LS Commercial E-News
July 24, 2007	Volume 1, Number 1
Economic Snapshots: · Unemployment 4.6% (National) · New Jobs for May 132,000 · Unemployment 5.2% (KC Metro) Quick Facts – KC Metro Area · 2^nd largest rail hub in the nation (Chicago is 1^st) · Outbound delivery from KC to all major population centers in the U.S. within 1.5 days · One of the few cities in the U.S. with 2 major vehicle manufacturing plants (GM & Ford) · KC is one of the top markets in attendance for professional sports 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 up · New Orders up · Inventories down · Export orders up · Employment down · Production up · Supplier deliveries up · Prices down · 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 07-09-07 - $2.849 07-16-07 - $2.889 07-23-07 - $2.889 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%	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. GOOD OR BAD NEWS TO COME? It is interesting times on the economic front, there are so many dynamics in play that affect the economy it is next to impossible to keep pace with all of the moving parts. Overall, the economy bounced back from a dismal 1^st quarter. GDP growth was way up and more in line with what is expected to be the overall growth for the year (2.2% to 2.6%). Much of the rebound was attributed to a significant increase in exports and an increase in consumer spending. The dollar has continued to weaken throughout the year and this has been a major boost to exports. As the dollar weakens against other currencies globally, it makes our goods less expensive which allow U.S. based companies a greater competitive pricing advantage thus resulting in increased sales overseas. As I have always said, the consumer is king and can make or break the market. The consumer is one of the key components in the overall health of the economy. The consumer stepped up spending during 2^nd quarter despite continued increases in energy costs. Additionally, corporate capital spending was up and this also contributed to a better than expected 2^nd quarter economic performance. The data suggests that the economy is on path for a slightly better performance over the last half of this year. This is certainly welcome news, but I am not on board yet with this prediction. I do think that we will see stable performance from the business sector. Most of my clients are reporting that their activity is good and there does not seem to be anything on the horizon that will drastically change that outlook any time soon. Given the consumer is king here; I have been looking closely at the consumer sector information to see just how sustainable consumer spending really is. I was interested in reviewing data on consumer income and expenditures to see how they balanced out. Overall, personal income was up, not a great deal but nominally higher. I was very interested in the comparison between the percentage of increase in spending comparative to the increase in personal income. Bottom line here; was the consumer spending the increase in personal income or were they firing up their credit cards. The answer here is a little of both; which means that the consumer spent all of the increase in their personal income and then some, which meant that they also used their credit card. I was not surprised by this, if you look at the fact that gasoline prices were moving up during 2^nd quarter, this expense would continue to capture a larger percentage of the overall expense for each consumer. The concern I have with this picture; as gasoline remains high, the money that will go to pay these higher gasoline prices will come right out of the economy. My initial thought here is that the retailers will be the first to feel the pain. The bottom line is that the consumer has only so much money and does not have access to unlimited credit. Therefore, the average consumer is faced with choices respective to their purchases and the pecking order is pretty well defined. Food, shelter and transportation are the top three and it is a dog fight by the rest of the economic sectors for the remaining consumer dollars. I will continue to watch the consumer spending sector closely; it will be interesting to see how things pan out over the next couple of months. My outlook for the economy for the next 30-60 days is positive. I do think we will see continued growth in the overall economy at a modest pace. Fed Watch The Federal Reserve as expected held in check the Fed Rate with no change in monetary policy. Nothing unexpected from the Fed meeting, their comments centered on the health of the economy, which they feel is very stable and they are comfortable with the current economic status. Additionally, the Fed has a measured comfort level respective to inflation at the current time. Overall inflation continues remain above 2% which is near the top end of their comfort zone which is 2.5%, which is not enough to make them nervous right now anyway. Based on their position, I do not expect any change in policy from the Fed any time soon. It is not likely that we will see any adjustment in interest rates; they should remain where they are through the end of this year. Inflation should remain tame and at the current level of 2.1% to 2.3%. Although I would rather see interest rates come down, consistency with Fed policy is good. The economy is under stress when the Fed is moving rates in any direction which creates challenges for all of us business people. I do expect some movement in the Fed rate during 2008. Based upon the data I have reviewed, It is likely we will see the Fed begin to decrease interest rates in a very slow measured pace some time during 2008. My best guess is this will occur sometime during 2^nd quarter of 2008. I covered in last month’s newsletter a policy move the Fed had taking regarding lending policies for the banking industry. The focus was on both residential and commercial real estate lending. The results of this policy move are now in full force. If you are in the process of buying a building or interested in making an acquisition, be prepared, the banks are tighten up their underwriting procedures and pushing equity requirements higher. On a positive note, interest rates should continue to be competitive but your overall cost for acquisition from a capital perspective will be higher. As always, keep a close eye on debt levels, it is always easy to become complacent when rates have been stable. You never know when the Fed will move and I guarantee you it will be at lighting speed and could catch you off guard. Industry Alert Corner Industry in the spot light this month, Bio-fuel. Energy costs are in the spot light, oil continues to remain at a historically high Level. The collective cry from the public about the high cost of fuel continues. Now the government is