LS Commercial E-News
September 24, 2007	Volume 1, Number 1
Economic Snapshots: · Unemployment 4.7% (National) · New Jobs for August -4,000 · Unemployment 5.2% (KC Metro) · Housing Permits way this month Quick Facts – KC Metro Area · Air Freight 21 million pounds moved through KCI Airport · Housing Permits in August – 450 units · Help Wanted down 25% compared to same time last year · Passenger Traffic moving through KCI July 2006-1,000,000 people July 2007-1,100,000 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 down · New Orders down · Inventories down · Export orders up · Employment up · Production up · Supplier deliveries down · Prices down · 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 09-03-07 - $2.893 09-10-07 - $2.924 09-17-07 - $2.964 Wheeler Downtown Airport Number of Flights July 2006 – 71,000 July 2007 – 90,000	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. DOWN BUT NOT OUT What should we believe; is the economy in a nose dive or just in a slight decline. If you listen to the media you will think the economy is at the edge of a cliff. Reality is, the economy is weakening but strong enough to generate positive growth throughout the end of this year. I have been spending time over the last couple of months talking to a number of clients in different sectors to see how business is going in their corner of the market. The majority of responses were business is slower than last year but still active. Additionally, many of my clients I spoke with felt there would be some slow down coming in their industry possibly as soon as this year. Most are cautious about making significant changes in their business or making major purchases. As I have mentioned in the past, I take all of the economic news I hear and weigh it against what I am hearing on the street from my clients. This gives me a genuine feel of what the economy on both a national and local level is doing. Although I think the economy is still on solid ground, there are some factors worth noting that could create additional softness in economic conditions. The new jobs report for August came in at a -4,000, this is the first time is several years that there was a net loss in new jobs. Many are worried about this, maybe a sign of a coming recession. Don’t assume this conclusion, most of the job loss was from the service sector, namely mortgage companies and those firms involved in that sector. The residential mortgage sector is shedding jobs in large numbers and we saw the result of that in the August new jobs number. I do think we will see less than stellar new jobs numbers for the next several months. The sub-prime melt down is expanding outside of the financial markets and that will cause further job loss. Also, higher food costs and continued higher gasoline prices will continue to be a lag on the economy. Remember, the consumer is king; we all need them to continue spending. Higher base line costs for food and fuel will continue to eat into disposal incomes which will continue to limit the consumers spending level. A greater threat is job security. I worry about this factor; when the consumer becomes unsure of the stability of their job you can bet they will cut back on spending. I have been putting in time researching this and have found that the consumer sediment regarding job security is going down. Given the average consumer has become concerned about their job; we are likely to see a decline in consumer confidence followed by a decline in consumer spending. That is a much greater threat to the strength of the economy than any factor facing us right now. What to expect in the next couple of months. More of the same, slower growth of the economy, lower new jobs numbers each month and a stomach full of continued sub-prime news. The residential real estate market will continue to slow; I think we are probably 24 months away from any real start to a recovery in the residential real estate market. Home values will continue to trend downward, the values will stabilize at some point but look for them to continue downward for now. The market was over inflated and what is occurring right now is a re-pricing of value. Will KC get hit hard, in this market we will not be shielded from the downturn. However, KC will not see the downturn as sever as other areas of the U.S. such as the east and west coast. Those areas will be much more affected and the correction may last longer than the 24 month time period I have predicted. Stay focused on your business, talk to your clients, this is the best way to navigate through this slow economic patch. This will ensure that you stay ahead of the trend. Fed Watch The Federal Reserve stepped off the side lines and got into the game by reducing interest rates by .50% and lowering the prime interest rate to 7.75%. I, along with most business people have been anxiously awaiting the Fed meeting which occurred in mid September. Over the last couple of months I was 92% sure of a rate cut. However, within the last 45 days, my commitment to that position was getting soft. The Fed has been out on the street talking about the economy and that they felt the economy was on solid ground. Then came the focus on inflation, and that inflation, not the state of the credit markets was the main concern. I really started to feel that there was a much greater possibility that the Fed was not going to lower rates but keep them in check. Keep in mind, the financial markets had already priced in at least a .25% reduction in interest rates. This was an interesting piece to the puzzle, I think the Fed was sending an early message that the financial markets were not going to dictate monetary policy to the Fed and that the Fed would do what they felt was best for the overall market and the economy. Here is the reality, if they Fed did nothing at the September meeting, the stock market would have taken an uncontrolled nose dive, I am talking a double digit loss and when things settled down a bit, the market would be sitting on a foundation as solid as cardboard, which could give out again at any time. Now, here are the cards the Fed had to play with. The credit markets are in the tank, housing sector is bleeding badly and instead of the economy creating 100,000 or more new jobs things went backwards with a net loss of jobs for the month. What you are hearing from the media is the watered down version of reality. The sub-prime loan market is massive, at current count there are roughly 2,000,000 loans classified as sub-prime. The fact that they are sub-prime does not make them automatically bad, if fact, over 80% of them are current and not delinquent. Here is the problem; these loans were structured as no money or low money down, at very low “teaser” interest rates. When the teaser rate period expires, these loans adjust to a higher interest rate. This is the problem, given increases in gasoline, utilities, food, etc. borrowers do not have the disposal income to pay a higher mortgage payment. This is a significant problem but not the initial cause of the loan problems. These loans were working fine until the housing