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November 2006 |
Volume 1, Number 1 |
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Economic Snapshots
Quick Facts – KC Metro Area
Meetings and
Presentations –
KC Local Business Owners by Age Under 25 - 1% 25 to 34 - 8% 35 to 44 - 24% 45 to 54 - 32% 55 to 64 - 21% 65 & over – 10%
Snapshot – Manufacturing Sector
DIESEL PRICING
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This Newsletter is being provided to you free of charge by Paul Licausi, President of LS Commercial Real EstateSLOW BUT STEADYLots of news during the month regarding the economy; is the economy expanding or contacting, are we in for a soft landing or a bumpy one. As I have always stated, take general information from the media as more hype then substance. The media will do one thing effectively, confuse you and play to emotions. They key here is to look inside the numbers and that will tell you the story every time. In review of the economic data throughout the month, the economy continues to expand. However, the pace of that growth continues to slow. This is not reason to panic or be worried at this time; this is the result of a deliberate action by the Federal Reserve to slow the economy. They are doing their job, increasing the cost of capital is their most effect weapon. Given the comments from the last Federal Reserve meeting it appears that they will leave interest rates where they are for now and likely this will be the case throughout the remainder of this year. This is good news for all of us, the economy has the legs to continue to expand but at a continued slower pace, no problem, this is what we all want, a sustained prolonged expansion of the economy. One key to this whole equation is the consumer, keep in mind they are the driver of this economy and if they decide to stop the spending train then you should start to worry as bad economic news will follow shortly thereafter. The good news is the consumer continues to hang in there; retail sales for October were good excluding Wal-Mart. The retail sector posted better than expected sales and this is a great sign heading into the prime holiday buying season. Wal-Mart posted much lower than expected sales but I do not believe that this is a reflection of the consumer; their dip in sales is related to their operations and not a reflection of consumer spending. Retail sales should be good throughout the remainder of the year, which will keep the economy moving forward. In talking with several customers during the month, business continues to be good. Still some caution, but overall positive outlook for the remainder of the year. I did hear some concern from transportation clients (who have just now started to see diesel prices come down) regarding new low sulfur requirements in diesel fuel that could jump prices higher. This is a government push to enact new regulations on the diesel fuel providers to produce a cleaner burning fuel. This push is to substantially reduce sulfur levels in diesel fuel which is much more costly to produce. This regulation is not just talk; these new regulations are slated to take effect within the next 12 to 24 months. The effect of these regulations is not yet known; diesel fuel is expected to increase once these regulations take effect. What will this do to transportation prices; depending on the level of the increase, will determine how much this will push overall transportation prices upward. What can we expect over the next 30 days, more of the same, slow and steady growth with an eye on the consumer as we enter the holiday shopping season. Fed Watch No change from the Federal Reserve regarding interest rates. All of the information that I have seen over the last thirty days indicates the Fed will keep interest rates at the current level for the remainder of the year. Although I feel we are at the high end of the rate scale, no real risk of any more increases is certainly welcome news. As always, inflation is the big worry, current forecasts put annual inflation for the year coming in between 2.3% to 2.5% which is at the high end of the Fed’s target. Given the current inflation numbers, is this really bad. Can we exist in a free market economy that does not have some inflation? We have seen deflation before and that is just as bad as inflation. My thought is that a safe range of inflation is from 1% to 2% this would balance the risks between both inflation and deflation. Anyway, the Fed keeps worrying about this and inflation will always be high on the list of issues that affect monetary policy. Where will rates be over the remainder of the year? Right where they are now. I do not see anything that will trigger the Fed to move rates up or down. The economy is moving as predicted, any increase in rates would stall the economy out, also, the Fed is fearful that lower rates right now would heat the economy back up and trigger an increase in inflation again. Given all that, no movement in interest rates until after the first of the year. Industry Alert Corner Industry in the spotlight this month, Consumer Goods-Snack Food. Snack food, is this a growing sector or has it lost its appeal. Given the focus on good health and improving diets in America you would think that potato chips would be a product, destine to disappear from the shelves. Next time you are in the grocery store take a look at the isle where the chips are displayed, the caveat here is the “isle” that’s right an entire isle. Not only is there an entire isle dedicated to this product type, but also it seems to be expanding. Potato chips are just one of the many products in the snack food sector, there are numerous products and my