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January 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.
DIESEL PRICING
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This Newsletter is being provided to you free of charge by Paul Licausi, President of LS Commercial Real Estate.HAPPY NEW YEAR!!!!CLOSE OUT 2006 START 2007 WHAT TO EXPECT IN THE NEW YEAREver been on an indoor roller coaster? If not, here is what happens, typically it is dark and you are just along for the ride not knowing which direction you will go next, up or down or some other way. The bottom line is you are just along for the ride and doing your best to anticipate the next move so that you can hang on and not fall off the ride. In preparing to write this newsletter, I thought, what best describes this economy over the last year and I wanted to find a unique analogy for comparison ala the indoor roller coaster. The economy started the year on fire, remember all the hoopla, monthly job growth was off the chart, consumer spending was strong and we had no signs of any cracks in the economic armor. Early in the year we all got on the indoor roller coaster but the lights were on, we could see where we were going and there were only minor ups and downs on the ride. Midway through the year, energy prices started to get our attention, interest rates continued upward, the housing sector started to turn downward and then the coaster operator turned the lights off and the ups and downs started getting much more evident. Most importantly, we all lost the ability to see what was up ahead. We could only sit and hang on and do our best to anticipate the next move of the coaster. For me; that pretty much summed up the last half of 2006, although there was an abundance of economic data out there, it was very difficult to anticipate where the economy was really heading. It was clear that energy prices were not coming down as drastically as I had thought, I really believed that oil pricing would be much closer to $50 per barrel, but not so. The monthly new job creation was pretty much on track as I expected with the exception of October and the manufacturing sector weakened much quicker than I expected. Was 2006 a good year, really depends on the sector of the economy you operate in, I believe on average that overall it was a positive year for most industries. Above average growth the first half of the year was trimmed by the sluggishness in the second half of the year, but overall most of us should have seen an overall positive year for 2006. What lies ahead for 2007, slower but steady growth. It is unlikely that we will see GDP growth over 3%. Manufacturing will continue to be slower and there is a real possibility that we will see several months of contraction in this sector. Unemployment will trend upward, we should see the unemployment rate remain closer to 5% throughout the year and new job creation will start to trend downward with a monthly average of less than 100,000 new jobs created monthly. My predictions here do not appear to be very positive, but it all depends on how you look at it. I do consider my predictions here to be positive, even though I am calling for slower growth; nonetheless I am still calling for growth. Higher unemployment, yes, comparative to 2006 levels, but still low compared to historic levels and finally lower new job creation. Again, the key word here is lower which still indicates new jobs will be created monthly just at a slower pace compared to 2006 levels. This is probably the best outlook we could hope for during 2007. It is indicative of the coveted “soft landing” the Federal Reserve wanted to achieve for the economy and if my numbers hold up it will be a moderate slow down in the economy to tame inflation but with the economy growing. Better than a recession, which is still a possibility but albeit a small one at this point. Take a look at some key economic indicators over the next couple of months; PMI index (manufacturing sector), unemployment, new jobs creation and GDP. Based on what these indicators show over the next couple of months will be a precursor to what we can expect over the first half of 2007. Fed Watch Not much activity from the Fed over the last couple of months. During the last Federal Reserve meeting in December the fed held interest rates in check and noted that inflation pressures were subsiding and that the economy continued to slow and that no action was needed at this point to tip the scales one way or the other. Typically, you have a few Fed Governors speaking about the economy but there has been very little activity by any of these folks and I think it must be a self-imposed quite period to let the markets adjust to the new year. The only Fed comments came from the Vice Chairman who is very influential, he indicated that the Fed was content with current economic conditions, they continue to watch the housing market closely and the energy markets, he felt that these two sectors could still see some volatility and that could put pressure back on the economy. He commented that the Fed did not see any need to intervene in the markets either raising or lowering interest rates and would look at more data as the new year got started. The consensus by several leading economists has been that the probability the Fed would lower rates in the first quarter of 2007 was at 50%. Information I have seen over the last month shows that this position has changed dramatically and that the probability of rate decease in the first quarter of 2007 is now at 14%. Further, the economist group that I put the most stock in, who is based in St. Louis, recently issued a statement indicating that they feel the Fed will leave interest rates at the current level during all of 2007. Am I on board with this predication, no, I do believe that the Fed will have to take some action during the year and decrease interest rates. The economy will need the boost at some