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October 2006 |
Volume 1, Number 1 |
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Economic Snapshots
Quick Facts – KC Metro Area
Meetings and
Presentations
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Snapshot – Manufacturing Sector
DIESEL PRICINGU.S. Weekly AveragePer Gallon9-04-06 - $2.967 9-11-06 - $2.857 9-18-06 - $2.713 9-25-06 – $2.595 |
This Newsletter is being provided to you free of charge by Paul Licausi, President of LS Commercial Real Estate.IS THE ECONOMY STILL SOLID OR GETTING SOFTAnswer to the caption, depends on who you listen to. There has been so much babble in the media regarding the economy it is difficult to know if we should feel comfortable or worry the bottom is about to fall out. Let me bring a layman’s perspective to this; the answer is not black or white but gray. Parts of our economy are doing very well while other parts of our economy are struggling. To make a generalized statement regarding the overall health of the economy is difficult to do and I think a wrong approach. Let me break down the economy is a few key sectors so that you can see which parts are doing well and which parts are struggling. Selected sectors within the economy that are currently down; housing, automotive, home improvement, and appliances. These sectors have trended downward for the last 3-6 months and the major culprit here is higher interest rates. Higher interest rates have taken the wind out of the sales of the housing market and despite what you might here on TV; I do not see this sector rebounding anytime soon. We have seen an unprecedented increase in home values over the last 3-4 years which has driven up pricing in this sector. There is now a natural correction that will occur in this sector which will bring down average values to a level that is more in line with historic averages. In some parts of the county, housing values have increased well over 50% in the last 3 years which is unsustainable. The increase in interest rates is a great equalizer; this increase significantly limits the size of house buyers can afford and therefore is a limiting factor within the market. Additionally, interest rates have a significant bearing on where the consumer spends money; higher rates curtail spending on higher priced goods, thus decreases in the home improvement and appliance sectors are occurring and will continue as long as interest rates remain on the higher end of the scale. The automotive sector has been adversely affected by higher interest rates but equally by higher fuel prices. The auto makers high profit vehicles have been SUV’S and trucks, both of these vehicle types have seen significant year over year decreases in sales in excess of 40%. This does not present a rosy outlook for this sector, the auto makers now looking to greater volumes in lower price vehicles which can deliver higher gas mileage to the consumer but which are far less profitable than the SUV’s and trucks. Meanwhile, selected sectors that are doing well; construction equipment, commercial trucks, food and consumer soft goods. All very health sales and more importantly production is at full capacity and orders continue flowing in to these sectors. How do we digest all this information to help determine future decisions regarding our businesses. The bottom line is that the overall economy is slowing and this trend will continue over the remainder of the year. However, sectors of the economy (some of which I have highlighted above) will be either up, down or flat. This is where you need to look closely and pay attention to; gather as much information as possible to understand where sectors within the economy that affect your business are heading. Some of us will see a great business climate over the next six months, while others will not be as lucky and see a significantly reduced activity level and a flat to down remainder of the year. It all depends on which sector of the economy you are serving, that is why I emphasize to look past the media generalities and dive in and dig for specific sector information. I believe that we are in for a soft landing from an overall economic standpoint, the overall economy will continue to grow but at a slower pace. The jury is still out on what to expect in 2007; I believe that there is an increasing possibility that growth will slow even more during 2007 which would bring the overall economy almost to a stop. I am not talking about a recession here just very little growth, the one positive aspect is that the Fed has made it clear they will not sit on the sidelines (as in the past) and will move quickly to stimulate the economy if the great economic machine slows to neutral. The Fed has committed they will be aggressive in lowering interest rates which will jump start the economy back on a growth mode the economy stalls out. Lots to think about, bottom line is to stay informed and be proactive. Fed Watch The Federal Reserve met this month to discuss monetary policy and to determine the course of short term interest rates for the next few months. The verdict, the economy has slowed to an acceptable level, inflation remains a concern and they decided to leave interest rates at their current level. This was certainly good news to me, I have mentioned over the last several months that short term interest rates were getting dangerously high. The absolute high point of any interest rate cycle, in my opinion, is an 8.5% prime; prime is sitting at 8.25% which only allows for one more .25% increase by the Fed. When prime is at this level, the cost of capital (interest rates) for the small business community is pushing 10%. I have always said that this is a natural threshold and is not positive when interest rates move from single to double digit for the average small business borrower. I watched this process play out in the last interest rate cycle, when small business owners borrowing rate approached double digits they slowed dramatically their pace of borrowing. Do the big boys at the Fed know this, I sure hope so. They are armed with data on lending activity from the banking community so they can see how increases in short term interest rates affect lending activity either positively or negatively. What’s next, I felt strongly that the Fed would raise short interest rates one more time during 2006, I am now on the fence regarding this belief, I still think the Fed could hit us with an increase one more time, however, all of the data and information I have seen over the last month now indicate that the economy is slowing too quickly and another rate increase