LS Commercial E-News
November 27, 2007	Volume 1, Number 1
Economic Snapshots: · Unemployment 4.7% (National) · New Jobs for October 106,000 · Unemployment 5.2% (KC Metro) · Housing Permits KC Metro area down 20% compared to this time last year Quick Facts – KC Metro Area · Air Freight 23 million pounds moved through KCI Airport during October · Housing Permits in October – 600 units · Help Wanted down 30% compared to same time last year · Passenger Traffic moving through KCI October 2006-900,000 people October 2007-1,500,000 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 up · Production down · Supplier deliveries up · Prices down · Customer inventories up 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 11-12-07 - $3.425 11-19-07 - $3.410 11-26-07 - $3.444 Wheeler Downtown Airport – KC Number of Flights September 2006 – 8,000 September 2007 – 9,500	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. STEADY BUT SLOWER Lots of data out this month on the economy. The economy continues to grow at a sluggish pace, but none the less it continues to grow. The housing sector continues to perform poorly. As I mentioned in this newsletter last month, do not expect this sector to come back anytime soon. Expect the news from this sector to remain negative. The sector will continue to show weak results well into 2008. Now having said that, none of us should be under the false impression that the real estate fairy will show up and use her magic wand to make everything better. Although I think a lot of people do believe this; however, instead of the real estate fairy, they think it will be the government who will solve all of the housing sectors problems. This too is foolish thinking, the housing sector like any other sector of the economy; it must run through a cycle. What is occurring right now is an adjustment of residential real estate values, and the re-pricing of risk. Until this process runs through the cycle, do not expect things in this sector to get better. Once residential real estate values have stabilized (hit the bottom of the cycle) the sector will start to turn around. Now, the government is trying to get in and affect the cycle, they are sponsoring a bail out fund and have strong armed several large banks to be a part of this effort. This fund will effectively become the secondary market significantly reducing Wall Street’s participation in the secondary residential mortgage market. As you may know, home loans are originated by mortgage companies who then package or as the street calls it “bundles” several of the loans together into a pool and then sell them on the secondary market. The secondary market was Wall Street and when the meltdown in the housing sector occurred, Wall Street stopped buying these mortgage pools effectively shutting down the secondary market. The government is now taking steps to create a new secondary market so that the system can come back on line and thus bring the housing sector back to life. Will this work, the short answer is yes; they will use the government’s deep pockets to restart the system. However, this will take time so do not look for any quick miracles out of this move. The overall economy remains on a steady slow growth pattern. The manufacturing sector continues to experience growth, consumers continue to spend money and inflation remains in check. One point of concern, the retail sector is expected to see slower holiday sales. The basis for that is the continued pressure on the consumer from higher energy and food prices. Time will tell here, I am not convinced that the consumer will stay home this holiday season. I think a bigger factor which could affect consumer spending will be consumer confidence. I have seen some data indicating a marketed increase in a concern for job security; this factor will have a far greater influence on consumer spending. If the consumer becomes concerned with the stability of their job, they will stay home and cut back on spending, to either conserve cash or limit any increase of the balance on their credit card. This information is not easy to find but a key ingredient respective to how well the retailers will do this holiday shopping season, I will be watching this area closely and keep you posted. For the balance of the year, I do expect more of the same, slow steady growth. I have maintained this position for some time and I have not changed my mind on this. I keep hearing about a potential for a recession, this is really a non-factor at this point. We have an active Federal Reserve and their actions indicate they will not sit on the sidelines and watch; rather, they will jump in and take action as needed to keep the economy moving ahead. Stay focused on your business, talk to your clients, this is the best way to get a feel of how your sector will perform over the remainder of the year. This will ensure that you stay ahead of the trend. Fed Watch The Federal Reserve will meet again at the end of October. The consensus on the street was for another ¼ point decrease in the Fed Discount Rate. However, most of the data that I have read recently have indicated no action by the Fed at the next meeting. The feeling is that the Fed will wait until they see how the economy reacts to the recent decrease in rates. Additionally, the Fed will watch the housing market closely to see if the affects of the slowdown in that sector spread to other sectors. I think this is certainly a nice position statement, my thought is the Fed continues to be worried about inflation (which jumped up during the month) and they are afraid that another decrease in interest rates too soon after their recent adjustment would create a potential for inflation to start taking off again. I disagree; the economy needs another shot in arm of lower interest rates. I do think we will see the