LS Commercial E-News
May 9, 2008	Volume 1, Number 1
Economic Snapshots: · Unemployment 5.2% (National) · New Jobs for March minus 80,000 · Unemployment 5.3% (KC Metro) · Housing Permits KC Metro area down 60% compared to this time last year Quick Facts – KC Metro Area · Air Freight 20 million pounds moved through KCI Airport during February · Housing Permits in March – 390 units · Help Wanted down 20% compared to same time last year · Passenger Traffic moving through KCI February 2007-780,000 people February 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 4-14-08 - $4.059 4-21-08 - $4.143 4-28-08 - $4.177 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. WHAT TO EXPECT NEXT If you are not confused about the state of the economy, you are in the minority. Just about everyone I have talked to about the economy over the last month feels we are in a recession. Times are bad and probably getting worse. I cannot stop at just a simply answer like that, I always dig in and want to know why they feel that way. The answers varied widely but no one really pointed to any solid reason why they felt we were in a recession. The most prevalent answers were high gasoline costs and because the media experts say we are in a recession. This is the common problem in our society; emotion, someone starts an opinion and next thing you know the band wagon is loaded with everyone jumping on and accepting that opinion as fact. Do some research here, read something more than your local newspaper or go beyond what you hear on CNN or CNBC. The answers are there, you just have to look and listen in the right places. Start with the Federal Reserve, they have a web site and they openly give their views and the basis for their position. There are several other very good economic based web sites along with the Wallstreet Journal. If you look past the emotional position that is prevalent right now, you will see that economic conditions are not as bad as we are being led to believe. Based on my research and what I hear from the street, here is where I am on the economy. Yes, the economy has slowed considerable but it has not stopped. The overall economy will grow this year, but the first half of the year we will see minimal growth in GDP, somewhere between 0.5% to perhaps 1.5%. That is slow compared to what GDP has averaged over the last few years, but nonetheless it is still growth. The second half of the year will be better; everything I have seen thus far leads me to believe that we will see GDP growth over 2% for the last half of the year. That is respectable and is certainly good news. Regarding recession, the economy is recessionary right now, meaning overall growth has slowed considerable. This is different from the media screaming “the sky is falling”, there is no reason to panic here; it is a slow down nothing more and a slight one at that. Yes, there is a lot of pressure on the economy; the housing market continues to struggle, gasoline and diesel prices are out of sight and food costs are nearing all time highs. This is having a negative effect on the consumer; however, is this a surprise anyone? This should not be, what did everyone think; the consumer would just keep on spending money with prices heading through the roof on their most core expense items. The short answer here is that the consumer is pulling back on spending; the question is will they remain on the sidelines. Who really knows, I have had a lot of comments from people indicating they are going to cut down on driving and cut down on food purchases. Nothing new there, you could expect that. Demand for gasoline has been trending downward since December of 2006 so this is not a new information item. Food is different, the average consumer will not reduce the overall amount of food they purchase; however, their purchasing decisions will be more heavily influenced by individual product costs. People like Kellogg’s will start to see the consumer pick a generic brand of cereal instead of the higher priced corn flakes. This will be the only real change in food sector. Having said all that, I have reviewed a lot of economic data over the last month and there are sectors of the market that are performing poorly and some that are doing very well. Financials & retail are feeling the pain right now; these sectors are very soft right now. Meanwhile, the Agricultural & Technology sectors are on fire and dong extremely well. What is interesting right now is that there is level of balance within the overall economy for sectors doing well and those doing poorly. So to say the overall economy is in the tank is wrong, there are sectors that are seeing great times right now. What to expect next, I am an optimist so I believe better times are just a month or two away. Keep in mind, the government is putting our money to work and pushing it back into the economy. The rebate checks will start hitting the consumer’s pocket book starting in May and if you are listening closely to the leading politicians including the President, they are all saying the same thing, “get out there and spend that money as soon as you get it”. Hey, it’s the American way, cash burns a hole in most Americans pockets so expect 2^nd quarter results to reflect a boost from these rebate checks. Fed Watch The Federal Reserve continued to work its magic in the financial markets. They continue to provide liquidity to the financial markets which has gone far to stop the free fall which has been occurring. Finally there seems to be a light at the end of the tunnel and the financial markets are starting to stabilize. Are they back to normal, far from it, but at least the bleeding has stopped. The Federal Reserve will be meeting at the end of April for an Open Markets Meeting which is when all of the Fed Governors convene for a meeting to discuss monetary policy and set interest rates. It is expected that the Fed will deliver another cut in interest rates. The consensus is leaning towards a .25% cut which would lower the Fed Discount Rate to 2% and prime would be adjusted to 5%. Enjoy this rate cut; it may the last we see for a while. Word on the street is that the Fed will take a breather after this rate cut and turn their attention towards inflation and the weak dollar. I would not disagree with this move if that is in fact what they will be doing. Although I am a strong advocate for low interest rates, I think they have given us enough for now and can take a break as long as they issue a position that they will move quickly in the future if the economy needs a nudge. At this point, I do not think they have any choice but to focus on inflation and the weak dollar. I do not see inflation as a big problem right now, we really are only seeing inflation in energy and food. The bigger problem is the weak dollar, they need to attack that issue. That process is already starting to happen; several European Union members have indicated they will start to support the dollar again. I noticed in the last month that Fed officials are commenting more and more on the dollar and the need to stop further weakening. What I see at this point, leads me to believe that over the next 6 months, the Fed will start to bring the dollar back to life and gradually strengthen the dollar over that time period. What does this mean, for one, as the Fed strengthens the dollar