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July 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.
Snapshot – Manufacturing Sector
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Paul Licausi, President of LS Commercial Real Estate, is providing this Newsletter to you free of charge.SOME SLOWING BUT STILL GOOD NEWSComing off the 1st quarter drag race the economy took a breather in 2nd quarter. Although the economy continued to grow during 2nd quarter, it was at a much slower pace than 1st quarter. One thing that is difficult for me (just a simple business man) to understand is how our economy can be on life support during 4th quarter of 2005 and on fire the following quarter (1st quarter of 2006) then ratchet down to half speed in 2nd quarter. If you looked at a graph of economic performance over the last 3 quarters it would look like a roller coaster. My thought here is that much of the inconsistency in the overall economy is due to commodity pricing uncertainty (oil, gasoline, metals, raw materials). Will prices remain at historically high levels or will prices fall. I think upper management in many companies have just decided to forget about worrying if and when commodity pricing (energy, raw materials, etc.) will increase or decrease and they got on about their business. This is just my thought here, but given that there are so many other economic factors that are in play it is difficult for anyone to get a handle on what to expect next. Given the recent data and information I have reviewed on the economy and discussions with several of my customers, the overall outlook for the economy over the next quarter is good. The overall economy will continue to grow during 3rd quarter but at a pace on par with 2nd quarter. The outlook so far for 4th quarter is more of the same so the outlook for the remainder of the year is good for us business people, a bit slower but steady. One word of caution here, the wild card in this game is always the Federal Reserve, as you know; historically they have been the prime contributor in creating declining economic conditions. I have no reason to believe that they will forgo their historical tendencies. In the recent Fed meeting minutes these folks are all scared about inflation and they will most likely over react and raise rates too much and stall out the economy. One glimmer of hope here is that the new chairman will change this trend and successfully the slow the economy and not push us into another recession. Good business policy dictates that you plan for the worst and prepare accordingly. If the worst does not happen and the Fed is successful in slowing the economy and not stopping growth altogether, you will be in great shape to take advantage of opportunities that arise. Fed Watch The release of the meeting minutes from the last Fed meeting hinted that the Fed is considering taking a breather from any more rate increases. Although I viewed this as great news, I am not going to bank on this yet, over the last 18+ years the Fed has not been able to successfully restrain itself from over correcting and raising rates too far and choking the economy and sending us into a recession. The Fed, as expected, did raise the discount rate to 5.25% at their last meeting which increased the prime lending rate to 8.25%. The most recent information I have been viewing over the last week has the possibility of another rate increase at the August Fed meeting at being close to 50%. Do I believe they can continue raising rates, you bet, remember this group is scared to death of inflation and I think that they would rather stall out the economy rather than risk an increase in the inflation rate. Pretty bold statement, may be going overboard here, but I am only looking at history and if you were to review the minutes from the Fed meetings you would see my point. These folks talk about inflation and it is one of the central discussions in their meeting. The one thing that is encouraging is the chairman is bringing more issues into the discussion rather than just inflation. It appears to me that they are looking at a much broader scope of economic conditions and this is good and will allow them to discuss root causes of inflation and not just a narrow part of the overall economy. I hope that they continue this path; this should have a positive effect for us business people and hopefully keep them from over correcting and pushing the economy into the dumper. What to expect over the next 90 days, possibility of one more rate increase (likely ¼ point) which will push prime to 8.5%. Although I am not on board that they will hit us again, if so, I think that will be it until possibly later this year. A pause by the Fed will help us all; it will settle the business sector down and keep us moving at a sustained pace. Industry Alert Corner Industry in the spotlight this month, Drug Retailers. The delivery of drugs to the general public continues evolve, the classic drug store you saw in the movies where the pharmacist was an older guy who knew everyone by name and dispensed both drugs and advice, looks drastically different today and probably will look very different in the future. The drug stores today are retail sales monsters; they are location sensitive wanting to locate at main & main and are willing to pay hefty rents to be there. However, these retailers are on the top end of the food chain when it comes to retails sales. The retail industry measures sales based on a number of measurements, one in particular is sales per square foot. This is done by dividing annual sales by the size of the retail building (square footage) this establishes a sales per square foot amount and many in the retail industry look at this data to determine the real strength of each individual location. The drug retailers are always on the top end of the listings, averaging over $500 per square foot in sales. This has no meaning