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APRIL 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.
Snapshot – Manufacturing Sector
Cost breakdown at the pump for diesel fuel Taxes – 19% Distribution/Marketing – 15% Refining – 14% Crude Oil – 52%
DIESEL PRICING
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Paul Licausi, President of LS Commercial Real Estate, is providing this Newsletter to you free of charge.SOLID OR SHAKEY GROUNDAfter outstanding news coming out of year-end 2006, the economy is starting to show some signs of sluggishness as we head into 2007. Watching all of the media coverage, it is difficult to get a grip on just where the economy is going. One day the economic news is positive and the next day there are predictions of a recession later this year. The media, as I have always said is selling hype, relying on the nightly news for the health of the economy will do no more than confuse you. I always look to some key indicators, which help me understand where the economy is heading and what to expect in the coming months respective to overall growth. Given that, here is what my take is on economic performance over the remainder of 1st quarter and into 2nd quarter. Slow steady growth, I have said this in the last two newsletters and I will continue to maintain this position. You may be wondering why I am maintaining this position. Here we go, key indicators are the crystal ball we should all be looking at, tops on the list is consumer spending which continues to remain steady. The consumer is king in this economy, if the consumer is out there spending money we will see economic growth, if not then you and I need to hold on because the ride will start getting rough. Looking forward at the trend in consumer spending, the outlook is positive. Personal income continues to increase which has been the trend for the last 8 months. As long as personal income continues to rise or remain stable the consumer will continue pumping money into the economy. Other key indicators to watch are energy prices, the housing sector and the manufacturing sector. There are several other indicators but watching the sectors I have mentioned herein will give you a good look into economic conditions. Comments on these sectors; energy prices will remain towards the high side of the pricing range but should not be a drag on the economy as was the case during 2006. The housing sector will continue to be soft, average home prices across the country have been falling. Is this bad, it is if it the value of your house is dropping? Does this have an effect on the overall economy, you bet, the most significant impact would be a negative effect on consumer spending. Thus far, this has not been the case and it appears the housing sector has reached the bottom of the cycle and has stabilized. Inventories of new homes are coming down which is the first sign that we could see better times ahead for this sector. Do not expect too much from the manufacturing sector, this sector will struggle throughout the year but we should still see some growth during the year. Here is the bottom line, we will see slower economic growth during the year, but nonetheless it will be growth. Is there a chance we could see a recession some time this year, I really see no chance of a recession but the Fed could be the wild card here. If the Fed increases interest rates this year, then there will be a real risk of stalling out the economy. I have not heard anything coming out of the Fed that would indicate that they feel there is a real need to raise rates; their position has been to remain neutral and maintain the status quo. FED WATCH Interesting month at The Federal Reserve, Chairman Bernanke spoke several times during the month reassuring congress and the market that the economy is not ready to fall of the edge of a cliff. The Chairman noted that weakness in the housing and automobile sectors was not as sever as first thought and that the housing sector was showing signs of stabilizing. Several other Fed Governors spoke during the month, all singing the same tune. However, former Chairman Greenspan spoke during the month as well; he has become the wild card in this economic game. In a speech to a high-powered group economist, he stressed the real possibility for a recession late in 2007; yes, later this year. His view is totally divergent from the Fed Board. They are very comfortable with the state of the economy and do not agree with his view of a coming recession. Be that as it may, Mr. Greenspan’s comments sent the financial markets into a panic and the DOW went into a nosedive and dropped close to 500 points in one day. Don’t kid yourself, even though he is no longer sitting in the big chair, this guy is still extremely influential and his comments can still move the markets. Chairman Bernanke countered Mr. Greenspan’s comments and reassured the financial markets that the Fed does not share his same view. Additionally, one of the influential Fed Governors spoke late in the month and stressed that the Fed is ready to step in quickly if they need to in order to adjust monetary policy to shore up the economy. For the moment, interest rates will remain stable so do not expect any movement in the prime-lending rate. Unless something substantial occurs with the economy, the Fed will sit tight and take no action one way or the other. I really do not see any chance of an interest rate adjustment until late summer. If there is an adjustment, there is a much greater chance that the Fed will decrease interest rates. INDUSTRY ALERT CORNER Industry in the spot light this month, Transportation. In case you are not aware, the BNSF railroad will start constructing a new rail hub in Gardner, Kansas in 2008. In studying this project, I was very amazed at the changes in the freight industry. The BNSF is responding to a shift in the way freight is being moved in the U.S. today. The railroads are quickly coming back into favor again. Once known for transporting large bulky materials, they are now moving more trailers across the county than are moving