you will see a direct impact on the commodity markets. The bottom line here, as the dollar increases in value, oil prices will decrease in direct relation to the dollar’s increase. It is a good idea for the Fed to complete this process over a period of time instead of a shot gun approach. The commodity market will start to move downward and this will allow those invested in the commodity market to exit in a timely fashion and not create another market blowout. If this in fact occurs, this is great news for the consumer and for the economy. The cost of both food and fuel will start coming down and take the pressure off the consumer who can then get their check book back out and start spending money again. The economy will return to more normal growth levels, the sun will start to shine again and everyone will get back to being in a good mood. Cross your fingers, let’s hope I am right!! Industry Alert Corner Industry in the spot light this month: Agricultural I am highlighting the front end players in this sector. These are the companies that provide the base products that allow the farmer to produce food. Some of the more notable companies in this sector are Monsanto, Bayer and ConAgra. These companies are involved in providing a wide range of products that support the food industry such as; seed, chemicals, fertilizers, pesticides and much more. They are the backbone of the agricultural industry and without them the farmers would not be able to produce food at the level they do. Sounds pretty boring, but if you have not looked at this sector lately you will be very surprised with the numbers this sector is pumping out. The companies operating in this sector are all doing very well and the future horizon looks like continued growth. As most of us have heard, food prices are at all time highs as is demand. The farmers cannot grow their crops fast enough and they have lots of outlets to sell. The American consumer being one, but exports are at an all time high as well and lets not forget the alternative fuel producers who are gobbling up a lot of food product as well. This trend will continue so get in the game here and start looking at companies in this sector. As always, with any sector there are a whole host of business service opportunities with companies in this sector. I do not see any slowdown in this sector so get on board here and start pitching your service to this sector. Manufacturing Sector Another challenging month for the manufacturing sector, although the performance was not as weak as February, the index reading for March was 48.6 which still showed contraction within the sector. Should we worry about the fact that the manufacturing sector continues to contract and not expand. I would not put much time in worrying about this. The reading was right in line with where I thought the sector would be for March. As I said in previous newsletters, I fully expect the index readings to range from 45 to 55 over the next several months so the reading for March is right in line with where I thought the sector would be. Yes, there is some softness within this sector but not to the point of concern and I do expect to see better numbers out of the sector over the next several months. Most of the key indicators were negative this month with the exception of Back Log Orders, Employment, Supplier Deliveries, Customer Inventories and Exports. The fact that Back Log Orders increased along with Employment and Customer Inventories is a very good sign. This is a sign that orders are not as weak as the numbers may show and that the manufacturers are seeing something on the horizon which triggered an increase in employment. Finally, end user customer’s building inventory is a great sign, their activity is a direct connection to what is happening on the street given the fact they are building inventory, it is an indication they are seeing some strength in their client base. I know there is a lot of negative news out there, but do not fall victim to this negative position. The manufacturing sector is solid and I do not see anything that is leading me to believe that we will see extended poor performance from this sector. Keep in mind, despite what you hear; the U.S. is in resurgence from a manufacturing perspective. News of the Canadian based aircraft manufacturer (Bombardier) considering several sites in the U.S. and more importantly KC, is further support to my belief that the U.S. continues to be of interest for new manufacturing facilities. The sector will get through this soft patch just fine and we will see strength returning to the sector as we move into the second half of this year. ENERGY SECTOR SPOTLIGHT Gasoline and Diesel pricing continued to rise along with oil which set record levels during the month. I had stated in previous newsletters that I felt that pricing for oil and fuel were no longer affected by supply and demand factors. I know that many of you believe what you hear in the media, that globally the demand for energy is going up and that thousands of people in China and India are buying cars and are sucking up most of the oil supply. Here is some evidence to support my position; recent information released by the U.S. Department of Transportation show a significant decrease in the demand for gasoline, here are the numbers by region of the country; WEST -3.5% NORTH CENTRAL -5.8% SOUTH GULF -1.8% NORTHEAST -6.0% SOUTH ATLANTIC -2.8% These are telling numbers, this is a comparison for the period from December 2006 through December 2007. The data shows a clear indication of a slow down in demand for gasoline. Keep in mind, the price of gasoline has increased significantly since the first of the year which most likely has created a further decline in demand. The question becomes, if demand is slowing as the data confirms, why is the price continuing to increase. The issue here is that the commodity markets are out of control and speculators are now controlling the price and not the supply/demand factor within the market. It will be interesting to see how long this cycle will continue. I had an interesting discussion recently with a business owner whose business is not directly affected by fuel pricing. He was upset about the continued increase in pricing (as are all of us). His simple take was that commodity pricing at these levels was not sustainable and that the bottom will fall out of the market in the near term. He really had nothing to support his belief other than his opinion, but I do agree with him. However, my position here is based upon the fact that demand will continue to decline and the oil companies at some point will be forced to decrease prices to bolster demand. This is a simple position, but I do not believe this is complicated, it is simple economics. The question is, at what point will pricing start to come down. Will it be forever tied to oil pricing? That is another whole segment; I have a lot of comments on that one. The bottom line here is that we continue to see gasoline prices increase. When I looked in the crystal ball recently, it was pretty foggy on this issue so I have no idea when we could see gasoline prices stabilize or even start to come down. I do expect for gasoline prices to trend lower, but that will happen when the pain from declining demand gets bad enough to get the oil companies attention.
