LS Commercial E-News
October 30, 2007	Volume 1, Number 1
Economic Snapshots: · Unemployment 4.7% (National) · New Jobs for September 110,000 · Unemployment 5.1% (KC Metro) · Housing Permits KC Metro area down 40% compared to this time last year Quick Facts – KC Metro Area · Air Freight 22 million pounds moved through KCI Airport during September · Housing Permits in September – 400 units · Help Wanted down 30% compared to same time last year · Passenger Traffic moving through KCI September 2006-850,000 people September 2007-900,000 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 10-15-07 - $3.039 10-22-07 - $3.094 10-29-07 - $3.157 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: Agricultural Products. I was driving recently across Missouri; prime corn, wheat and soybean county. It was harvest season and the farmers were out in force running every piece of equipment you can imagine. I was amazed at the amount of activity, more than I have seen in the past. The price of crops has gone off the chart, what had once been a sector where pricing was flat to down every year; the agricultural sector is knocking it out of the park. The farmers are hauling in record revenues from their crops and as you can guess, they are spending money again on equipment and other associated materials. I have clients who are servicing this sector, they are experiencing record earnings. It’s about time; this cycle does not seem to have an end in sight. There are several factors that have contributed to the increase in crop prices. The major factor we all hear about is the alternative fuel market (ethanol and bio-diesel) but another factor is exports. World wide, the population continues to increase. China and India continue to add population base and these two countries have been a source of increased exports for U.S. farmers. I do not see this changing, we should continue to see a healthy export market and as the alternative fuel industry grows, this will be another outlet for agricultural products as well. There are a whole host of companies who are involved in the agricultural sector, including; transportation, agricultural machinery, raw materials, chemicals and so on and so on, you get the picture. The entire sector will see great performance, and this sector represents a prime business opportunity for those of you who are not providing service to anyone in this sector. You need to jump on this right now; I can assure you that your competition is out there looking around so take action on this now. This sector represents a great opportunity not only today, but for an extended period of time to come. As I mentioned, I do not see any slow down potential in sight any time soon so jump in now and ride this sector’s wave. I would be happy to discuss this sector further should you have questions feel free to call me with any questions. Manufacturing Sector Another solid month from the manufacturing sector, the sector expanded again during September with an index reading of 52 which was slightly lower than the index reading in August. Nothing new here, the reading is consistent with a slower growth trend for the overall economy and we should continue to see index readings hovering just above 50 for the remainder of the year. For all of the doom and gloom we hear in the media regarding the economy and the health of the manufacturing sector, the sector just keeps humming along. If you take the time to read the ISM (Institute for Supply Management) reports, they paint a different picture of the manufacturing sector than we all see from the news. Listen to the media and you would think the manufacturing business in the U.S. is on its last leg and soon to be a thing of the past. I have a much different view, I think the manufacturing sector has been holding its own, and is making a come back. I know this is probably a contrarian view, but as I have told you I call it as I see it from a “feet on the street perspective”. I always try and give you a different perspective on topics I comment on, when I use a term “feet on the street” I am referring to my interactions with actual manufacturing companies and the activity on the street. We are all inundated with views from sources that are far removed from the front lines so the input we see is derived from a theoretical perspective and not first hand knowledge. What I see going on is a resurgence of manufacturing, lots of start up manufacturing operations that are providing specialized services and doing extremely well. From a larger company perspective, I am seeing the start of major capital investment in manufacturing plants within the U.S. covering a wide range of products. As I mentioned in past newsletters, the sector is finding more efficient ways to produce their products and are expanding in the U.S. rather than abroad. I believe strongly that this trend will continue, my position here is not in line with popular thinking but it is what I see happening. Now to dive into the data for the month, overall the key indicators were generally positive. New Orders, Production and Prices were down only slightly. This is consistent with what I expected; we will likely see this seesaw of slightly up or slightly down readings over the remainder of the year. Employment and Supplier Deliveries were up for the month and manufacturer inventories were down. I do believe there is some hesitation within the sector to wait and see whether the consumer will be spending money during the holiday season. If the consumer cuts back on spending, this will hurt the sector so it appears the manufacturers are being cautious respective to any real build up in inventory and just playing the wait and see game at this point. I do expect more of the same reporting for the remainder of the year. The sector will continue to expand but at a very slow pace. ENERGY SECTOR SPOTLIGH Oil continued to climb upward pushing past $90 per barrel with no backstop in sight. Can oil hit $100 per barrel; your guess is as good as mine. The bigger question is where gasoline and diesel prices will be if oil hits $100 per barrel. For the first time I noticed a “disconnect” between fuel prices and oil prices. I have watched fuel prices move upward as oil prices moved upward. However, during the month I noticed that there was a disconnect between fuel and oil prices. Oil prices steadily moved upward, but fuel prices remained flat. Could this be the start of a trend where fuel and oil prices become unplugged and follow separate paths. I will report more on this next month, I will be seeking input from some clients who are dealing with oil and fuel pricing everyday. For now, we all should assume that fuel prices will remain in the same range as they are right now, maybe moving up or down by $.10 to $.15 cents a gallon either way. One thing I am watching is what the oil companies will do with pricing as we approach the holiday season. Will they give the consumer some relief and drop prices or keep them in check. Reducing fuel prices could have a significant impact on how well the retailers do this holiday season. Lower fuel prices will give the consumer more money to spend with the retailers, the question is do the oil companies care, my guess is only to the extend it affects them positively.