could stall the economy out. Additionally, I have heard a lot of discussion indicating the possibility that the Fed will start lowering rates within the first two months of 2007. Do I believe this, two months ago I would have said no way, but given how much the economy has slowed in the last 45 days, a decrease in rates early in 2007 is not out of the question. The goal of the Fed is to prolong a sustained expansion of the economy over a long period of time. They have effectively slowed the economy down to a trickle and they will have to stimulate the economy some time during 2007, which means lower short term interest rates on the horizon for you and me. How can you use this in planning your business activities for 2007; it is safe to assume that during the year we will start another interest rate cycle. For the last 26 months we have been in an increasing rate cycle, during 2007 we will enter into a decreasing rate cycle. What will happen will be virtually a repeat of the increase cycle, only the rates will be decreasing. The Fed will lower rates over a long period of time, the last cycle was 26 months and you should expect the same as rates decrease. This is a good time to start looking at capital investment again (equipment, facilities, etc.), your cost of capital will be decreasing so money should start getting affordable again. This is the time period when small business can afford to start increasing debt again to grow revenues and market share. Industry Alert Corner Industry in the spot light this month, Consumer Goods. What are consumer goods; this sector could include a whole host of products and is a broad category. Yes, this sector has a wide variety of products so I will be focusing on just a couple of items that I think are really seeing great sales and represent service opportunities for all of us. One key product in this sector that I have been watching is detergent, which includes laundry and kitchen detergent. What is so interesting about this consumer product, sales are trending upward and the manufacturers of this product class and kicking it out at full blast. As you can guess, everyone uses this product and our consumption is not trending downward. There are several manufacturers of this product category and competition for market share is fierce. However, there are plenty of sales to keep these players seeing great revenues from this sector. Two of the larger players in this sector are Church & Dwight and P&G. I mention these two companies because they have a significant presence in the KC metro area. Both are market leaders and their operations are growing in this product category in the KC area. Sales for detergent will continue to rise, the manufacturers in this sector continue to remain creative and promote and improve their key brand names. Additionally, there are new products related to the detergent market that are coming out which will be a sale enhancement for this product category. The bottom line here is that there continues to be a very bright future for this product class and the manufacturers will continue to see healthy sales. The second category is personal care products; what does this include; shampoo, conditioner and body wash. What is exciting about these products, sales just plain sales. Next time you are in your favorite retail outlet check out the shelve space dedicated to these products; this should demonstrate how significant this product category is. Like detergent, this product class has a continual use structure, significant reoccurring sales. This is also a sector where competition is fierce, but the manufacturers are doing a great job at injecting value add propositions in their marketing. This sector will continue to see healthy activity and the manufacturers will see solid sales. Some of the key players in this product category who have a major presence in the KC metro area are P&G and Unilever. I urge you to do some research here, look further into this sector group. I have mentioned some of the key players who have operations in KC but there are more companies located in our market who produce or distribute consumer goods in our market. Do some research here; this sector will remain healthy and could offer some great service opportunities for your company. Manufacturing SectorThe manufacturing sector reported a 40th month of continued growth. The sector decreased slightly in September compared to August. The September index reading of 52.9 was hovering just above neutral which is a 50 index reading. What is happening in the manufacturing sector, why the steady decline in activity, should we start to worry? I stated in this newsletter last month that the media would jump all over this sector and start beating the doom and gloom drum. That is what is starting to happen, get ready for a fresh batch of negative news on the sector which will continue for the foreseeable future. Are they right, I continue to take the opposing view; the sector growth is slowing but none the less it is still growing. I have said over the past few months that slow growth is what we can expect and this is exactly what is happening. It is not an indicator of bad things to come for the sector, it is simply an affect of a sustained period of high energy prices, high interest rates and tightening labor markets which has created some softness on the demand side. Noticed I said some “softness” and not a downward spiral. Over the last 45 days energy prices have started to come down, it appears that the Fed will hold tight on interest rates and the likelihood now is that we will be entering a decreasing interest rate cycle and we should see some relief in the employment sector since new job creation was way off the mark this month. These factors will allow for consumer spending starting to trend upward as well as capital spending by the business sector. This will sustain the growth in the manufacturing sector. Let me say here that I do not see the sector taking off, but remain on a steady slow growth path for the next 2 quarters. Expect to see the index reading remain in a range from 51 to 55 through the remainder of the year. Reviewing the ISM report this month, the results were fairly stable conditions with some of the key indexes lower but the important point here is that they were just slightly lower which is not concerning at this point. New orders held steady during the month which is a good indication that there is stability in the sector. Production, Supplier Deliveries, Backlog Orders, Employment and Exports were down slightly. Pricing, Customers’ Inventories and Imports were slightly up. 