over the highways in a standard over-the-road truck. Why the shift? It all begins with materials, which is the products being delivered. These products, once manufactured in the U.S. are now being manufactured overseas. This is old news, however, given the fact that these materials are now coming in on a TEU (twenty-foot equivalent container) container which is stacked on a large ship along with thousands of other TEU’s arriving at a U.S. port, the game has changed. These containers are now off loaded at the port, stacked on a train and moved inland to a rail hub similar to what BNSF will be building in Gardner, Kansas. The fundamental shift is that more freight movement across the country will be via rail than standard truck. This was hard for me to believe at first, but once I studied this in more depth, the numbers do not lie. The number of TEU’s coming into U.S. ports is growing significantly. What do I call significantly, how about 50%+ per year. It is off the chart, and I might mention inbound traffic into the U.S. is expected to continue to increase. Growth in the railroad sector business is not coming from their standard product base (agricultural, aggregate and coal) but TEU movements. This is why these rail hubs are starting to pop up. Major rail hub development is occurring in Chicago, Dallas and soon to be Gardner, Kansas. What does this mean for us business people, why would we care about this, most of the TEU containers are for large corporations and not mid to small business. As always, I like to try and identify a trend early, I believe that this will create a number of service opportunities in many different sectors. Just to name a few; you transportation providers, their will be a number of new service opportunities for you as the BNSF operation comes on-line. You have no idea how much merchandise will be coming into this hub which will all need to be delivered to the end user. I see opportunities for material handling providers, security providers, construction services, just to name a few. The fact that this shift is occurring now, you should jump on this and find out if you can plug your service and realize some new revenue. MANUFACTURING CENTERSuffering a setback last month, the manufacturing sector got back on a positive course again during February, moving back to an expansion mode. After a poor performance in January, the sector had a nice surge in activity during February. What happened that pushed the sector into an expansion mode again. There was a jump in new orders and production. As I stated in last month’s newsletter, the manufacturing sector had been slowing production over the last several months and reducing inventory levels. I noted that maintaining historic low inventory levels was not sustainable long term given any increases in new orders. Well during the month of February; there was an increase in new orders (up 4.6%) and the manufacturers responded by increasing production to bolster inventories. When the sector jumps up production, there are other key indicators that are affected as well. Employment is almost always affected; during February the manufacturing sector employment increased 1.6%. This is all good news for the sector and we should see more of the same during the coming months as well. Now, this was certainly good news, but don’t jump up and down yet. As I have said before, we will see this seesaw effect for most of this year. The PMI index for February was 52.3%, which indicates expansion. Keep in mind that any reading in the index over 50% reflects expansion; anything reading below 50% indicates contraction. I still believe that we will see the index averaging from 48% to 54% throughout the remainder of this year. The sector will remain sluggish and will mirror the performance of the overall economy. Given many economist last year predicted we would be heading into a recession at this time in 07, this outlook for the sector is certainly welcome and is diverse from the predictions levied last year. Results from the key indicators in February we much better than last month but still the sector are fighting to keep moving forward. New Orders, Production, Employment, Prices and Backlog Orders were up. Also showing an increase were both Manufacturers inventories and Customers’ Inventories. This is a sign, that both the manufacturing level and distributor level are increasing inventory levels, which is a welcome sign. The only indicator that was down was Supplier Delivers, which was only down slightly and should have a better reading next month given the increase in both new orders and production. ENERGY SECTOR SPOTLIGH Oil prices spiked during the month and heading past $60 per barrel before dropping down into the high $50 dollar per barrel range. This is going to be the norm for the next several months; we will see oil jumping up and down moving in a range from the low $50 per barrel range to the low $60 dollar per barrel range. I really thought that we would see some price relief in oil but it appears that the traders will not let the pricing come down below $50 per barrel. What does this do for gasoline and diesel, pricing for these fuels will follow the same up and down price movement as oil. My guess is we will see lower pricing during March, April and into mid May. Once the summer travel season starts, gasoline prices will start to trend upward. Respective to Diesel, depending on how quickly the low sulfur fuel is introduced into the system this will put pressure on pricing as the low sulfur diesel is a more expensive product. Many of the states are moving towards requiring low sulfur diesel in an attempt to cut emissions, but this will be a slow process to switch over from the current diesel fuel product. Energy pricing for electricity and natural gas continue to be stable, keep in mind that most of these products are regulated and the utility providers must apply to the State public service commissions for rate increases. This has allowed stability in pricing for electricity and natural gas, however, I have noticed most of the utility providers I have been watching are stepping up to the plate and asking for rate increases. Even if approved, pricing will only increase slightly. Overall, nothing new to expect in the next 60 days respective to energy prices. Your best weapon here is to aggressively manage your company’s usage and look for ways to minimize that usage as best as you can. |
