|
Economic Snapshots:
·
Unemployment 5.2%
(National)
·
New Jobs for April minus
20,000
·
Unemployment 5.5% (KC
Metro)
·
Housing Permits
KC Metro area
down 60%
compared to
this time last
year
Quick Facts – KC Metro Area
·
Air Freight 21 million
pounds moved through KCI Airport
during March
·
Housing Permits in April
– 400 units
·
Help Wanted down 40%
compared to same time last year
·
Passenger Traffic
moving through KCI March 2007-950,000 people March 2008-950,000 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
flat
·
Inventories down
·
Export orders up
·
Employment down
·
Production up
·
Supplier deliveries up
·
Prices up
·
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
05-12-08 - $4.331
05-19-08 - $4.497
05-26-08 - $4.723
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.
NOT OUT OF THE WOODS YET
I continue to be encouraged by the economic
data that I am seeing regarding the health of the economy. Despite the
continued insistence by the media that the economy is in the tank, economic
conditions are improving. GDP results continue to show the economy is growing
and we should see the momentum continue to pick up over the next several
quarters. The financial markets have generally stabilized and we should start
the feel the effects of the government stimulus checks over the next several
months. All positive things to focus on but even with this good news we are
still not out of the woods yet on the current economic slowdown. The housing
market continues to struggle. Residential real estate values have not yet
stabilized and we are still seeing average home prices decline. Unemployment
has started to tick upward and we will most likely see this trend continue.
We could see unemployment reach as high as 5.7% this year which was the
latest forecast from the Federal Reserve. I do not share this belief,
although I do think that we could very well see unemployment average above 5%
for some time this year, I do not think it will reach the high water mark the
Fed has forecast. Finally, energy and food prices continue to be a source of
irritation for everyone.
There you go, I have given you the
positive and the negative, you choose which of these you want to ponder on. I
will choose the positive, I think the gray clouds are starting to get thin and
the sunshine is right around the corner. Now, with all my optimism I am not
just a wishful thinker here. One thing that remains undetermined is how the
government stimulus checks will impact the economy. I have heard some media reports
on this but I never heard what the actual size of the stimulus was, when I
finally researched the number it was staggering. The total sum of the rebate
checks will be $115 billion, yes I said billion. The government has cut first
wave of checks which amounted to $50 billion which is expected to be fully
distributed by the end of May. The remaining $90 billion of the rebate checks
is expected to be distributed by the end of June. Now, the key here is how
much of that money will make it back into the economy. The consensus is that
on average a person receiving a rebate check will spend 40% of the rebate
check meaning that we should see roughly $46 billion moving through the
economy over the next 3 quarters. Those numbers are significant and this
would certainly give the economy a shot in the arm and jump start us back to
much more positive economic news.
There is certainly a lot to feel good
about here, expect slow steady economic growth and continued softness in the
housing sector as well as historically high oil and fuel prices. I did not
comment on food prices, I know they are high right now, but I am less
concerned with the state of pricing in the food sector. I believe that
increased pricing in this sector is temporary, and we should see prices
coming down towards the end of the year. I was talking with a client this month;
they distribute food products and work closely with the USDA. He had a
discussion with one of his contacts inside the USDA and the word is that we
will see bumper crops this year. In fact, in certain crop groups (i.e., corn)
the forecasted size of the crop is so large that there are not enough storage
facilities to hold the crop and that the farmers are looking for alternative
means to store their products. This should have an impact on pricing which
should start bringing down overall food prices this year.
Fed Watch
The consensus
is that the Federal Reserve will take a break from concentrating on interest
rates and now focus on the dollar and inflation. Based on everything I have
read over the past month, it looks like the Fed will maintain interest rates
at the current level through the end of this year. This is not bad news, I do
believe that they have done enough regarding interest rates and that
maintaining them at the current level will be sufficient to maintain positive
growth for the overall economy. Most of the comments from the Fed over the
last month have been directed at the weakness of the dollar and concerns
about inflation. We should see the Fed taking a more aggressive position in
supporting the dollar, so expect dollar free fall to come to and end.
