LS Commercial E-News
March 31, 2008	Volume 1, Number 1
Economic Snapshots: · Unemployment 4.8% (National) · New Jobs for January minus 63,000 · Unemployment 5.7% (KC Metro) · Housing Permits       KC Metro area          down 20%       compared to       this time last        year            Quick Facts – KC Metro Area · Air Freight 21.5 million pounds  moved through KCI Airport during January            · Housing Permits in January – 380 units · Help Wanted down 10% compared to same time last year · Passenger Traffic moving through KCI January 2007-780,000 people January 2008-800,000 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 down · Inventories  down · Export orders down · Employment down · Production down · Supplier deliveries down · 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 03-10-08 - $3.819 03-17-08 - $3.974 03-24-08 - $3.989 Wheeler Downtown Airport – KC Number of Flights January 2007 – 7,000 January 2008 – 7,000	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. ECONOMIC STABILITY THAT IS THE REAL QUESTION The media is certainly having a hay day covering the economy. Every media outlet out there (TV, newspaper, internet, etc.) is pitching some position on the current status of the economy all of which is negative. So much information but nothing to really give us a clear picture of what reality is right now. I have been intrigued with the level of coverage the economy is receiving and rightfully so. The economy is one of the few things that affect all of us no matter who you are or what you do. What has been most interesting, in my discussions with numerous people over the last month, is the difference in opinion I am seeing. Though most of the people I have talked with feel that we are either in a recession or the economy is certainly very weak, the reason for the perceived economic problems varies widely. I have heard our economic challenges blamed on everything from the housing sector meltdown to our reliance on foreign oil or the effect of foreign imports. It is apparent that all of us are influenced by the media and what is happening in our respective industries. If you can get past the media hype and concentrate on the core economic data, you can get a much clearer picture of what is happening within the overall economy. The indicators do show the economy has slowed; there is no doubt about that. GDP (gross domestic product) growth has slowed considerably since the first of the year. GDP is the measure of the value of goods and services produced within the U.S., and is a direct reflection of the economy as a whole so there should be no question about the condition of the overall economy when you see GDP trending down. Current GDP numbers show us the overall economy has slowed. This is not what anyone wants to see, we all want to see positive GDP growth which equates to solid business conditions for all of us. However, our economy operates in cycles and we are experiencing a cycle right now. The question is, are things as bad as we are led to believe, my answer is NO. There are some positive aspects of the economy that will not be covered in much detail by the media. In case you did not notice some of these positives here are a few for you to ponder. · The housing sector continues to struggle; however, sales of existing homes jumped 2.9% in February which far surpassed previous forecasts. This is certainly good news and is an indicator that the sector may be nearing the bottom of the current down cycle. One interesting data point was, average housing prices continued to decline in January even as sales increased. I think we will continue to see more of this correction occurring, we very well could see sales of existing homes increase while average housing prices decrease. This is a clear indication that the revaluation of the sector will continue until housing prices reach equilibrium. This process is geographically based so we should not see this occurring nationwide, rather it will be localized to specific geographic regions. · The capital markets are starting to stabilize. Now, there is a long way to go but the residential mortgage sector is starting to get stitched up. The government has certainly been applying lots of focus on this sector. I think most of us fail to really grasp just how far they have gone to shore up this market. They are providing massive levels of capital to the mortgage providers to allow them to continue to make loans. Additionally, they have now effectively created a new secondary market for the mortgage providers to sell their mortgages and replenish their capital accounts. Despite what you call it, a bailout or an assistance plan, the government is quickly becoming the backbone behind the residential mortgage market. You and I (as well as the rest of the U.S. tax payers) collectively, are now backing most of the residential mortgages. Although I do not agree with this strategy, this action will shore up the market and stop further deterioration. The alternative would be to allow the free market system to function which would result in significant defaults which would have a negative impact on the overall economy. Given the governments action here, look for continued healing in this sector and a return to hearing some positive news about the housing market sometime later this year or early next year. It is safe to assume that we will see continued weakness from the overall economy over the first half of the year. Expect to see GDP growth between 1% to at best 2%. Do not be surprised if we continue to see negative job growth for the first half of the year. The monthly new job numbers will be influenced by large scale layoffs by the big boys which will we see an immediate impact of those layoffs in the monthly jobs number. Do not put too much credence in the jobs number right now, there is just too much maneuvering by large corporations that are responding to weaker revenue numbers so they are trying to get shore up their balance sheets by shedding staff to try and meet their quarterly numbers and protect their stock price. Hang in there; things are not as bad as you may think. The small business sector is holding its own and we will make it through this soft patch and get back to better economic times.  