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March 2006 |
Volume 1, Number 1 |
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Economic Snapshots · Unemployment 4.5% (National) · New Jobs for February 243,000 · Unemployment 5.0% (KC Metro) · Housing Permits continue trending up
Quick Facts – KC Metro Area
· Air Freight 19 million pounds moved through KCI Airport in · Housing Permits in January – 800 units · Help Wanted up .10% compared to same time last year · Passenger Traffic moving through KCI December 2004-780,000 people December 2005-760,000 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 up · New Orders up · Inventories up · Export orders down · Employment up · Production up · Supplier deliveries down · Prices down · Customer inventories up |
This Newsletter is being provided to you free of charge by Paul Licausi, President of LS Commercial Real Estate.STRONG RESULTS SO FAR IN 2006Good news continues to roll in on the state of the economy. Unemployment dipped below 5% and is expected to continue to trend downward. An interesting fact regarding unemployment, when the unemployment rate dips below 3.5% the government considers that full employment. Given our current reading we are less than 1.5% from that level. This news bears something to feel good about; it is a definite indication that the economy is really starting to pick up steam. However, as the labor market shrinks it will start to put pressure on wages and most likely will push wage prices upward. Even though I feel that we will see some upward pressure on wages, I really do not see any likelihood that will happen until later this year or perhaps more likely first part of 2007. More good news this month out of the retail sector, the consumer has returned to the game and spent lots of money during January and February of this year. The media blamed the increased consumer spending on unusually warm weather and predicted that over the next couple of months we would see a drop in consumer spending. They may be right; my thought here is that will not be the case. As we enter spring, the consumer will be buying clothes and a wide assortment of other goods as they always do as the change of season occurs. How strong will consumer sales be during the next couple of months, this will be dependent upon the goods being offered to them and more importantly the pricing and incentives that will be on the table. If the products are compelling and pricing is competitive the consumer will be there as always adding more debt on their credit cards. Respective to durable goods and large ticket items, incentives will be the key to how well sales do in this category. The car companies will need to be aggressive to keep product rolling off their lots; competitive pricing and finance incentives will keep the durable goods moving out the door as well. What can we expect from the economy over the next couple of months; more of the same as we have experienced over the first couple of months of this year. Energy prices, interest rates and the threat of hurricanes and other potential natural disasters or terrorist events continue to be a point of stress on the economy but their effect is becoming less prevalent. Expect slow steady growth, pending any major event we should have a strong first half of the year. Fed Watch New chairman on board, say song and dance from the Fed. Mr. Greenspan is out and the new Chairman is in and the rate hikes continue. It is expected at the March Fed meeting that they will raise the Fed Funds rate to 4.75%. Now many felt that this was not a certainty because the economy was showing some internal signs of weakness. However, given the latest economic reports and the trend downward of the unemployment rate, there seems to be no support for leaving the Fed Rate at the current level so expect an increase. The latest comments I have seen over the last month now indicate that the Fed will raise short term interest rates again at the May meeting by .25% which move the fed rate to 5%. At a 5% fed rate the prime rate would be 8% which historically has been a threshold at which the economy starts to turn soft. The largest group to utilize prime based borrowing is the small business sector. Given most of the short term borrowing is on a typical prime plus 2% this would push lending costs to 10%. One interesting comment I did hear within the last 30 days, several economists have the opinion that there is a high likelihood that the Fed will be lowering rates during 4th quarter of this year. I am not quite on board with this thinking but I would not total disregard it. Lending rates at 10% or above have always triggered a slow down in the economy so if history repeats itself then the Fed would have to react with lowering the Fed rate in order to prop up the economy. Industry Alert Corner Industry in the spot light this month, Animal Health Companies.
What is Animal Health, the sector contains a wide range of projects but predominately drugs. Does that surprise you? Humans consume truck loads of prescription drugs every day so why would it surprise you that we are pumping drugs into our pets. In case you did not know, Kansas City is home to the greatest concentration of Animal Health Companies in the U.S. and the list continues to grow. I was at a forum recently that highlighted this sector and found out that some of the highest rated college programs for animal health are located in Kansas and Missouri. These schools are graduating some of the brightest kids in the animal health field and that is drawing the companies into our area.
The growth in this sector is impressive, the market for pet drugs is on fire and the companies in this sector are growing at lighting pace. Some of the more notable companies who have a major presence in the KC market are; Bayer, Hills Pet Products and Fort Dodge. These are just some of the leading companies in the field of animal health that have a major presence in our market.