starting to take some baby steps to encourage the development of alternative fuels. In the past, these steps by the government were just for show with no legislative action to actually make a material change in policy. Now, things are finally starting to change, the government issued a policy statement encouraging the use of alternative fuels and most recently backed it up with a number of legislative policies that put in process benchmarks for the auto makers to significantly increase the number of hybrid vehicles they produce annually. Additionally, congress has enacted new legislation that offers alternative fuel producers a new bundle of incentives that encourage the production of alternative fuels. One of these alternative fuels is Bio-diesel. This is diesel fuel that is produced from a number of waste products like animal fat. I have a company I am working with in this industry and have been amazed at the innovation that is occurring respective to the manufacturing process for these products. In looking at the sector as a whole, business is brisk. They are literally selling every gallon they can produce, the only limiting factor is that most of the companies in this space are local or smaller regional companies and this business is very capital intensive so growth is curtailed by the level of capital investment needed to grow. The interesting thing about the bio-diesel sector is how the product is produced, although there are many different waste and agricultural products that can be converted into bio-diesel, animal fat and agricultural products seem to be the most widely used. I am amazed at the creativeness of the people operating in this sector, taking animal fat destined for a land fill, a total waste product and turning that waste product into a usable fuel. This is great stuff and for once the government is promoting something worth while. Given my limited exposure thus far to this industry, I am impressed with the sector. Demand is high for their fuel, most of the operators are not selling into the retail side of the market as of yet, but selling into the bulk side of the market. The company I am working with is producing a significant number of gallons annually and is about to start providing product to companies who will distribute their product as an alternative for home heating oil. This will be a great boost for them and demonstrates how the alternative fuel market is a poised to take off. I have mentioned just one sector of the alternative fuels market; there are numerous other parts to this sector which should all see significant growth over the next several years. Given the rich incentives that the government has extended to this sector, capital flow into this sector will be increasing. It is a good time right now for you to do some research regarding this sector. There are and will be numerous service opportunities within this sector and the early bird will most likely get the worm. Be advised, many of the companies operating in this sector and small to mid sized and under funded. However, this will change, so do not let credit weakness now deter you initially. Capital will flow into this sector which will significantly bolster the balance sheets of many of these companies. The key here is to get in early so that you will be well established when the money guys show up to join the party. This sector is hear to stay don’t miss out of an opportunity. Manufacturing Sector Continued strength in the manufacturing sector during June. The PMI index reading for June was 55.9 which was up from a 55 index reading in May. The sector continues to rebound from a weak 1^st quarter with significant increases in New Orders. Given the increase in new orders, this triggered an increase in production. Increasing production is the best news we can hear. This will spur continued activity throughout the entire economy. Another positive effect from increased new orders is the decrease in inventories for both manufacturers and distributors. This is an indication that the manufacturers were not producing product fast enough to keep pace with demand and were pulling out of inventory. A part of the increased production, manufacturers will push to replenish their inventories and those of their distributors. Another key indicator; backlog orders was up as well. As I have always mentioned in the past, this is one of the best indicators for future growth within the sector. This is a clear indication of the strength of the sector. I really like what I am seeing and hearing regarding the manufacturing sector. The resurgence of the sector is certainly welcome news to all of us. The effects of the dollar declining in strength against other global currency, is giving U.S. based manufacturers an added edge in pricing power. This is exactly what we have been seeing from other nations (namely China) who have restrained their currency, making their exported products very price competitive resulting in excessive trade surpluses. Given the fact the dollar has been losing strength; we are seeing a surge in exports due to U.S. manufactured goods becoming very price competitive with the rest of the world. Not surprising, many of these countries that have been killing it on exports are now talking about instituting tariffs and other fees to make imported goods into their countries more expensive. The U.S. should certainly return the favor if this is the practice they are going to follow. The key indicators were positive and I expect more of the same good news regarding the sector over the next couple of months. ENERGY SECTOR SPOTLIGH Oil spiked over $70 per barrel during the month and gasoline pushed past $3.00 per gallon. I wonder just where fuel prices are going, at what level prices will stabilize at. I have been looking at a lot of information and data on fuel prices and the basic conclusion I have come to is that the oil companies are going to milk this cow (the American public) as long as they can. A recent report regarding a survey of the major oil companies indicated that they were not going to make any further investments in enlarging their existing refineries or construct new ones. The justification for this position was the push by the government to promote alternative fuels. My take on this is that any action on the oil industry to increase production is just not beneficial for them economically. The only reason to increase capacity is for the benefit of the consumer and why they have us captive they will keep up the pricing pressure (hence keep milking the cow as long as possible). I do not see any change in the immediate future regarding any change in fuel pricing. In fact, I heard a major oil company executive speaking recently who predicted oil moving upward in price even higher than the current pricing levels.