Fed Watch                                     The Federal Reserve has been working overtime to prop up the economy. They lowered the key Fed Discount Rate by .75% to 2.25% thus lowering prime to 5.25%. The consensus is that the Fed is not done yet; it is likely that they will lower interest rates again when they meet in April. The size of the cut is anyone’s guess but it appears likely they will cut interest rates by another .25% to .50%. All the data I have reviewed in the past month indicate that the fed has established a low water mark for the Fed rate at 1.75%. Now this is speculation on my part, but given their activity level since the first of the year it is likely they will give us one more cut and then take a breather for a while to see how their actions will affect the overall economy. If that is the case, prime should remain at 4.75% for some time. The Fed did not stop at lowering interest rates; they have been working hard to stabilize the financial markets. Given they are the gate keepers of the money supply; they have been flooding the financial sector with liquidity (money). They are now committed to plugging the hole and stopping the bleeding. They have started allowing non-bank financial institutions to come to the Fed to borrow money. It appears they are intent on doing what is necessary to calm the markets and get the credit system working again. Their actions are starting to work but it will take time. One area of the credit markets that has gone dormant is the mortgage sector. Yes, lenders are still loaning money to consumers to buy or refinance homes but there is no functioning secondary market for them to sell these loans and replenish their capital accounts. The typical mortgage company originates a loan to a consumer for a home. The mortgage company finances that loan with the use of a credit line or other arranged financing facility. Once the home loan is completed the mortgage company will sell that loan to another firm who intends to hold that mortgage for the long term. These firms (large funds) are the ones you have been reading about taking massive write downs for these loans. As you can guess, these large funds are no longer buyers of these mortgages thus forcing the mortgage companies to hold these loans, which is not the business they are in; they originate loans with the intent to sell them and not to hold them for the long term. This is at the root of the residential mortgage market problem at this time. The Fed has come in and intends to get this market moving again. How are they going to do that, they are providing a means for these large funds to off load their mortgage securities. The Fed is trading Treasury Notes for these mortgage securities which are backed by the home loans. What a country!! The funds trade low credit mortgage backed securities for the ultimate security a Treasury Note. In one move the companies have shored up their balance sheets by removing potentially bad paper for government paper. Now the government (or more correctly you and me) will assume the risk on billions of dollars in residential mortgages. What is the purpose of this action, to restart the mortgage sector. The Fed will get the desired result here, the mortgage sector will come back slowly but the cost in absorbing bad loans could get painful in the process. Although I do not fully agree with the Fed action here I do think a drastic action like this is necessary and will be better for the economy and all of us in the long run. Credit costs will continue to trend down and I do expect the bankers to loosen this up and start lending money again. Industry Alert Corner Industry in the spot light this month: Food and Dining Typically I highlight a manufacturing or related industry in this section but I wanted to talk about retail in this section this month. In addition to industrial property development, LS Commercial is active in the development of retail properties as well. As I talk with our property management division regarding the activities of our retail tenants, I have been paying close attention to our tenants who are in the food industry. As you may know, retail sales have not been lighting things up lately. Many of the large retailers (Target, JC Penney, Sears, etc.) have been seeing sales trending downward. The retail sector is closest to the consumer and has started to see the affects of higher energy and food prices. I am not saying that all retail sectors have been having a hard time, but there are certainly sectors of the retail industry that are. The one area of most concern for me is our food retail tenants. I am starting to see many of them start to have some challenges. The bottom line for them is that the consumer has only so much disposal spending dollars and that as their core costs go up (food, gas, housing) they have less of those disposable dollars to spend. A consumer who was going out to eat twice a week is now going out only once a week or every other week. Those sales are now lost and competition for those reduced nights out is fierce. I stress with our retailers to be aggressive in times like these, fight for those sales, and give the consumer a reason to come into their place of business. This all sounds good but in a lot of cases I am asking them to do more with less money, which is tough to do. I am starting to see the consumer take a small breather here, I do think it is just a short rest and we should see the consumer getting back to more typical spending later this year. In the meantime, keep a close eye on your clients in the retail sector. Things could get a little worse before they will get better. Manufacturing Sector The manufacturing sector gave back the gains the sector posted last month with an index reading for February of 48.3. An index reading below 50 indicates contraction within the sector. This reading is consistent with what I have been saying in this newsletter for some time, we will continue to see index readings range from 45 to 55 over the course of this year so the February reading is not surprising to me. Although all of the key indicators were negative this month with the exception of New Orders which increased, this was not alarming news. I know most would feel that this is just another sign that the economy is heading into the tank, but I am not in that circle of thinking. Yes, it is safe to say we are seeing some softness in the sector; that is expected given the challenges within the economy right now. However, I feel strongly that the softness will be short lived and we will start to see sustained strength return to the sector later this year. I have been busy talking with my manufacturing clients to see how they are doing. Many are reporting some slowing of activity but most are still positive and expecting that 2008 will be ok. Concerns many of them have, is the price of energy and raw materials. Finding and retaining employees is another concern I heard. This is the word from the street; it is not as bad out there as we are being led to believe. If you disagree with me on this I want to hear from you. I have been noticing an interesting trend that has been occurring over the last year. The statement that “manufacturing has left the U.S.” has been worn out over the years; that is all we have been hearing. I have noticed that manufacturing has been making an encouraging resurgence which no one is talking about. I first started seeing this in the specialty manufacturing sector, which is, very specialized products that are not a volume production item. The reason behind this is because those companies buying these products needed precision that could not be done offshore. Now I am seeing other manufacturing sectors adding plants in the U.S. such as; cars, trucks, construction equipment, motorcycles, pet food, animal pharmaceuticals and now airplanes. I am starting to see some limited media coverage on this. Their explanation is that the weak dollar is making manufacturing more affordable in the U.S. Yes, this is part of it, but a greater factor is that manufacturing in the U.S. is still more efficient and effective compared to other areas globally. Yes, it is still more expensive to manufacture products in the U.S., on average, but many companies are finding that the higher cost is offset by the efficiencies and the quality of the products produced in the U.S. I may be the only one out there seeing this trend but nonetheless it is there and I strongly believe that we will see this continue.   