Now, if you are wondering what kind of products these companies are dealing with; it is all small box items consisting of pills and liquids. They are substantial users of warehouse space and transportation services and move lots of product through their supply chain. There are a variety of service opportunities with this sector so put some time in researching the sector to determine where your service would be a fit. This sector is sizable and is on path to double in size over the next several years. Manufacturing Sector
The manufacturing sector reported a 33rd month of continued growth. The sector improved in February comparative to January which was an indication that the economy is back on solid footing after a slight dip the last two months of the 2005. The February index reading was 56.5 which was quite a jump over last month’s reading. Most of the media have been reporting robust growth in the economy, this is mostly hype but given he data contained in this report this month the manufacturing sector is showing some very positive signs that the sector is performing well right now. I will be adding a new feature next month in this news letter, the LS Commercial Business Survey which will be similar to the ISM report but be regional in scope. I will have 25 of my clients participating in this survey each month (rotating this survey to different clients every quarter) covering a wide range of manufacturing, transportation and distribution companies. This will give me the opportunity to share with you information on how the national manufacturing sector is performing but also how the regional industrial sector is performing as well. I think this is very important because access to this information will allow you to get a feel for both the national and regional/local manufacturing and business sectors performance. The report was positive for the manufacturing sector, most of the key indicators were up, the manufacturers returned to building inventory again last month, new orders were up, employment was up and production jumped up in February as well. One point of concern in the report was supplier deliveries were down; this is raw materials and component parts supplied to the manufacturers. I am not treating this as any red flag event, this key indicator has been negative rather than positive for several months and I think is due more to innovation and better technology which is allowing the manufacturers to be much more efficient in producing their products. Some could look at this key indicator and make the argument that this is a precursor to slower production in the near future given the manufacturers are not aggressively ordering raw materials and component parts. I would not agree with this, if this was the case the inventory levels would be much lower than they are and plant capacity would be much higher. I believe the manufacturers are striving to achieve a balance between production/ inventory levels and new orders. To further support his position, inventory levels remain a hair over 30 days, this level compared to historical levels of 90 days of inventory indicate that the manufacturers are pushing hard to maintain this balance between production/inventory and new orders. It appears to be working so I would not assume we will see inventory levels rise much higher than 30 day supply until we have another spike up in demand. Key indicators in the report this month; New Orders were way up, Production was up, Employment was up, Supplier Deliveries were down and Inventory Levels increased slightly. One key indicator I always watch is back log orders, they were up again in February which is always good news and signals demand continues to be consistent. ENERGY SECTOR SPOTLIGHT Forget about predictions, there is absolutely no rationale in assessing energy prices because this sector is affected by predominantly non-economic stimulus. What do I mean by non-economic stimulus, the normal economic factors of supply and demand are no longer the driving factor in pricing. The major factors affecting pricing are; politics, weather, hedge funds and civil unrest in oil producing countries. All of these are non-economic based and are very much emotion based. The media makes light of these issues and then hype takes over which affects pricing. One big contributor to price instability is the activities of the hedge funds. These funds conduct speculative buying of oil and gas futures and artificially prop up prices. When will this end, I really have no idea. One thought here is that pricing will be unstable until supply gets to a point where the producers need to adjust price to move the product and the financial markets are unable to compensate pricing with over supply factored into the equation. Bottom line, I do not see things changing here for at least the first half of this year. I do believe that at some point pricing will come down, but that could be towards later this year or early next year. However, I could be all wet on this so your guess here is as good as mine. One interesting development in the energy sector is the governments push to develop alternative fuel sources. This has been mostly talk in the past with no action; however, there are no some real money incentives that the government has put out there to encourage more activity in this area. Look for the car companies to lead the way with hybrid vehicles that can operate on electric or other alternative fuel sources. Coal is already starting to make a come back as well. I heard recently that the U.S. has the largest deposits of coal in the world. There is something to think about. |
KC INDUSTRIAL REAL ESTATE UPDATEThe industrial real estate market during February continued to be active, as I mentioned in the last couple of newsletters, willingness to move forward and either purchase a building or lease space continues to be the difference in how the industrial real estate market is performing comparative to this time last year. I am seeing less and less hesitation by companies in the market interested in buying or leasing to complete transactions. After discussions with several of my clients, the prevailing difference this year comparative to last year is that their customer base is giving them firm commitments, which was not the case last year. Therefore, there is much less hesitation out there to complete a transaction and get on with business. The velocity of purchase and lease transaction continues to pick up, this is common given the activity naturally increases in the spring and summer months, however, it is much more active so far this year and I expect that to continue as the year progresses. Inventory levels for lease space will continue to be lower than normal, some new inventory in existing buildings will come on the market throughout the year and there will be some new buildings come on line this year as well in both the bulk (building size over 50,000 square feet and ceiling height exceeding 28 feet) and flex (building size below 25,000 square feet and ceiling height 18 feet or lower) product type. Lease rates on existing space will remain generally the same with some potential increase in the average lease rate which would occur in late 3rd or 4th quarter of this year. Look for lease rates in new bulk space to be slightly higher this year but the real change will be most will be quoted on a net lease basis comparative to a modified gross industrial lease basis. The difference in these two lease structures is how taxes and insurance are treated, in a modified gross industrial lease they are included in the base rent and the tenant pays any increases in taxes and insurance over the amount of these two costs when they signed the lease. In a net lease structure, the taxes and insurance are separated from he base lease rate and the tenant pays estimated payments each month for these two components with the Landlord reconciling the actual costs for taxes and insurance at the end of the year and then billing the tenant for any short fall in the estimated payments made throughout the year. Is there a significant difference in these two lease structure, some but the bottom line is the net lease allows the Landlord to recapture the tax and insurance costs quicker under the net lease structure. Generally, a modified gross industrial lease is more favorable for the tenant. If you are considering purchasing a building, inventory levels are slightly lower than compared to this time last year. Building prices have trended upward somewhat but more of a concern right now is interest rates. If you pursue purchasing a building, visit with your banker first. You can use some current inventory information to determine the price range of buildings in your target size. Your banker will be able to give you an idea of the payment amount based upon a target acquisition price. This is an exercise that I strongly recommend because it will go far in helping you make a good decision and understand the financial commitment involved in purchasing a building. I have no reason to believe that short term interest rates will be heading lower so this will continue to have an impact on the overall cost of owning a building. COMPANIES MOVING IN THE MARKET
· GREAT
AMERICAN BUILDING
· NORANDEX
· GOODALL RUBBER
· DR.
MCCULLOM 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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