Inflation is still pretty tame, although we are seeing prices for energy and
food go through the roof, pricing in the other sectors of the economy has not
experienced the same aggressive upward trend and are more in tune with
average historical inflation increases. The Fed is doing fine in my opinion;
they have been far more aggressive in attacking the economic challenges than
in the past.
However,
I do find fault with the Fed in one area. They are way behind the curve
regarding the banking industry. I have no idea why there is such a disconnect,
between the Fed and the street (small business). I had always thought that
the Fed had good information from the street via the advisory boards for each
Fed district. These advisory boards are populated with small business people
and are designed to allow the Fed Governors to keep pace with what is
happening within the small business sector. I think this is one of the most
important groups for the Fed to hear from, it should give them a good
understanding of how their policies are working within the economy. There go
the problem; the Fed continues to keep a tight choke hold on the banking
industry. Right now, it is as bad as I have seen it in many years regarding
the banking industry willingness to loan money. What I mean is that there is
certainly willingness on the part of the banks to loan money; the problem is
that there is a high degree of fear regarding how they structure the loan.
Most bankers I have talked with about this over the last couple of months
will tell me privately that they are under significant scrutiny from the Fed
right now. Most of their loans are challenged by Fed Regulators which equates
to a very tense lending environment. Overall I am supportive of the Fed and
think they are doing a good job, but in this regard they are failing badly. What
needs to happen here is for the Fed to remind the banks that they are in the
business of making loans and putting their deposits to work within the
economy. But more importantly, they need to assure the bankers that they will
not be chided for making a loan. This is a significant part of the recovery
from this economic slow patch that we have hit. If the small business
community cannot gain access to capital at reasonable terms then the
improvement in economic conditions will be slow to materialize. Let’s not
forget; the small business sector employs roughly 70% of the work force; if
you shut the capital spigot off, then forget about positive economic things
happening. The sector will not expand and more importantly retain their
employees or will be hiring more people. It is simple but apparently the Fed
is slow to grasp this one.
We
will see what happens over the next couple of months. The first step to
making a difference here is for the Fed Governors to start making comments
regarding this issue. If you start hearing some rumblings out there this
would be a very positive step.
If
you have outstanding debt, now is a good time to take a look at the debt
structure and interest rate. Variable rate debt pricing from the banks is
competitive right now but they will be pushing downward the loan to value
percentage for the loan. Good news is you should be able to get an aggressive
interest rate but just will not be able to borrow as much money. Fixed rate
debt is less competitive but nonetheless you should look at your current debt
structure and interest rate. Let a couple of bankers give you a loan proposal
this will allow you to see what is being offered and if it would be
advantageous for you to pursue.
Industry
Alert Corner
Industry in the spot light this
month: Alternative Energy
With all the buzz about the
alternative energy industry I thought I would put this sector in the spot
light this month. What has been a hot sector, which was suppose to change the
world, is now showing signs of weakness. The government continues to throw
lots of incentives out there for those who are still willing to invest in
this sector. However, it appears some of the shine is off the diamond. Over
the last six months, we are seeing many of the darlings in the sector having
financial problems. Over the last sixty days, there have been some
significant players in the sector go out of business. Is this a sign of
things to come, I am not sure at this point but certainly should raise some
concern for those doing business with companies within this sector. I think
the issue at hand here is the basic value proposition. The alternative energy
sector was supposed to provide fuel and other energy alternatives for all of
us as a precursor for decreasing our dependence on oil. It appears the basic
problem has been that we are taping our food supply to do that so public
opinion is starting to challenge this push for alternative energy if it means
that our food prices will be skyrocketing on a continuous basis. What happens
from here, the industry is not going away; there is far too much momentum for
that to happen. What I think will happen, will be a push to move away from
using our food sources to produce energy and find some other means to accomplish
the same results. Can we get there, I think so, but it will take more time.
