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Economic Snapshots:
·
Unemployment 4.5%
(National)
·
New Jobs for May 157,000
·
Unemployment 5.0% (KC
Metro)
·
Housing Permits
down this
month
Quick Facts – KC Metro Area
·
Air Freight 21 million
pounds moved through KCI
Airport
·
Housing Permits in April
– 600 units
·
Help Wanted down 40%
compared to same time last year
·
Passenger Traffic
moving through KCI April 2006-820,000 people April 2007-890,000 people.
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 down
·
New Orders up
·
Inventories down
·
Export orders up
·
Employment down
·
Production up
·
Supplier deliveries up
·
Prices up
·
Customer inventories up
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
06-04-07 - $2.799
06-11-07 - $2.792
06-18-07 - $2.805
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A LITTLE WEAK BUT STILL MOVING FORWARD
The headline is the theme for this
month regarding my comments on the overall economy. No doubt, forecasts from
both the government and leading economists are being revised downward. At the
beginning of the year, the outlook for economic growth was strong. GDP growth
for the year was projected to be well above 2006 levels. Then comes 2nd
quarter, the wind left the sails and the economic ship started to show signs
of slowing. To be honest, the majority of these predictions are a “best
guess”. I am not throwing rocks at the government brain trust or the hoard of
economists that issue forecasts. These people are very sharp and I do respect
and listen to their viewpoints on the economy. However, most people hear
these forecasts and take it as fact, it is their best guess based upon a
review of data that is available at the time they issue the statement. That
is why you see recasting of economic forecasts occurring frequently. New
information becomes available and thus recasting of forecasts occurs.
For this reason, I always look at these
economic forecasts as a snap shoot of current conditions and as a look
through the window for the next 30 to 60 days at most. The world is just too
unstable for the markets to have any level of stability. Thus, I expect fluctuations
in the global markets to occur which always has an impact on the U.S. market
either positively or negatively.
If you want to see my theory playing
out right now, look at the oil industry world wide, it continues to be
affected by supply issues and geopolitical unrest. Until there is some level
of stability do not expect any change in prices at the pump.
Now for some good news, even with all
of the instability in global markets, the U.S. economy remained in a growth
mode. There are definitely some drags on the market, housing remains
sluggish. The latest reports I have seen show housing still very soft in most
of the major markets in the country. Housing prices are still dropping but
not at the pace compared to previous months. Given the velocity of the decline
in housing values is decreasing at a slower pace, this is a good sign that
the sector is nearing the bottom of this down cycle. Energy continues to
affect all of us. The price of oil remains above $60 per barrel; this will
keep the price at the pump towards the high end of the pricing range.
Finally, employment has now popped up as a concern for a percentage of the
consumer base. I caught some information on the employment concern in a
recent article I read. It contained a study which indicated that 56% of the
consumers pooled indicated they would be reducing their spending based on
concerns about the stability of their job. Now, the study was focused on the Midwest, so I think this could be more localized than a
trend nationally, but none the less it is the first reporting I have seen
that has indicated concern regarding employment. This article was in conflict
with what has been reported on the jobs front, we had a great new jobs number
last month which will certainly help in propping up the economy over the next
several months so hopefully any concern from the consumer standpoint will be
minimized by these strong new job numbers and they will keep spending at
record levels.
My outlook for the economy over the
next 60-90 days is still the same as I issued in the newsletter last month, slow
managed growth. We should continue to see GDP grow at a rate of 1.8% to 2.4%,
the consumer is staying in the game and continues to spend money in this
economy. Energy, housing sector and interest rates will continue to be a drag
on the economy but the economy will continue to grow.
Fed Watch
The power
and influence the Federal Reserve has over the economic markets continues to
amaze me. I liken the Fed to a puppet master, and the economy the puppet.
They can move any part of the economy with no effort whatsoever. Case in
point, Chairman Bernankle has been out on the circuit talking about the
economy and economic policy. The hot topic, bank lending policies. With the
sub-prime loan scare (meltdown I think is the word I hear most to describe
it) he is now focusing on lending policies for the mortgage market in
general. Of course, sub-prime loans are now out of favor (15 minutes ago they
were the greatest financial tool in history allowing home ownership to a
group of Americans who otherwise have been shut out of the home ownership
game) and the providers of this financial instrument have been punished and
most are or have gone out of business due to their lack of or access to
capital. The Chairman is now pushing for a substantial increase in the
lending requirements for what is classified as a sub-prime loan. The direct
result will be that the same group of Americans that were utilizing this
financial product to buy a house will not longer have access to these loan
programs thus eliminating them from the home ownership game (the apartment
owners and developers are popping the cork on the champagne right now,
occupancy rates for apartments and other residential real estate will be on
the rise). Now should there be a change here, was the lending policies of the
sub-prime lenders too lax, maybe, but in true Fed fashion, they will
completely go overboard and pound the sector into a dormant state.
