves until after the first of the year. Once the new year ushers in, there is a push by these companies to address their space needs, so throughout 1st quarter it is typically very active as these companies secure space for their operations. Given activity thus far, I do expect 1st quarter of this year to be more active than 1st quarter of 2006. I am seeing a much higher number of companies out in the market this year comparative to this same time last year. Small manufacturing and service companies seem to make up the majority of the companies out in the market right now. Distribution companies have not been as active as in the past. It has been some time since I have seen this level of small to mid size manufacturing companies out in the market. All expanding their operations and leasing more space, which is a great sign for the health of the manufacturing sector in KC. The overall inventory level of available industrial properties remains stable and there has been no real change in either vacancy levels or lease rates. There has been a good balance between the space being leased and space coming on the market available for lease so this has allowed for lease rates to remain stable. I do not expect to see any real changes in the overall market, over the first half of this year, expect for inventory levels to remain at current levels, lease rates to remain stable but do not expect any real lease incentives. What I am seeing in the market right now is still a willingness from Landlord’s to allow for 1-2 months free rent to offset a portion of the cost for the Tenant to relocate into their building. Apart from that, no real incentives to mention. Kansas City continues to be a topic of discussion nationally, I continue to see press on our market and this should continue. As I mentioned in previous newsletters, the landscape of the industrial real estate market in KC will change dramatically when the BNSF completes their rail hub facility in Gardner. Some of the more prevalent changes that will occur will be; large box distribution facilities, significant increase in transportation companies doing business in our market, average tenant size in the KC market will increase significantly and construction of industrial facilities will increase as well. These are all positives for our market, but with this will come some challenges. Labor supply could be stressed given the influx of several large corporate users and we could see some price pressure on transportation costs for locally moved freight. As with any significant change, there will be both positives and negatives but I do believe in this case the positives will far outweigh the negatives. Quick comment on the “for sale” industrial real estate market. Pricing has been holding steady ($30 to $40 psf depending on the building type and location), inventory level of existing buildings remains unchanged so no real movement one way or the other in this sector of the market. Expect interest rates to be stable into 2nd quarter of this year, I do not anticipate any interest rate risk. The bankers are still very interested in providing capital to the business community and owner occupied real estate is still of high interest to the banking community. One word of caution if you are considering purchasing a building: Do you homework before you buy. I see too many companies and individuals who do not do an adequate job in analyzing a property prior to purchase. What I mean by this, you need to take the time to fully assess the property, the goal here is to know more about that property by the end of your inspection period than the Seller. This will allow you to make an informed decision on whether or not to proceed with purchasing the building. I often hear about companies who do not do a good job at inspecting a building prior to buying it, then once they own it they have a multitude of problems they have to address and more importantly did not budget for. If you are considering purchasing a building I am happy to provide you with a summary of steps needed to fully assess a property prior to closing, just shoot me an e-mail or give me a call I am happy to provide this information to you. 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. |