	KC INDUSTRIAL REAL ESTATE UPDATE Mid summer and the local industrial real estate market continues be active. It is at this time of year that we typically start to see a natural slow down in the market. However, I am not seeing that this year. We are as active right now as we have been all year. There are a significant number of prospects in the market who are looking for both space to lease and buildings to purchase. I am always studying the market and the tendencies of the prospects. One thing I have notice of late regarding the operating trend of the average prospect is the consideration time period (as I call it) that prospects are spending in the decision making process. The consideration time is the period of time from which a company enters the market physically looking for space to the time in which they secure a suitable location. I am starting to see that gap widen beyond typical levels. Consideration time varies between companies but a typical search in the market to find a suitable space to lease is 2 to 3 months. I am seeing that gap widen to as much as 4 to 5 months. The reason? I believe it is uncertainty with the market. Now, this varies by company and there can be any number of factors. Much of the hesitation I am seeing right now is uncertainty regarding whether a target space is really right for them. Most companies have a very specific requirement and they are focused on facilities that fit that requirement. Once they identify a facility that fits that requirement, this is when the second guessing starts, whether their requirement is correct or the space can fulfill their needs. This creates uncertainty and thus slows the process way down to the point where they really do nothing while they work through their process to determine what it is they really need. Has this uncertainty had an adverse effect on the industrial real estate market, none at this point. The prospect is most greatly affected, they loose the opportunity to lease or purchase the facility so they are forced back into the market to search for another facility. I am sure many of you have experienced what I have just explained, it is not uncommon. However, my advice here is to spend a greater period of time establishing your space criteria and stick to it when you locate suitable space on the open market. Hesitation will create an opportunity for you to miss out on the space and the risk is that you will not be able to identify another facility that will address your needs as well as the facility you missed out on. If the space is right, move forward. There is new construction occurring for industrial warehouse facilities in several submarkets throughout the KC metro area. New projects are going up in Lenexa, Shawnee, Olathe and Gardner on the Kansas side. On the Missouri side, new facilities are being built in Lee’s Summit, Blue Springs, Independence, Kansas City North, KCI area and south Kansas City. These new buildings range in size from 10,000 to 50,000 square feet and all offer demised space within the buildings. The vacancy rate is holding at 8% and I do not expect that to move much through the end of this year. Lease rates throughout the metro area have remained fairly steady with some areas seeing slight increases. For typical 2^nd generation warehouse space (older buildings averaging 10+ years old) you can expect lease rates ranging from $2.50 psf to $4.50 psf depending on the location and amenities. You will find, less expensive lease rates as you get closer to downtown KC. Higher lease rates will be found in the outer lying submarkets on either side of the state line. The smaller bay “flex space” product market is also seeing more new inventory as new buildings come on line in Lenexa, Shawnee, Lee’s Summit, Olathe, Blue Springs and Kansas City North. The lease rates for this product type have been trending upward. You can expect to see lease rates for existing buildings (older projects) in the $6.50 psf to $8.00 psf range. Lease rates on newly constructed flex space are ranging from $10.00 psf to $12.00 psf. You can expect some level of build out for office space in the new projects which would be covered in the quoted lease rate. One important point to mention is that the vacancy rate in this product type has been coming down steadily over the last 24 months. For that reason, much of the lease incentives have gone away. The most you can expect at this point is 1 to 2 months of free rent period to cover your moving costs. COMPANIES MOVING IN THE MARKET INTERNATIONAL STORAGE 13,255 SF KC, MO GENESYS 218,000 SF KC, MO SIMPLEX 31,933 SF LENEXA, KS AVCORP 10,424 SF LENEXA, KS 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.