	KC INDUSTRIAL REAL ESTATE UPDATE The KC industrial real estate market remains solid. I know that you are reading about how bad the economy is and all the challenges out there. However, I am not seeing much of any slow down in the industrial real estate market. I was talking with a client recently and we were discussing the health of the business market in general. I told him that I was seeing activity from local and regional companies much more so than the large corporations. I am seeing some slowdown from companies at the larger end of the scale but the mid size and smaller sized companies are still very active. Flex warehouse continues to remain solid. Vacancy levels continue to remain below 10% and lease rates are increasing slightly. Vacancy levels for bulk warehouse remain sub 9% and I do not see any change during the year. Lease rates will remain stable and but there is a possibility that lease rates could increase slightly for this sector. I mentioned in the newsletter last month that I would dive into greater detail the process for acquiring a property. I find that many companies and individuals do not complete sufficient due diligence prior to acquiring a property. The first question that I hear is why do I need to do all of this research to buy a property? The quick answer is that you must be assured that you are not buying into a problem that could cost you far more than the price of the property to correct. Most buyers take the Seller’s word regarding the condition of the property and the status of any environmental or title issues. The cardinal rule, information from the Seller is just that; information, and not to be treated as fact. Here are some very direct steps that you need to take prior to completing the acquisition of a property. These are considered part of the due diligence process. 1. Seek the guidance of a professional commercial real estate broker. You might think this is a lay up for me to say, but the bottom line is that the typical buyer is not immersed in the commercial real estate industry everyday and needs an advisor who is plugged in to the market. The broker will provide detailed information on market sale comparables, general activity of the area in which the building is located, zoning information and a whole host of other information that will be critical in determining the price at which the buyer should purchase the property. 2. Retain an experienced professional attorney who practices real estate law and real estate transactions. The attorney should be on board prior to making an offer on a property. The attorney should be involved in the formation of the purchase contract. The attorney will be very involved throughout the entire process. The attorney will create the real estate purchase contract, review material documents associated with the transaction such as; title policy, survey, deed, environmental report, etc. Also, the attorney will research the current zoning class for the subject property and confirm that the property is zoned to accommodate your use. Should you decide to close the sale transaction; the attorney will prepare all closing documents and assist with the closing process. The attorney is vital to the transaction and no one should attempt to purchase a property without the assistance of an attorney. 3. Preliminary items to procure; Title Work, Survey and Environmental report. These are a critical part of the due diligence process. The title report is provided by a title company and shows the buyer a complete summary of all items that affect the subject property that are of public record. This is the first step in the process to obtain title insurance and is a critical document to obtain. The title work will allow the buyer to determine if there is anything that would “cloud” the title such as; mechanics liens, easements, encroachments, judgments, etc. This will also verify that the Seller actually owns the property as represented. The title policy will ensure your ownership at closing. The survey is critical as well. The survey that is most effective is an ALTA “as built” survey. This defines the property boundary, confirms the size of the parcel and any improvements, identifies all easements, shows all utility line locations and generally shows you everything that is happening on the property. This is the most effective survey and should always be a part of this process. Finally, the environment report is a must to have as well. The most typical report is a Phase 1 Environmental Report. The environmental engineer completes an extensive review of the property both physically and historically. The report is extensive and will contain a determination from the environmental engineer as to the environmental condition of the property. 4. Inspections, this is the physical inspection of the property. The inspections will include assessing the following; structural stability of the building, electrical & mechanical systems within the building, heating and air conditioning equipment, roof and parking lot. You should utilize professionals in these fields to complete the inspections to determine the condition of the property. Buying a building or raw land site is no easy task. Many believe that the process is simple and without issue. I have seen far too many instances where a company or individual who has not followed the steps listed above, completes a purchase of a building or raw land site only to find out that there are significant issues with the property post closing. Making a purchase is a major commitment and should be treated as such. Doing your homework up front will result in a successful transaction. The goal here is to know more about the subject property than the Seller, prior to closing and eliminating any surprises that would result in increased costs associated with the ownership of the property. If you would like more detail on this process or have further questions, please do not hesitate to call me at 913-681-5888 or send an e-mail to licausi@lscr.com. COMPANIES MOVING IN THE MARKET INGERSOLL-RAND 15,000 SF KC, MO BEST BRANDS 98,000 SF BONNER SPRINGS, KS KC DIGITAL PRESS 22,000 SF NKC, MO EIS, INC. 15,360 SF NKC, 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.