guess is they occupy roughly 15%-20% of shelf space in the grocery store. The question I ponder is why this sector is growing despite the public health warnings that have been in place for a long time. Apart from taste, the only other factor I can think of is convenience and price. Now the manufacturers in this sector are master marketers and that does have a great deal to do with the continued expansion within this sector. Also, they are progressive in developing new products and delivering new flavors with existing products. Additionally, they have responded to the health concerns with offering products that are less fattening. Why am I highlighting this food industry sector, snack food is a growing sector and represents some great service opportunities. Major players in this sector are; Frito Lay, M&M/Mars, Planters and P&G just to name a few. This sector has major national players but also a number of local and regional players as well. The snack food sector is large and there is plenty of room for lots of players so the service opportunities are numerous. I look for this sector to continue to expand; the sector seems to be immune from down turns in the overall economy so they will still be pumping out product even in lean economic times. This sector is worth researching; there are many service opportunities from logistics and supply chain to plant support and systems support. Additionally, most of the manufacturing for these products is still done in the U.S. and I do not see this sector moving production off shore in the future. So next time you open that bag of chips or dig into the pretzels, be thinking of how your service can benefit this sector. Manufacturing SectorThe manufacturing sector reported a 41th month of continued growth. The sector decreased again in October that was the third straight month the index reading has decreased. The October index reading of 51.2 which is just a sliver above neutral, which is a 50 index reading. Three months in a row with a downward trend, do we start worrying now. The reading this month was not what I had hoped for but it was in the range of what I was expecting. What I was hoping for was a much higher index reading with lots of great news. Instead, we got a very lackluster reading with all kinds of cautionary notes within the ISM report. Don’t get worried yet; I have mentioned in the last several newsletters that we will see the index readings ranging from 51 to 55 over the next several months. I have not changed my opinion here, the manufacturing sector continues to cool off; this is not a reason for anyone to think the edge of the cliff is getting close. There was enough positive news within the report that should give all of us some comfort that the manufacturing sector has enough stamina to weather slower economic conditions. Most of the key indicators were down this month, as always I look closely at New Orders, Production, Inventories and Backlog Orders. All of these indicators were down with the exception of Inventories, which increased substantially this month. Although I never like to see decreases in these key indicators, they were slight decreases and not enough to raise any worries at this time. One thing to keep in mind, overall retail sales have been very good over the last 90 days, with the exception of Wal-Mart, the majority of retailers reporting sales figures were all up significantly. This will have a positive effect over the coming 90 days for the manufacturing sector. I am holding to a positive outlook for the manufacturing sector throughout the remainder of the year. The sector will continue to expand but at a very slow pace. Reviewing the ISM report this month, New orders down slightly we could very well see a reversal in this index next month trending upward again, Production, Supplier Deliveries, Backlog Orders, were down slightly. Pricing was down significantly, Customers’ Inventories, Inventories, Exports and Imports were slightly up. One other key indicator, Employment was up during the month, which could signal an increase in production and inventories during the coming months. Once again the readings on the indexes moved only slightly one way or the other. The sector remains stable and I look for more of the same results during the coming months. ENERGY SECTOR SPOTLIGHT Good news continued during the month regarding the energy sector; prices continue to trend downward. Pricing at the pump for gasoline continued to seesaw from $1.90 to $2.10 per gallon. Meanwhile oil continued it decent below $60 per barrel. This is great news for the economy and the business community. Fuel pricing affects every business and consumer, as prices rise or fall we all feel it instantaneously. The savings from lower fuel costs that the consumer is seeing is being pumped right back into the economy. This is good news for the retail sector and could not come at a better time heading full fledge into the holiday shopping season. As the consumer pumps their increased disposal dollars back into the economy, assuming fuel pricing continues a downward pricing trend, this will create a ripple effect across several sectors starting with the retail sector and reaching eventually the manufacturing sector. The basic question is will gasoline prices continue to trend downward, so long as oil prices decline gasoline will follow. The real question is can the oil producers slow down production enough to prop up oil prices, that seems to be the plan but my guess here is that greed will prevail and the supply of oil will continue to flow as producers try and gain market share. The result will be a continued decline in oil prices but at a slower pace as pricing nears $50 