Who knows, by the time we do get there, oil could be priced at $35 per barrel
again which would certainly make public opinion interesting to judge.
My advice here is to look very
closely at this industry if you are providing service within this sector. I
believe that there are certainly elevated risks for the companies in this
sector so just make sure you are aware of your exposure here. I do not think
there is going to be a meltdown in this sector but I do believe there will be
continued problems.
Manufacturing Sector
Steady as she goes, not much to
report here for the Manufacturing sector. More of the same this month as the
previous months, the sector is still sluggish but not as weak as the
economists had predicted. The ISM index for April was 48.6 which indicated
contraction within the sector but just slightly. This reading was right in
line with where I feel we will see the sector for the next several months. As
noted in previous newsletters, I have noted that we can expect the
manufacturing sector to seesaw between slight contraction to slight
expansion. This is just what we can expect given how the economy is moving
right now.
I felt the report contained much more
positives this month than negatives. Most of the major indicators
(Production, Supply Deliveries, Backlog Orders and Exports) were positive for
the month and a good indication that we should see much more positive news
from the section as we move along through the summer months. The report did
show that manufacturers did pull back some on employment as they had
completed some necessary build up in inventories. New orders over the next
several months will dictate whether they will ramp up on employment again or
remain lean.
I do think the government stimulus
will help the manufacturers over the next several months. As the rebate
checks hit the consumer’s bank account we should see spending increase which
should give a nice shot in the arm to the sector. We will not have to wait
long to see if the consumer will be spending those rebate checks as most of
the checks will be sent out by mid summer so the first real chance to see the
effects of the rebate checks will be in third quarter of this year. Cross
your fingers and let’s hope the consumer stays true to form and spends that
extra money.
Nothing new to expect over the next
several months, we should see more of the same as we did this month in the
coming months from the sector.
ENERGY SECTOR SPOTLIGHT
Are you kidding me, gasoline exceeding $4 per gallon and oil having
the potential to hit $150 per barrel. Would you have ever guessed this
scenario could or more importantly would happen. I am raising my hand right
now; count me in on the disbelief position. What I am seeing with the energy
sector is just plain ridicules. Current pricing levels are not supported by
anything other than pure greed and speculation. This has been a topic of
discussion wherever I go and as you can guess the discussion usually results
in solving nothing and me hearing more complaining about prices and how much
the oil companies are making. Lest we forget, we are a capitalistic economic
system focused on making money so why all the griping about what the oil
companies are making. No one is forcing you to drive your car or fill up your
tank. By the way, demand for gasoline continues to trend down yet prices
continue to go up, you go figure that one out.
Here is where I am on this, I do not subscribe to the popular
opinion that demand worldwide is going up, and China
and India
are gobbling up oil at a record pace. If that were the case, why are oil
inventories remaining relatively stable and not significantly down. My
position is the commodity markets are totally out of control and that there
is a significant premium built into the pricing for the players who have
significant positions in the commodity market. This is an old fashion
strategic maneuver by the speculators and that is what is driving up pricing.
If you really look at how prices are moving, we could have inventory data come
out showing an increase in inventory and a decrease in demand yet prices go
up. That should tell you that the standard rules of the game (supply and
demand) that drive most markets are no longer in play and emotion is what is
driving the boat here. I was talking about this recently and heard an
interesting perspective, there is an artificial pricing premium built into
the market of as much as $50 dollars or more per barrel and that oil should
be priced around $80 dollars per barrel. I really wanted to understand the
basis for that position, emotion was the key ingredient. Not that I am on
board for this thinking but it is certainly interesting to consider.
Where do we go from here, it looks like up. These prices will
move higher until the end user no longer tolerates it. That is the only thing
that can change this trend we are in right now. The government can do what
they want but they will end up screwing things up far worse than just letting
the markets run the course here. I do believe that the bubble will burst here
at some point this year. You just cannot have demand declining and supply
increasing as long as we have seen and expect pricing to continue to go up.