	KC INDUSTRIAL REAL ESTATE UPDATE The KC industrial real estate market continues to hold its own, despite the continued softness in the residential real estate market. Entering 4^th quarter, historically we start to see a slow down in activity as we approach late November. I do think we will see some slow down but there is an awful lot of activity in the pipeline and I would be surprised if we see the pace slow substantially. The vacancy level for bulk warehouse continues to remain in the 8% range. Historically, vacancy rates at this level have never remained this low for an extended period of time so the market is setting some records here. Now, given the low vacancy rate, you would think that new construction would be in high gear. The answer; no, the local developers have really shown a great deal of restraint and not overbuilt the market during this period of low vacancy rates. There has been some new buildings go up, but this has been at a very controlled pace and we have not seen an abundance of new buildings coming on the market. The balance between supply and demand has been well maintained between existing product that becomes available for lease and new product that has been built and is ready to lease. The balance has allowed prospects in the market for space to have variety to choose from; new more efficient buildings which are more expensive or older buildings which are less efficient but less expensive. Credit goes to the local development community for showing some patience here and not piling on new product. From the tenant perspective, inventory of available space to lease will remain at the current level with lease rates remaining stable. Do not expect any lease incentives beyond one to two months free rent. The flex market continued to improve, vacancy rates are now in the 9% range and the development community has followed the same development process with this product type and has not overbuilt in the market. Flex space was slower to recover from the last recession, but the market is doing fine. The new projects that are being built are leasing up well and I do expect the flex market to continue firm up over the next 12 months. From the tenant perspective, inventory of available space will remaining close to the current level with some possibility that inventory levels could drop, lease rates will trend upward slightly. There are some lease incentives still being offered, expect one to two months of free rent. Additionally, respective to new space you should see build out dollars for new office space. I will be highlighting big box distribution space in KC in the November newsletter. The KC market is ready to come into the forefront for distribution nationally. The BNSF Logistics Park which will be located in Gardner, Kansas (southern suburb of KC) is under development and will be fully functioning by 2009. The number of companies considering KC for a major distribution facility is encouraging. The interesting thing here; most people in the KC market who are involved in the industrial real estate industry are still unsure if KC will ever see any real big box distribution development. Additionally, many of the municipalities are also showing signs hesitation respective to this wave of new development seriously. For those of you who do business in Chicago or Dallas, watching the activity in those communities is a preview of what will happen in the KC market. The inter-modal parks spur activity like we have not seen in KC; this is the difficult part for many to understand. Anyway, the wave is coming and those who have their boards ready will ride it as the wave comes into town. I will highlight the activity associated with big box distribution in the coming newsletter, stay turned you will be amazed at what is on deck so far and what is expected to come. COMPANIES MOVING IN THE MARKET CROWLEY FURNITURE 76,650 SF INDEPENDENCE, MO OVERSTOCK FREIGHT.COM 40,000 SF INDEPENDENCE, MO CARGO LARGO 70,000 SF SUGAR CREEK, MO MERIDIAN AUTOMOTIVE 40,000 SF EDWARDSVILLE, 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.