to someone who has never seen sales presented in this fashion, just to give this number something for you relate it to, a very good grocery store will average $400 per square foot in sales and retail giants Wal-Mart and Target do not run sales at this level so this gives you some idea of the strength of this retail sector. Why does this retail sector do so well, several reasons, they are selling high demand items (drugs, foods, personal care items, liquor, etc.) and they are appealing to convenience (store on every major corner). They are able to provide a wide variety of demand items in a convenient location. Pretty simple you think, not so fast to assume this. These retailers are in one of the most competitive industries in our economy, most of the major players in this industry are financial heavyweights and they are fighting for the best locations and to keep the flow of human traffic coming in to their stores. One aspect that makes this retail sector no cakewalk to be successful in, is the government. They constantly change the government supported health plans, which always challenges profitability for these retailers. Now having said all that, this industry will continue to grow. Last I checked the doctors were not cutting back on prescribing drugs, rather, this will continue to increase. This will continue to expand the customer base in this sector. There are a number of service opportunities to this sector; transportation, warehousing, logistics, equipment, fixtures, retail software tracking systems, just to name a few. This industry is worth investigating; see how your service might fit a need here. There are several major players; Walgreen’s, CVS and Riteaid are the big national players. There are a multitude of smaller players who would be good customers as well; Long’s Drug, Duane Reade and many more. One thing I really like about this sector is that most of the players are financially sound; this sector is worth your time, check it out. Manufacturing SectorThe manufacturing sector reported a 37th month of continued growth. The sector slowed slightly in June compared to May. The June index reading of 53.8 was lower than May, which was 54.4. Although the activity slowed during June, the report showed some positive news in some key indicators, which should give the sector some promise for further expansion of the manufacturing sector during 3rd quarter of this year. The report this month showed some slowing in the overall manufacturing sector. On the surface this was not what all of us would have wanted, everyone always wants to see expansion and great news on a go forward basis. Despite the less than positive news this month, I am encouraged by how well the sector is doing despite the pressures within the overall economy. The sector continues to grow despite higher costs for energy and raw materials, increasing interest rates and a slowing in consumer spending. Those are all ingredients for an aggressive slow down in activity within the sector. However, the sector continues to churn along, all be it at slower pace but still on the positive side of the line. I have been talking with several manufacturing clients asking about their view on how well their business will do over the remainder of the year, most are optimistic. That was great news to me; I should mention that in addition to being optimistic they were also cautious. No one has a crystal ball showing what the 3rd and 4th quarters will bring, so to be cautious is smart and shows me that there is much more forward thinking go on now than I have seen in the past. Looking into the report, I really thought the key indicators showed stability more than anything else. New orders, customer inventories and backlog orders were all up which should result in a good 3rd quarter in sales. These key indicators show a trend over the past 30 days that sales are trending upward. Production, employment, supplier deliveries, inventories and pricing were down but just slightly. This indicates that the sector ramped down production slightly and pulled more from existing inventories. I expect to see an increase in production to meet increased sales over the next quarter. What now, expect more of the same, slower growth, which in my book is the safer path rather than the sector being on fire and making the Fed a nervous wreck? The only thing that could be a wild card for the sector will be global politics. If the North Koreans continue to do irrational things there could be more international political problems and it is underdetermined how that would affect the sector but my guess is it would not be positive. ENERGY SECTOR SPOTLIGHT No relief in site here, think pricing is coming down soon, your guess is as good as the next person. As I have been saying over the last several months, this sector defies normal economics, all of the information over the last month has shown that supply is either the same or higher than this time last year and demand has actually declined. If this is the case why has pricing gone up or more importantly not come down. I have no words of wisdom here, there is just too much emotion at work in this sector and that is what is driving the pricing. Interesting comments coming from several different government sources regarding alternative fuel, they are moving the issue to the front burner. Now when the government talks about something that is just what it is, lots of talk very little action. However, in this case the President and Congress have been taking action and pushing incentives for alternative fuel. One interesting aspect of this has been the discussion regarding coal. In the past this product had lost it luster because of the problems in mining the product and the pollution it produced while burning it to create energy. It seems that the government is becoming less picking and they are now pushing the rebirth of coal as a means to lessen our dependence on foreign oil. I caught some press recently highlighting the coal reserves in the U.S. and they are immense. There are plants coming on line right now that can process the coal into fuel, this will get the attention of OPEC. I think this is a great move, this raw material is located in the U.S. and we can keep those revenues here at home. If this is a means to lessen our dependence on foreign oil, then the risk of an increase in pollution levels is well worth it. My guess is that the OPEC countries will be watching this development very closely and if we start to bring these plants on line quickly and process the coal into fuel you will see the price of oil start dropping like a rock, image that. As for energy prices, I see no light at the end of this tunnel yet so be prepared to pay close to or over $3.00 per gallon for gasoline. |