Fed take action by the end of this year. If the economic growth has not stepped up and if retail sales are sluggish during the holiday season, I would put an 80% probability of the Fed delivering another decrease in interest rates. They will need to do so allow the economy to gain some momentum going into 2008. Let’s not forget, 2008 is an election year and the Fed will be under a lot of pressure by the politicians to try and help sway the outcome of the elections. Now, I have commented in recent newsletters about the state of the local banks. The credit markets are starting to come back to life, all bet it very slowly. The banking environment continues to be in the cautious mode. I do not expect any change in this sector until some time next year. You can expect to see the bankers be much more conservative than in the past. Loan requests will be heavily scrutinized, expect loan terms to be much more stringent and loan to value or purchase price decrease. The banking sector continues to be under scrutiny by the regulators and the sector is still reeling from the uncertainly within the credit markets. If you are heading in the market to look for capital, be very cautious and look closely at the lending terms being presented to you. Understand that we are entering a declining interest rate trend; but the bankers are slow to react to this and are maintaining rates at the high end of the pricing range. This may be a good time to sit on the sidelines for a bit just to let the banking sector work through the current cycle. I do think we will be in a much better lending environment during the coming year. Industry Alert Corner Industry in the spot light this month: Defense Industry The defense industry is experiencing a significant level of growth. This should not be news to you, we have been involved in a war for the last several years and it is understandable that the defense contractors would be busy supporting the U.S. war machine. But it is really much more than that, I was really never aware, as I would assume most people are in the dark, as to the size of this sector. It is large, very large and growing. You can see this in recent announcements from defense contractors who have operations locally. The recent announcement of the new manufacturing plant that will be constructed on the south part of the metro area along 150 highway near 71 highway. This will be a new plant that will replace the existing production facility currently located at the Bendix complex. The facility produces components for warheads. This will be an investment that will exceed $100,000,000 and create a new state-of-the-art facility. Also, there will be significant investment at the Lake City Complex in eastern Jackson County. This facility produces primarily munitions (bullets) and the additional investment will allow for increased production. These are just two defense contractors who have operations in the KC metro area, there are many other companies who are operating in this sector and represent service opportunities. There are several factors that will create favorable conditions for this sector on a go forward basis. However, politics play a significant role here and a change in direction respective to defense spending by the government could turn the tide quickly for this sector. For now, I see nothing but growth for the defense industry and service opportunities abound for those who fit the need. Do some research here; you will be surprised how many companies who have operations locally in KC are involved in the defense industry. These are targets for your service and will be worth your time pursuing. As always, if you are serving this sector now or find an opportunity, keep a close watch on the political climate, stay ahead of the game and you will be fine. I would be happy to discuss this sector further should you have questions feel free to call me with any questions. Manufacturing Sector Weaker than expected activity this month, the sector inched out a slight positive index reading coming in at 50.8 which was down compared to last month. The activity in the manufacturing sector was right in line with what I had anticipated. The housing sector continues to be a drag on the overall economy and the manufacturing sector has not been immune from the effects in that sector. As I have mentioned in previous newsletters, I continue to hold firm to my forecast of index readings between 50 to 52 for the remainder of this year and now extending into mid 1^st quarter of 2008. This is not bad, slight expansion is fine given the challenges in the economy we have faced this year. There are some bright spots here to consider; I have heard a lot of crying regarding the declining dollar; a weak dollar is boosting our exports which will be a bonus for the manufacturing sector. The export index was way up this month, U.S. manufactured goods are finally competitively priced and for once we are pushing more product out to the rest of the world. I have noticed an increase in belly aching from our trading partners, they are complaining about the weak dollar and the fact that U.S. goods are less expensive and they are having trouble competing from a price and quality standpoint. It is about time U.S. based companies got into the game. I like to hear we are selling products to the rest of the world instead of just being a consumption point. On the flip side, I have talked with several clients who import products and the weak dollar has increased their costs. So there are some challenges on both ends of the spectrum here. Most of the key indicators were down for the month; New Orders, Production, Supplier Deliveries, Backlog Orders and Imports were all down. I am always concerned when new orders and backlog orders are down; these two indicators are typically a precursor for activity