At some point the oil companies will have the reduce prices to bring back
demand. To do otherwise will mean that they will continue to increase prices
on declining sales, that model is not sustainable long term; you have to have
someone buying your product. What will be interesting will be when the bubble
does burst what will happen. There will be a loud cry from the commodity
market from the people that were stranded with high cost options they will
take a beating on. They will be looking for someone to bail them out and this
should fall on deaf ears. Prices will drop as fast as they increased and we
will see the consumer cheerful again which equates to much better economic
conditions. Just a thought but certainly something to hope for.
|
|
Summary Info
1.
Vacancy Rate 8%
2.
Average Retail Rates
Bulk Space-$3.36 psf / Flex space-$8.47 sf both are modified gross industrial lease types
3.
Transaction volume for
May - 25 Transactions-553,249 sq ft of industrial space leased or sold
4.
Average transaction
size 22,129 sf
5.
10 months is the
average marketing time for
6.
New Building 25,000 sq
ft Lenexa, KS.
|
KC INDUSTRIAL REAL ESTATE UPDATE
More of the same for the KC
industrial real estate market this month, solid and steady. Demand remained
consistent throughout the month with lots of activity in size ranges from
5,000 square feet to 25,000 square feet. This included both flex space and
warehouse space. The companies that are most active are local and regional
companies. Less active were the larger corporate users, they seem to be
pulling back some which is not surprising given the current state of the
stock market. Midsized bulk space is seeing some activity but less than the
small size range spaces. However, activity remains very high in the large
bulk size ranges of 250,000 square feet and up. KC continues to see lots of
interest for both manufacturing and distribution operations looking for in
this size range. KC got some great news this month with the announcement that
KC was chosen by Pure Fishing for the location of a new regional 400,000
square foot distribution facility. The facility will be located in the KCI
industrial submarket and the building is expected to be completed by early
next year. Expect more to come for these large facilities, KC is on the radar
screen for every major manufacturing and distribution facility search so we
can expect more good news to follow the Pure Fishing deal.
New construction should pick up
slightly the second half of the year. New projects will be coming on line in Lenexa, Olathe, Lee’s Summit and in the
Northland. This will add inventory space to the market along with some second
generation space which will come on the market as well. Vacancy levels remain
towards the lower end of the curve at just above 8%. I do not expect much
change this year as we should continue to see demand slightly ahead of supply
through the end of the year. Lease rates will remain flat to slightly up. Do
not expect much of any lease incentives other than maybe one or two months of
free rent. With demand as strong as it has been, Landlord’s are not being
pushed to offer much more than some free rent to attract users to their
properties.
I wanted to make you aware of some
new information regarding leases that is starting to become a part of most of
my leasing discussions for our projects. Over the last several months I am
having a reoccurring discussion regarding the structure of the lease. The
discussion is the classification of the lease as either an “operating lease”
or a “capital lease”. I have to be honest, this is not a typical discussion I
have ever had in the past and is something completely new. I have been
researching this over the last month and will be reporting more on this in
the next couple of newsletters to follow. The push for the classification is
coming from a change in the general accounting standards and is being pushed
to ensure that companies are reporting their financial obligations correctly.
This process of determination is not complicated on the surface, but does
require some work to make the correct determination as to the type of lease
so that the company can place the obligation in the correct area within their
financials. To what extent this will affect local and regional companies that
are “non-public” is undetermined. At this point all of my discussion on this
topic has been with publicly traded companies. I will provide greater details
on this process and a summary of the differences between these two lease
classifications so that you will be aware of this in case this becomes an
issue for your operation.
COMPANIES MOVING IN THE MARKET
MAIL SORT 27,500 SF
LENEXA, KS
SMART WAREHOUSING 71,566
SF LENEXA, KS
PPG INDUSTRIES 14,951
SF
KC, MO
CITY OF RAYTOWN 17,000 SF INDEPENDENCE, 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.
|