However,
the worst part is the Chairman did not stop there. Based on the fact that the
sub-prime loans were being used to finance real estate, he now is focusing on
the real estate sector in general. I guess the Fed was not happy with just
dropping the bottom out of the residential real estate sector, now it the
commercial real estate sectors turn. Bernankle issued a policy statement to
the commercial banking industry; he is concerned with the loan ratio for
commercial real estate that the commercial banking industry is carrying right
now. What this means, is that the Fed regulators when examining a banks
overall loan portfolio will look at the diversity of the loans they make,
i.e., business, equipment, vehicles, credit lines, inventory, real estate,
etc. The issue here for the Fed is what percentage of the overall loans are
for commercial real estate. Some banks have as many as 7 commercial real
estate loans for every non-real estate loan. The Fed has issued a statement
that they want to par that back to no more than 3 commercial real estate
loans for every non-real estate loan. As you can guess, not good news for
guys like me who make a living with commercial real estate. I could not
disagree more with this policy position, to assume that a local banker is not
knowledgeable enough to understand loan diversity within their loan portfolio
is just crazy, bankers by nature are and have to be some of the sharpest
people around, they are responsible for other people’s cash, no room for
error here.
What
is the effect, given my comment above regarding the Fed’s ability to affect
the markets; I have seen an immediate change in the underwriting approach
from the banker’s. This change has occurred quickly (over the last 45 days)
and I do expect tougher underwriting and less advantageous lending terms for
commercial real estate loans until the Fed calls off the dogs here. Will this
affect you, you better believe it. If you were considering buying or
constructing a building to house your business, you will find your banker
less accommodative and the cost of capital will be higher. Now, I do not want
to discourage you from pursuing a purchase or constructing a new building if
that is what you want to do, I am telling you that it will be more difficult
and costlier of a process. However, one thing is your favor is lending is
heavily influenced by relationship and that will be a favorable factor but at
the end of the day the bankers know that some Fed regulator will be breathing down their neck asking what is
the deal with this commercial real estate loan and that will have an
influence on how they underwrite and price the loan to you for a building.
Enough
of my ranting and raving here, as you can tell since my industry is in the
target sight right now and it is a raw nerve point.
Interest
rates, nothing new here, they will remain in check for the next three months
minimum. Many economists were expecting a rate cut by mid year, but while
inflation remains on the high side of the Fed comfort zone there is no chance
of a drop interest rates any time soon. The economy is moving slowly enough
right now to keep them happy, new job numbers continue to be acceptable and
there is really nothing on the immediate horizon that would cause the Fed to
take any corrective action to counteract. The long and short of it, interest
rates remain the same, prime continues to stay put at 8.25% with no change in
the immediate future.
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, Insurance.
Always a hot topic but it is
probably the least area of focus for all of use business owners and managers.
I thought I would highlight this sector and share some of the changes I have
seen over the last several months.
If you are like most of us, if
someone asks you about your insurance your response is let me talk with my
agent. Think about that, if someone asked you about what interest rate you
are paying on your credit line or what did you pay for your last forklift,
would you respond let me talk to my banker or my sales representative. The
answer is no, that is information you can fire right off the top of your
head, why is it that we seem to treat insurance as something we just do not
need to know every detail about. I really see this as a mistake, every one of
us should know in detail every aspect of our insurance coverage and cost, I
am as guilty as the next guy. I just demonstrated this, one of my buildings
in Texas was damaged by sever weather, in talking with the local folks in
that market that take care of my property they asked me some very simple
questions regarding what was covered under my insurance policy and what was
not, can you guess what my answer was, I spouted out “let me talk with my
agent”. This was the wrong answer, I should have been able to respond right
back to them what was covered and what was not. Now, I will tell you, I do
know what my general coverage is but beyond that, forget it. Why I think this
is a big deal is that as I talk with clients about issues that affect their
business, insurance costs seem to come up more frequently now. Be advised,
the insurance industry is a “for profit” industry and making money is a top
priority. If you need an example of this just talk with a friend or business
pier and ask if they have ever tried to file a claim. I have been dealing
with several claims over the last year, I have determined that the training
for the insurance adjusters is pretty simple, they take your name and an
account of the incident enter it into their system and then proceed to tell
you “NO” your claim is not a covered event. I can tell you at that point you
will become an expert at what your policy covers and what it does not.