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Interesting start for 1st quarter of 2007, lots of activity in the market, which has been well above the pace compared to this time last year. I wondered why the change in activity, there was much more hype regarding the economy last year, yet this year is much more active than last year. I have noticed significantly higher confidence in the business climate from the prospects out in the market and from my clients as well. Business is good thus far and there seems to be some real stability. One thing I watch, respective to companies in the market looking for space, is the basis behind that need. Two simple things I look for; are they expanding or contracting. This helps me get a feel for the overall market and where it is going locally. So far, the companies looking to expand represent 80% of the prospect base I have seen in the market place. That leaves 20% looking to contract (smaller space to downsize). This is a very positive sign and shows a great deal of confidence out there, which is a positive for all of us, real estate people. Looking at the real estate market data, several interesting points, even with all of this leasing activity, the inventory of available space has actually increased. Second generation space (older space) made up the balance of the increased inventory. This space is older space and typically less efficient space than newer space but has an appeal because of lower lease rates. This is a clear indication of increased movement within the industrial real estate market. Lease rates have increased slightly, overall for bulk warehouse product (18 foot or higher warehouse ceiling height, 10,000 square foot spaces or larger) lease rates are up slightly. I do expect for lease rates to continue to increase but at a slow pace. Lease incentives are all but gone. I am not seeing any tenant improvement allowances offered, minimal free rent if any and very little movement from the quoted lease rate. Now, is there any way that you can achieve some incentives from a Landlord, here is where you get the inside scoop from a Landlord’s perspective. Some very important points for most Landlord’s; length of lease, financial stability of the Tenant, the improvements requested by the Tenant are they beneficial to the space or are they very specific to the Tenant’s operation, principles guarantee of the lease or corporate guarantee of the lease and investment in the space by the Tenant. Most prospects when approaching a Landlord to lease a space ask the Landlord to pay for all improvements needed to the space by the Tenant, ask for a short lease term and then want to limit in every way any financial risk respective to the lease. Now no Landlord begrudges a prospect from asking for everything. However, it does not allow for much a foundation for a positive lease transaction to occur. If you have identified a space that works for your operation, the best way to approach structuring a fair lease agreement is to recognize the Landlord’s focus points (which I listed above). You are going to have a much greater likelihood of achieving an advantageous lease structure if you consider things like offering a longer lease term (at least 3 years, 5 years is much better). Additionally, If you are requiring Landlord to pay for improvements within the space that are for your operation, show willingness to pay for a portion of those improvements, this goes far with most Landlord’s, they have great comfort knowing that the Tenant has some skin in the game. Finally, regarding the topic of a personal or corporate guarantee of the lease, keep an open mind here. It is unreasonable to assume, that if the Landlord is being required to invest in improvements to the space for your use, that the Landlord receives no financial commitment beyond just signing the lease. Think of this investment as a loan because that is exactly what tenant improvements are; they are alternative financing for the Tenant. Given you follow my suggestions, you will find that you have a much better opportunity to structure a lease that will allow you to obtain more advantageous lease terms, and by the way the Landlord will be happy as well. Put these two ingredients together and this makes for a successful long-term relationship. Keep in mind, the real work starts after you move in to the space, you will living with this Landlord for several years so it is best to start things out on a successful note, it will make the rest of the deal go smoothly. If you are interested in acquiring a building, no real change from my comments last month. Pricing has been holding steady ($30 to $40 psf depending on the building type and location); inventory level of existing buildings remains unchanged so no real movement one way or the other in this sector of the market. Expect interest rates to be stable into 2nd quarter of this year, I do not anticipate any interest rate risk. An owner/user is still on the top of the wish list for the bankers so access to capital should not be issue. For small business owners who are interested in buying a building, spend some time talking to your accountant and lawyer to determine the best structure for you to own a building. I always encourage small business owners who want to buy a building to purchase the building personally (using a Limited Liability Company structure) then lease it back to the company. This will allow you to use this structure as a retirement vehicle in the future. A small business purchasing and owning real estate corporately will make far less return on that invested capital as compared to investing that same capital and putting it to work internally within the business. 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. |