point during the year, it is more likely, in my opinion; that this will occur in mid summer of 2007. The next Federal Reserve meeting will be in late January and the Fed will be giving guidance for the remainder of first quarter at that time. Be sure and watch the news at the end of this month so that you can be aware of their comments. Otherwise, looks like rates will remain stable for the first half of 2007. Industry Alert Corner Industry in the spot light this month, Rail Intermodal Containers. I am sure you have heard the news about BNSF constructing a major rail hub in Gardner, Kansas. This is a big deal for KC; the major railroads have been making significant investments in selected areas throughout the country constructing these rail hubs. The key to these sites is what they are designed for, they are not an A-typical rail hub which is a centralized yard for trains to come in and where cars are switched out and sent to the end user. These rail hubs are for container traffic. This is the fastest growing segment of the railroad business, transporting overseas containers from the costal ports to inland staging areas. This business is growing at a tremendous pace, inbound overseas containers coming into the U.S. is growing at a pace that the ports cannot keep up with. Most of the coastal ports are landlocked and they cannot be expanded which has put significant pressure on the amount of inbound container traffic they can handle. The result is an increase is the amount of time a ship must wait before it can be unloaded. The ports have been working with the railroads to increase the amount of container traffic they handle which will allow the ports to decrease wait times for inbound ships trying to get their loads into the port. The BNSF facility that will be constructed in Gardner will act as an inland port. Containers will now go from the ship to the rail and then to one of the railroads inland ports. The containers will be offloaded from the train and then onto a truck chassis and delivered to a sorting warehouse located close by the rail facility. The decision by BNSF to locate this type of facility in the KC metro area (Gardner) is big. This facility will quickly generate a whole host of business activity on the southern part of the metro area. You will see an inflow of major corporations who will locate facilities in this market and will be working in conjunction with the BNSF facility. It is amazing to see how much the container traffic at the ports has increased with no sign of slowing down. This will continue to push the activity level upward at these inland ports operated by the railroads. Look for great things to happen as the BNSF facility comes on line. You need to take a hard look at this project and understand how this facility will operate and how your business can service the companies that will be coming to town to utilize the rail facility. This will be a major business center and the early bird in this process will most certainly get the worm. If you want more information on his project or have questions give me a call I am happy to give you input. Manufacturing SectorThe manufacturing sector reversed course again during December, with a one month contraction in November, the sector bounced back in December with an impressive rebound in activity posting a index reading of 51.4 which is a 1.9 point increase over the November index reading. What happened? There was a significant increase in new orders during December; I attribute this to late surge in consumer spending for the holiday season. As I mentioned in the last newsletter, I have been watching consumer spending throughout the holiday season and going into the last part of the holiday season a survey showed that only 50% of the consumers had completed their shopping. It appears that they got busy during December and there was a surge of spending towards the end of the season which pushed new life back into this sector. Given this spurt of activity, do start cheering yet. I still believe that we will see the index reading hover in a range from 48 to 52 over the next few months. I revised my index prediction in last month’s newsletter to 45 to 49 based upon the latest information I had on forecasted GDP growth. New GDP forecast for first half of 2007 have revised the GDP upward somewhat so this should give the manufacturing sector a reasonable chance of maintaining a slight expansion. The key will be consumer spending, energy costs and how quickly the housing market stabilizes. Based on what I have seen so far, consumer spending will continue to remain around the historical average or slightly below that, energy prices will continue to come down with oil prices stabilizing around $50 per barrel and the housing market should hit bottom sometime in the 1st quarter of 2007. That should be the end of the downward cycle for the housing sector and we should see an upward trend sometime late 2nd or 3rd quarter of 2007. I do not expect the housing sector to return with all the fanfare as before, rather a slow methodical upward pace. What to expect as we start 2007, very slow growth in the manufacturing sector. It will interesting, to see if the sector can continue the gains they had in December. All of the major indicators were up, New Orders, Production, Employment and Supplier Deliveries were all up significantly. Inventories were down slightly and Backlog Orders were down slightly. I always like to see the indicators this way, typically, good news follows for the next couple of months. However, Backlog Orders were down which means the order pipeline was not as robust. One offset for this was the decline in inventories, the manufacturers will need to maintain the production level during the next few months to replenish inventories so that will keep the sector moving forward. Look for more of the same slow methodical growth during the 1st quarter of 2007. By the way, this is not a bad thing; the