per barrel. I had a discussion this month with a business owner who felt that the big oil boys were making unrealistic profits and felt strongly that the government should step in and put some constraints on the industry. The basis for his opinion was that fuel has now become a key to the average person’s function in daily life similar to electricity, natural gas or other utility services and that we should have some controls in place to protect the consumer. Interesting point of view, my first comment to him was that I did not begrudge the big oil boys for making money; they certainly should have every opportunity to enjoy profits as prices increase, keep in mind, they also have full exposure to suffering a loss in revenue as prices fall. The interesting point here is the case of dependence, is the average consumer dependent on fuel to function each day as we all are on the other utilities we use each day. Certainly something to think about, my comment to him on this point was alternative fuel sources are now more than just talk and although there is not an abundance of choice this will certainly change. Case in point that one of the large Japanese car manufacturers is increasing production of hybrid models and their hybrids now account for 15% of the overall annual production with that number moving upward each year. The central issue to me on this is allowing the government to get their hands in this arena, historically when the government starts to get their hands in any private industry sector nothing positive ever happens. Let the free market system work, pricing will react to the normal supply and demand forces, albeit it may take some time but eventually the system will work. To allow the government to levy some profit tax or require some formula for reinvestment in drilling or rebate to the consumer will drive private industry out of the sector and will significantly reduce the number of players in the sector. In a free market system when you reduce competition pricing for the product will increase. |
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KC INDUSTRIAL REAL ESTATE UPDATEI was talking with a client during the month and he inquired how the industrial real estate market was doing, my answer, steady and sound. I think news regarding the poor performance of the residential real estate market has many feeling the commercial real estate market is in the same predicament, not so. These two sectors are completely different and never trend in the same direction. A slow down in the residential market will have no effect on the industrial or commercial real estate sector. Really nothing new to report in this sector, vacancies remain at historic lows, inflows of prospects entering the market for space continues to be high and inventories continue to remain tight. The interesting thing given the health of the industrial real estate sector is that lease rates continue to remain relatively flat. Now that is certainly the case for existing space that is available for lease, lease rate pricing continues to remain flat to slightly up. This continues to be good news for the user base who is out there leasing space, it would be reasonable to assume that given the tightness in inventory right now that pricing would naturally trend up, that has not been the case and I see no signs of lease rates increasing significantly on existing space. Speaking from my perspective on my properties, the focus is on attracting good companies and obtaining longer-term leases, not in moving lease rates up. I am not alone in this thinking, most local Landlords are focusing on the same thing I am, good tenants and longer-term leases. Now, respective to newly constructed buildings, lease rates are heading upward. This is one area where there is really no choice on the part of the developer/building owner. Construction costs are much higher now and lease rates must reflect this. Companies who are leasing new buildings are willing to pay the increased lease rates in exchange for obtaining much more functional space for their operations. The thought process, paying higher lease rates compared to an existing building, a user can offset that higher cost with the efficiencies they will pick up in a new building. In most cases this is right, the new buildings being built do offer much more functionality, but the key for any company analyzing leasing new versus existing space should study this aspect closely to ensure that they make the right decision and that the increase in cost for a new facility is justified. During the remainder of the year, the activity level will start to slow as we enter the holiday season, decision making this time of year is slow at best and most companies push facility decisions back to after the first of the year. Given the expected slow down over the next 60 days, it will have no effect on vacancies, we will continue to see the overall vacancy rate remain around 8.5% and lease rates will remain stable. We will see some increase in inventory levels over the next 60 days; there are several new buildings under construction that will come on line by the end of the year. Heading into the first of the year, interest rates will continue to be stable and should start trending downward by mid year, construction costs are starting to level off and we may even see a decrease in some key construction components (steel, sheetrock & asphalt) which will spur additional new building construction. Most lease incentives will be gone with the exception of some minimal free rent. I am very confident that the industrial real estate sector will have a very solid year in 2007. 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. |