Coverage is just one aspect,
review of your policy in general is a great exercise for you, it will force you
to compare your coverage to what business activities you are doing. I think
you will be surprised when you look at this; it is likely that you are doing
things your insurance does not cover. Additionally, it is always a good to
look at deductible levels and coverage amounts. The bottom line here, your
business changes so your coverage should mirror your activities and your deductible
should be something you look at as well. Insurance is a fixed operating cost
and is something that should be adjusted every year depending on what
business activities you are doing.
Don’t wait until something
happens to really understand what your policy covers, by then speaking from
experience, it will be too late.
Manufacturing Sector
Better news for May from the
manufacturing sector. The PMI index reading for May was 55 which was
significantly better than the last three months readings.
What changed to trigger such a strong
reading this month, new orders were king this month. This was the standout
indicator in the report and it always acts like a spark for the entire
sector. Bottom line here, if the manufacturers are selling then they get busy
which creates opportunities for the rest of us service providers.
Another positive reading in the
report was production. Production had been down the last couple of months in
response to weak sales for the sector. The manufacturers responded this month
to the increase in sales by ramping up production. They pulled from inventory
to meet demand which caused inventories to decrease. Overall, the report was
positive which has not been the case for the last couple of months. The
feeling from the sector seems to be much more upbeat and comfortable that
sales will continue to trend up. One specific area is exports, they are way
up and the data shows that this trend will continue. The comments within the
report were very encouraging, it appears that the weakening dollar is allowing
U.S. based manufactures to pick up market share internationally as their
products are becoming much more
competitively priced. Based on the comments within the report, this trend is
expected to continue.
However, there were some concerns
voiced in the report, it appears that many of the manufacturers are having
resistance from their customers for the manufacturers to pass along price
increases on raw materials, most notably petroleum based products.
Additionally, energy costs are still a large concern.
The details on the key indicators
are; New Orders, Production, Supplier Deliveries, Customers’ Inventories and
Exports were all up which is a an indicator that we should see more of the
same positive news next month The other indicators were either neutral or
slightly down but nothing that sparks any concern.
My outlook for the sector is positive;
I do believe that there is some wind back in the sails for this sector. The index
readings will remain in a range from 49 to 56 during the next three months.
Keep in mind, the performance of this sector is closely tied to consumer
spending. If consumer spending lags then expect to see the index reading
trend downward. So far, the consumer is hanging in there and opening the
checkbook or better yet swiping the credit card.
ENERGY SECTOR SPOTLIGH
Just get use to $60 plus for oil and gasoline prices hovering
close to $3 per gallon. We will continue to get hammered here on prices for
the foreseeable future. I continue to be amazed at the pricing levels for oil
and gasoline as well as diesel. One thing that I have been watching closely
is the rumblings coming from the consumer, have you noticed lately there is
very little complaining. I think maybe the consumer is getting use to the
pricing, I do not know about you but I sure like $1.80 per gallon for
gasoline rather than $2.98 per gallon.
Interestingly, I am now seeing the government take some action
here. There is new legislation that is being debated right now that will put
stiffer regulations on the car makers to provide for better gas mileage.
Also, there are new requirements for hybrids and alternative fuel use
minimums effectively reducing the use of gasoline and oil. It appears that
the government is now taking strides to force a change and mandate the use of
alternative fuels which is a certainly a changing of the direction of product
use for the long term. Now, do not forget, the government is collecting large
sums of money in fuel tax so you can bet that this move to alternative fuels
is being done to ensure they do not suffer on the revenue side. One thing
that has always baffled me, I am sure they see the pain for the average
consumer and business operator struggling with the substantially higher cost
of energy, why have they not given us some relief by lowering the fuel taxes?
Good question to ask your State or Federal congressperson next time they call
you for a campaign donation.