key here is growth and I believe it is better to have a prolonged period of slow methodical growth then if the sector was on fire moving upward quickly. It is much easier for all of us to adjust and keep pace with a prolonged period of methodical growth. ENERGY SECTOR SPOTLIGHT I have noticed more press lately on the commodity players in the oil futures market. Lots of crying about how they continue to lose money and how hard it is to play in the oil futures commodity market. Interestingly, I did not hear any of this concern over the last year when they were cutting a fat hog playing in this market, while the consumer was paying dearly for gasoline and diesel fuel. The last article I read, highlighted the costs to hold a futures position in oil, and yes it is expensive. The problem for these people is that the speculators who have been propping up the market are leaving the oil futures commodity market in droves, leaving no one to support the prices. As I have stated in several past newsletters, when these people leave the market oil will start coming down. Well get ready, it appears that the big hedge fund and equity fund players are reallocating their investment structure to significantly reduce their investment in the energy futures market. As these big boys leave the market, support for oil commodity prices will soften. This should allow for oil prices to move downward and hopefully gasoline and diesel to follow. I am not convinced that we will see oil drop below $50 per barrel in the short term; it appears the producers are trying to organize to support the price at that level. Long term, jury is out of pricing. I have seen data supporting pricing for oil in a range from $20 per barrel to $100 per barrel. Too many factors to contend with (geopolitical, supply, weather, etc.) we will all need to take a wait and see approach as the year unfolds. Nonetheless, I do expect lower energy prices in 2007 as compared to 2006. By the way, the OPEC boys finally conceded that it was really difficult to enforce the reduction in production they called for; greed wins out on this one. |
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KC INDUSTRIAL REAL ESTATE UPDATE2006 ended on a positive note for the overall industrial real estate market in KC. Another strong year for the market, vacancy levels continue to trend downward ending the year at 8%. Historically, an 8% vacancy rate is about as low as we have seen in this market for some time. Lease rates did trend upward slightly and inventory levels of existing properties being offered for sale or lease remained tight. What will 2007 bring; more industrial building development. We will see an increase in bulk warehouse space. There are new buildings that will be coming on line in Lee’s Summit and KC North areas on the Missouri side, on the Kansas side new buildings will be coming on line in Lenexa, Shawnee, Olathe, KC, KS and Gardner. Most will be a-typical for the KC market, 50,000 to 100,000 square feet, 24-30 foot ceiling height and typical space sizes of 20,000 square feet and up. Pricing on these buildings will be in the $4.00 per square foot range with a NNN lease structure. Many developers are trying to push this type of lease structure in KC (which is common in most major markets), which is different from a modified gross industrial lease structure that is most common in the KC market. The NNN lease structure has a set base rent amount ($4.00 psf) plus the tenant will pay NNN charges, which consist of Real Estate taxes, Building Insurance and Common Area Maintenance thus making up the three parts to the NNN. The Tenant will pay an estimated amount monthly for all three of these cost components as additional rent on top of the base rent. At the end of a calendar year, these three cost components are reconciled for actual costs and the NNN estimated charges are adjusted for the coming year based upon the actual costs for the previous year. This structure is different from the standard lease type we see in this market, modified gross industrial leases are most common, in this lease structure the tenant pays a fixed base lease rate which includes the base year for Real Estate Taxes and Building Insurance, in addition to that the Tenant pays a separate charge for Common Area Maintenance. At the end of a calendar year, if the Taxes and/or Insurance have increased over the base year amount (which is established at the time the tenant takes occupancy), the tenant will pay to landlord the increased amount as additional rent. The Common Area Maintenance is an estimated amount paid monthly which is reconciled at the end of each calendar year and the new year estimated monthly payment amount is based the actual costs of the previous year. You will continue to see a move towards the NNN lease structure for new buildings; older buildings will remain on a modified gross industrial lease structure. During the coming year, expect inventory levels to remain tight and there will continue to be an upward movement in lease rates. This should not deter you from getting out there and moving forward on space to accommodate your business activity. You will still be able to find selected incentives (some free rent, build out allowance, etc.) for properties that are older. Do not expect much of any incentives for the newer properties; the developers just cannot afford to extend any. If you are interested in buying a building, pricing has not softened any, in fact pricing has continued to increase. On older facilities that typically sold in the mid $30 per square foot dollar range over the last 12 months now are selling over $40 per square foot. Do not look for any downward movement in pricing this year. The good news if you are thinking about purchasing a building, interest rates should remain stable during 2007 so the cost of capital should not increase above the current level. 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. |