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 It is the last week of September and I just filled up my tank at a cost of $1.97 per gallon. I just mentioned in this newsletter last month that I had heard some predictions by economists that we would see $2.00 per gallon pricing on gasoline by Thanksgiving, well it appears we hit the mark early. This is great news but will it last. Based on everything I heard and read over the last 30 days it appears pricing on oil is heading downward so it is likely gasoline prices will follow as well. The last bit of news that I heard from OPEC was that they had a price target for oil in the low $50 per barrel range. I have no idea what the magic is with this pricing level but it appears they are ready to support that pricing level. Even with this information on OPEC, I am sure they will try and support oil at the highest possible level with production cuts, this will most likely have some effect but if the trend is for lower pricing it will difficult for them to slow the train down here. Just a comment here, can you believe that any of us would be encouraged by $50 per barrel oil prices, not that long ago we were complaining about oil going above $30 per barrel. What will this mean, more money in the consumer’s pocket which is what we all want to hear, and the timing could not be better heading into the holiday season. Let’s all hope the consumer opens up the check book or that credit card and feeds this economy; we all need it. I will be doing extensive research regarding the cost of diesel fuel over the next 30 days; I want to find out what the pricing trend for this product will be over the next several months. I will be sharing this information with my transportation clients during the month and will include information on my findings in this newsletter next month. My thought at this point is that diesel pricing will be trending down over the next few months; this should allow the transportation sector to see some relief on the expense side and allow for decreased fuel surcharges to their clients. The only issue that I can see that could have a negative impact on diesel pricing is the new low sulfur requirements from the government which could drive up the cost to produce diesel fuel. More to come later on this. An interesting point, I had mentioned several months ago that I felt that energy prices had been adversely affected by the Hedge Fund industry playing in the energy commodity markets. In case you did not give any credence to my position, just this month, a large hedge fund (Amaranth Advisors) suffered a substantial loss ($6.5 billion) in the energy futures market. This is not an isolated incident and there will be more of these stories to come, I have mentioned that these big players played some part in propping up the pricing in energy market. You are starting to see that these big players can no longer artificially prop up prices and normal supply and demand factors are now weighing in on the markets; which is now starting to have a much greater impact on pricing. What to expect over the next couple of months, supply should continue to be plentiful and this should continue to push pricing downward. Can we see gasoline remain below $2.00 per gallon; I think this is a real possibility but how low pricing can go is the real question. |
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KC INDUSTRIAL REAL ESTATE UPDATEThe industrial real estate market continues to be solid. Vacancies remain at historic lows, inflows of prospects entering the market for space continues to be high and inventories continue to remain tight. All this makes for a Sellers/Landlords market right, not necessarily the case. Yes, incentives have all but left the market, free rent and tenant improvement allowances are not common to see today, but competition among building owners remains fierce, which is a substantial benefit for a company leasing space. Even with record low vacancies, lease rates have remained relatively stable. There has been some upward movement but those increases have been very minimal. When I talk with my fellow industrial real estate developers, the common gripe is that lease rates have not increased enough to cover the increased cost of new construction and higher interest rates. This has certainly played a central role in the limited amount of new construction that has occurred locally. Couple increased construction costs with higher interest rates and the lack of significant increases in lease rates and you have a no win situation for the developer. Look for limited new construction in our market for the remainder of the year. Now, if interest rates start to come down early next year, and based on the information that I have read over the past 60 days regarding anticipated reductions in raw material costs for the construction industry, this could trigger new construction to start occurring again by mid 2007. This would add needed inventory in our market. Lease rates are another issue; I do anticipate that lease rates will continue to tick upward, but nothing substantial, they will remain relatively stable; however, it is likely we will see some trending up of lease rates on newly constructed product during 2007. One factor that could have an affect on lease rates in our market is the inflow from outside companies entering our market to locate a facility here. I noted in this newsletter last month that the interest level in KC from companies who do not have a presence here is way up. Now, this has been companies focused on large box distribution facilities, but there has been an increase from companies considering smaller size ranges. If inflows from outside companies increase in the smaller size ranges, this could create an opportunity for building owners to increase lease rates substantially higher than the current trend. It is more likely that we will see some affect of this during 2007, and not in the immediate near term. Nonetheless, it is still a possibility so keep that in mind. What can we expect for the remainder of the year, more of the same, we will see above average leasing activity through Thanksgiving, then activity will slow some over the holidays. Beginning in January of 2007, activity will pick back up and should remain above average through the end of 1st quarter of 2007. The “for sale” market inventories remain towards the low end of the scale. Building prices have inched upward between 5%-10%; pricing should remain stable through the end of the year. I do not anticipate any reduction in sale prices over the next six months. 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. |