over the next couple of months. I am not yet ready to worry; I want to see how things look over the next month and see if there is a rebound in these two indicators. I know there is some softness in the sector right now, but I do not think that there is a risk that the sector will see contraction. I am sticking to the position of slight growth; time will tell if I am on target here. There were some positive areas of the overall index; Employment, Inventories and Exports were all up. This is certainly good news, but is likely a result of actions taken by the manufacturers over the last couple of months to increase production to bolster inventories in anticipation of the holiday shopping season. My guess here is that inventory levels have been increased to sufficient levels and we will see production and employment drop in the coming month. This is dependent on the strength of the holiday sales, if they are strong we should not see any drop in employment and the manufacturers will continue to produce product. If the holiday sales are weak, look for employment cuts as the manufacturers will be focused on cost control. Lots to come to end out the year, keep your fingers crossed. ENERGY SECTOR SPOTLIGH Oil continues flirting with $100 per barrel, fuel costs are jumping upward again and I am tired of hearing about this. I have talked to some many people about the reasoning behind the spike in oil and fuel costs and have heard every position imaginable. Do I agree with any one position, NO, I continue having a hard time believing that some magic event suddenly took place and bam pricing is now high as a kite. Yes, all of the thousands of reasons why we are where we are make some sense, but the bottom line here is I cannot see any solid evidence that supports pricing at the current or forecasted future levels. I have to be missing something here, I am asking for your comments I want to know what your take on the current oil and fuel situation is and where we are going. I would like as much input as possible, e-mail your comments to me at licausi@lscr.com I want to hear from you. I want to see comments from as many different view points as possible and I will report the findings in the December newsletter. At the end of the day, I still think current pricing is supported by nothing more than speculators in the commodity markets. They have hyped up the emotions to a frantic level and keep fueling the fire. I heard recently that some of the future contracts for oil in 2008 are approaching $150 per barrel; yes, I said $150 per barrel. I cannot wait to hear the reasoning supporting this pricing, what could the market possible dream up next. I look forward to your comments.
	KC INDUSTRIAL REAL ESTATE UPDATE The activity level in the KC industrial real estate market continued on throughout the month. As I mentioned last month in this newsletter, typically we see the market slow down as we enter November; however, this is not the case this year. I welcome the activity and hope it holds through the end of this year. There is a lot of movement within the market; I am not seeing the traditional resistance to decision making before year end which has been very typical historical. Companies are out in force and pushing to get space secured by year end which is a welcome change of pace. I have been asked a lot of questions recently regarding any negative effects occurring in the commercial real estate market from overspill from the problems in the residential real estate market. None at this point, the two markets are unrelated so it is unlikely we will see any effects apart from companies who are serving the residential market where there business operations are affected. Apart from that; no adverse affects and I do not expect to see any negative effects. Having said that, I am seeing some indirect negative effect on the small to mid size business sector resulting from the problems in the residential real estate market from a banking standpoint. This is related to a larger problem in the credit markets resulting from a meltdown in the residential mortgage market. I do expect to see any real slow down hitting this sector until possibly mid 2^nd quarter of 2008. This is not a direct result of the problems in the resident real estate market but problems in that sector have created uncertainty in the banking sector which has resulted in the banks limiting access to credit and increases the cost of credit for the small to mid size business sector. I do not expect this to be significant but none the less it is likely we will see some slowdown in 2008. The industrial real estate market will remain unchanged throughout the remainder of the year. Expect overall market vacancy to remain in the 8% range. Lease rates continue to remain stable; we will not see any movement upward or downward. Limited lease incentives continue to be the norm, you can expect 1-2 months of free rent as a lease incentive with limited tenant improvement allowances. There are a lot of projects on the books that are planned for 2008, not all will be built, but we will certainly see some new product coming out of the ground in late 1^st or early 2^nd quarter of 2008. List prices on buildings being offered for sale, continues to remain at the high end of the pricing range. I expected to see some reduction in pricing towards the end of this year but that has not occurred. As always, Sellers have kept pricing high throughout the high interest period. Now that we are entering a declining interest rate period, my bet here in that sale prices will start to trend down. COMPANIES MOVING IN THE MARKET VARIFORM 71,000 SF INDEPENDENCE, MO AGCO CORP. 106,000 SF INDEPENDENCE, MO SE FOX 7 COMPANY 18,000 SF KC, MO MIDCONTINENTAL CHEMICAL 15,000 SF OLATHE, KS 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.