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KC INDUSTRIAL REAL ESTATE UPDATEWe are in mid summer, which is typically a slower time of year for the industrial real estate market. However, this year has bucked the norm, the market remained active during the past month and based on current pace we should see this activity level continue through to at least mid 3rd quarter of this year. Why the change, better business climate, more activity in the business market is pushing companies to make space decisions. What effect has this has on the market, decreased the inventory of buildings being offered for sale or lease. Now, this would normally be bad news for the user base because it would decrease inventory of existing buildings that are available for sale or lease and lease rates and building sale prices would increase. However, there has been an increase in the amount of space that is available for sale or lease, which has offset the increased activity level in the market. This has allowed for lease rates to remain stable and I do not see a great deal of risk that lease rates will push upward significantly if as all. Inventory for buildings being offered for sale is different, there has been more properties sell then new properties coming on the market for sale. Sale prices in this sector of the market have been trending upward, I do not see this changing because we are just not seeing enough new properties come on the market for sale, this will continue to bolster the prices for existing properties that are on the market. What’s new in this sector, for the first times in 4 years, new flex space is being constructed. Flex space is an industrial building that is multi-tenant with smaller bay sizes (average 2,500 sf up to 10,000 sf), ceiling height of 18 feet or less, minimum 30% office finish and both dock hi and drive in loading. These buildings appeal to the service sector and are populated for the most part by local and regional companies. These are a number of new buildings either under construction or getting ready to start. Building activity for this product type is occurring in Lenexa, Olathe and Shawnee on the Kansas side and Independence, Kansas City north, Riverside and Lee’s Summit on the Missouri side. Why the long layoff period, high vacancy levels in this product type following 2002, which averaged over 20%. The vacancy rate in this product type is now just above 10% and moving downward. As the vacancy rate has declined lease rates have ticked upward which has allowed for new construction to start again. The other key contributor to new building activity in this product type is the tenant base as a sector (service sector) is very active which indicates that business is good for this user group. New construction should continue well into 2007, economic conditions will dictate how long the run will last. The bulk market (large space sizes with 20+ ceiling height) is very active but there continues to be sufficient inventory with existing buildings so there is not a lot of new product planned right now. Vacancy rates for this product type remain just below 9% and lease rates remain stable. I see no change for the remainder of the year. I have had several discussions with clients recently regarding purchasing a building; I have advised that the timing is not right. Increasing interest rates, building sale prices at the top end of the curve and a lack of sufficient inventory to choose from. Unless you find an absolute glove fit in a facility, now is not the time to pursue a building acquisition. I caution clients that even though owning a building always sounds like a solid plan, you need to think through the decision very carefully. Most do not fully consider this decision, key issues like; flexibility, expansion ability, does the building fit the anticipated future needs of the company, location, access, etc. These are just some of the global issues you need to consider before buying a building. Many companies buy a building that fits their needs today; 3-5 years following the acquisition their business has changed (expanded, contracted, etc.) requiring a different use of their space. Typically, it is a simple case of the building being too small or too large; they need a different facility now, which is where the challenge begins. They need to move now but need to sell the building in order to afford to do so, this could take 6-12 months to complete so many companies are forced into double expenses, paying a lease or mortgage payment on a new building and the mortgage payment and operating costs on the former building. This is just one example of what can happen, the bottom line is that flexibility is key in determining what the right thing is for your company. Most executives have some idea of what the future looks like for their company but at the end of the day business changes at the speed of light and it is very difficult to anticipate what your facility needs will be in the future, maintaining the ability to be flexible is key. 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. |