On a different note, I was at a conference discussing industrial
real estate. During a particular discussion regarding new construction of
industrial facilities one of the panelist who is a large general contractor
made a prediction regarding future requirements of newly constructed
buildings, he feels strongly that corporate America will require building
systems that will capture and utilize energy. This was totally out there and
he was referring to solar power, wind turbines, and thermal as well as hydro.
Initially, I thought this was more of a futuristic comment to make and yes I
can definitely see a positive here, but the costs to implement this would
outweigh the desire to have these systems. However, if you really think about
this, the systems today are much more advanced, yes they are expensive but
compared to 5 or 10 years ago, they are much less expensive. The real point
of his comment was that given the cost of energy does not seem to be trending
down and the fact that the utility companies are becoming increasingly
difficult to deal with, his comments do not seem to be way out there and I
can see this becoming reality sooner than later. Something to think about.
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KC INDUSTRIAL REAL ESTATE UPDATE
The local industrial real estate
market continues be active. Lots of companies in the market looking for space
to lease and there continues to be a significant level of companies in the
market interested in purchasing a building.
I always compare the general outlook
of the economy to the level of prospect activity in the KC market. There is
some correlation between the two, but more often than not, there tends to be
a lag between how the overall economy is doing and how the local KC market is
doing. If the overall economy is slowing, we typically do not see any signs
of weakening in the local KC economy for about 6 months. You can expect that
trend to be the same as the overall economy heats up, the local KC economy
will be about 6 months behind on following the overall economy’s path.
The most active areas within the
metro right now are: Missouri side - KC
north (Northland Park, Liberty and
NKC), eastern Jackson County (Lee’s Summit,
Blue Springs and Independence). On the Kansas
side - south Johnson
County (Olathe
& Gardner), western Johnson County
(Edwardsville). These areas are seeing the most leasing and sale activities.
Additionally, it is in these areas where most of the new projects are being
built or on deck to start building this year. You may be wondering why these
areas are getting the attention right now, available existing space is one
significant reason as well as many of the projects located in these areas have
either direct access to the highway system or are very close to a major
ingress point to the highway system. Additionally, these areas have larger
concentrations of industrial land that is zoned and ready for new
construction. Companies interested in building a new facility can choose from
a variety of sites which will allow them to start building quickly. Several
of the communities located in these areas are being aggressive in attracting
new business to their community and are offering incentives (i.e., tax
abatement, IRB Bonds, TIF and other incentives) to attract companies to build
in their community. The communities who are not offering any incentives are
starting to fall behind. Case in point, Lenexa
and Overland Park,
these two communities have traditionally never given any tax or other
incentives to attract businesses into their communities. Over the last
several years, they have watched company after company choose surrounding
communities who offering incentives (i.e., Olathe & Edwardsville) and
this has caused them to rethink their position. Recently, both Lenexa and Overland
Park have both granted tax abatement and other
incentives to retain and to attract new businesses into their communities.
This is going to be a necessary operating strategy if these communities want
to retain and bring in more business into their communities. Now, this is
great news for you, be sure and keep this in mind when you are out in the
market looking for a facility or land to build on. These incentives are out
there, they are not necessarily going to be offered up front, you will have
to ask but once they know you know the game, they will play aggressively to
peak your interest.
Lease rates are trending up slightly,
no worry on your part here, the average increase is slight at best. I expect
more of the same for the remainder of the year. Sale prices on existing buildings continue
to remain on the high end of the pricing range. It is typical for older
buildings of less than 50,000 square feet to price out at $38 per square foot
(on the absolute low end) and up depending on location and functionality. If
you are interested in a newer building less than 50,000 square feet (less
than 15 years old) be prepared to see pricing north of $60 per square foot
and up. Again this pricing depends on the location and functionality of the
building but certainly prices in this age and size range are high. Buildings
that are older averaging over $50,000 square feet are pricing out at $30 per
square foot and up depending on age, location and functionality. In this size
class, in these older facilities, these properties are competing with new
facilities that offer greater functionality and better location so they are
heavily discounted against pricing for those buildings. With any building
purchase or new construction, financing is an issue; higher interest rates
along with higher equity requirements by the banks will push the cost of
either buying or building a new building upward.
COMPANIES MOVING IN THE MARKET
GENESYS CORP 218,000 SF
KC, MO
SPECIALTY INTERIORS 12,570 SF LEE’S SUMMIT, MO
CROWLEY FURNITURE 71,650 SF INDEPENDENCE,
MO
DEDICATED DISTRIBUTION 22,400 SF KC, 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.
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