We can expect more of the same for the next several months for this sector so buckle up and hold on it will get better. ENERGY SECTOR SPOTLIGHT I am not hearing anything that is leading me to believe that gasoline or diesel prices will come down anytime soon. As I have told you in previous newsletters, I have really struggled to understand what is going on with energy pricing. I am getting to a point where I am starting to see the bigger picture here and the more closer I get to really grasping what is at hand here the more I am determining that the energy sector is not being significantly affected by supply and demand. Here is what I mean by that, oil is traded in U.S. dollars. When the dollar falls in value the price of oil increases to offset the loss in value. This is the short answer but it is a significant factor in the price of oil. While the government continues to stay the course on a weaker dollar policy, we can all expect to see oil prices remain high. When I said supply and demand were minor factors, they are not the driving force behind pricing anymore. If supply and demand were driving pricing we would have seen prices come down as demand is flat and supply is up. By the way, if you ever hear someone talk about supply and demand you are going to hear how China and India will be putting vehicles on the street in record numbers and will be taking most of the oil supply. Although that might be true someday, someday is still a long way away so to use that line is nothing more than pumping up emotion. Alternative energy took a hit in the last 60 days as some promising ethanol producers threw in the towel and closed up shop. They are blaming the high cost of corn for their problems which priced their profits out of the equation. I do not know where things will shake out in that industry, it will be interesting to see how the government reacts as these producers continue having problems. Keep in mind, the government has piled on a whole host of incentives and tax breaks for the alternative energy industry, I am anxious to see what their next step will be.
	KC INDUSTRIAL REAL ESTATE UPDATE I was meeting with a client this month and he was very interested in how the industrial real estate market was doing. He is in the service sector and works with large companies in corporate America. When I told him that the market was doing well he was surprised. He said that he was starting to see some of his clients slowing down. Keep in mind, he is working with large companies and does not have much exposure to mid sized or smaller sized companies. I told him that the mid sized and smaller size companies were very active right now and that we are seeing a much higher level of activity within those two sectors compared to this time last year. The activity within the industrial real estate market in KC continues to remain solid. I am seeing much greater activity in the mid to smaller size square footage requirements since late last year. The most active size ranges in the market right now are for space sizes from 5,000 square feet to 25,000 square feet. There are a number of companies in the market right now for this size range of space. Space sizes over 50,000 square feet are seeing less activity. Given the fact that space sizes of 50,000 square feet and up are typically pursued by the larger corporate users, the fact that we are seeing less activity there is evidence that the larger users are taking a step back right now and sitting on the side lines waiting to see what future economic conditions will look like. I expect to see continued activity in the smaller size range of space throughout the remainder of the year. Development of new facilities to meet these size requirements is occurring, but not with any significance so inventory levels will remain limited during 2008. Mid size space inventories will be increasing and there will be some very attractive deals from a tenant perspective. Expect lease incentives for space sizes in excess of 40,000 square feet to include 1-3 months of free rent plus some level of tenant improvement allowance. Lease rates across the board will remain flat to slightly up. Expect to see new building activity occurring in Lenexa, Shawnee and Olathe on the Kansas side. On the Missouri side, KC North, Eastern Jackson County, Lee’s Summit and KCI area will see new construction activity. Those companies out in the market looking for a building to purchase will continue to have good inventory levels to choose from. Pricing has not come down at this point and I still believe that the overall market pricing is still too high. We could very well see some decrease in pricing during the year, but you just need to be very selective and have patience in order to position yourself for a reasonable buy. Interest rates will continue to trend down, so throughout 2008 we will have a good buying environment. I have spoken with some companies recently who are not following a proper process in acquiring a facility. If you are actively looking to buy a facility, you must do the proper due diligence on that facility prior to completing the acquisition. I will cover this process in detail in the next newsletter so if you are thinking of buying a building you should study the contents of the newsletter next month and follow that process. It is better to do your homework up front and avoid a potential problem, then figure it out after you have purchased the building and find out you have a significant cost to correct something you missed going in. COMPANIES MOVING IN THE MARKET IFCO SYSTEMS                          81,500  SF     KC, MO SURFACE SOLUTIONS               23,700  SF    LENEXA, KS NOSTRUM LABS                         79,138  SF    KC, MO AVERY DENNISON CORP            74,880  SF    RIVERSIDE, MO 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.