sector started to go into the tank. The fact that the value of the houses these loans are secured by, are now worth less is the root of the problem. In the past, when these loans “adjusted” borrowers would have simply refinanced the loan to obtain a lower interest rate compared to the adjusted rate on their current loan. No problem, the beat goes on and everyone is happy. However, with the housing sector seeing values coming down, the borrower does not have the ability to refinance the loan so they are stuck with the significantly higher mortgage payment. This has been one of the major causes of defaults in the sub-prime market. We will not be done with the sub-prime market problems for another 2 years. We have seen the first couple of waves of interest rate adjustments and there are two more large waves coming, one in 2008 and another in 2009. The question will be will the housing sector recover enough to allow these borrowers to refinance when their adjustment hits. The Fed had indicated that the problems in the sub-prime market had not affected the other credit markets. Do not believe this, most have no idea how intertwined the credit markets are. I recently attended a conference on the credit markets and it is amazing how intertwined the markets are, the fact that many of the sub-prime loans were monetized and sold in pools into the financial markets tells you that there is not one sector of the financial markets that is without exposure here. The buyers of these securitized pools included hedge funds, pension funds, insurance companies, banks, including foreign governments. You just do not hear about this because this issue is being kept very quite. In addition to some real monetary exposure within the credit markets, the greatest effect from this is fear. I am seeing fear spreading across the entire spectrum of money providers. This is a much greater problem in the market than the sub-prime issue. The fear is coming from uncertainty, as long as the credit markets remain in a state of uncertainty, obtaining capital will be more difficult. What I mean by this, you can expect higher interest rates on loans, lower loan to value mortgage amounts and more stringent loan terms. I do not expect things to change until the credit markets start functioning again which is likely to be later this year. Now, given all that, the good news here is the Fed has stepped up to the plate and started reducing interest rates. I do expect the Fed to continue reducing interest rates at least once more this year. I felt we would see interest rates reduced by ¾ of a point by year end and I am still of that belief. I think we will see one more cut of .25% by year end but I may be conservative on this, we could see more than that depending on how the economy performs over the next couple of months. The rate cut is great news for all of us. The cut will soften the economic slowdown we are in right now. Retail sales will be a little lower this holiday season compared to last year but should rebound in 2008. As we now enter an interest rate decline cycle, capital will start to become more affordable. Once we get past the effects of the credit market problems and things return to a more normal cycle, this will allow the business community to get back to business and start taking advantage of a much more favorable lending and lower capital cost environment. Industry Alert Corner Industry in the spot light this month: Animal Health Industry. I have included this sector is previous newsletters but wanted to highlight this sector again this month. In case you are not familiar with this sector, companies within this sector are involved in animal health products such as; nutrition products, drugs, vaccines and a number of other important products and services for animals. This sector is on fire, companies within this sector are among the fastest growing in the U.S. with no end in site. If you are a pet owner you can understand why this sector is doing so well. For those of you non-pet owners, just look at the financial strength of the players in this industry. I was talking to a client recently who does business with a number of companies within this sector; he indicated how well his clients were doing and the amount of M&A activity within the sector. A key point here, KC is quickly becoming a location of choice for companies within the industry. From St. Joseph on the Missouri side to Lawrence on the Kansas side, the KC metro area is seeing a major inflow of animal health companies locating into new or existing facilities. The Kansas City Area Development Council is dong a tremendous job of recruiting companies within this sector to come to the KC metro area. I just heard that one of the Animal Health Associations has decided to relocate their headquarters to the KC area. This is big news! A contributing factor to the influx of animal health companies is due to the strong animal health education programs at the universities in Kansas, Missouri and Iowa. Major universities within these states have leading programs in animal health which are a factor when these companies are considering facility locations. This is great news for the KC metro area. Companies in the animal health sector represent great service opportunities for all of us locally. Additionally, these companies are financially sound so that should be another incentive for you to do some research here and find out if you can provide service to one or more of these companies. The industry will continue to grow and with KCADC and other economic developers pushing to bring more companies within this sector to town, this should create further service opportunities for all of us. The opportunity is there, it is up to you to take some action here. I would be happy to discuss this sector further should you have questions feel free to call me with any questions. Manufacturing Sector Slow steady growth is the order of the day for the manufacturing sector. The sector showed expansion again during August with an index reading of 52.9 which was slightly lower than the index reading in July. 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. The sector has been under some pressure for the last several months resulting from a slow down in the overall economy. This will continue to be the case for the remainder of the year. There were some bright spots within the report during the month. The following key indicators were up for the month; Production, Employment and Exports. This is a great sign; the manufacturers ramped up production during month to bolster lower inventory levels. Inventory levels for both the manufacturers and the distributors were down, replenishment of these inventories will continue over the next several months. The pipeline of new orders was slightly down during the month, but not enough to be concerning. I have been seeing more press about manufacturing in the U.S. starting to make a come back. I am sure this sounds off base, the media would lead you to believe that the manufacturing sector checked out of the U.S. years ago. While many manufacturing operations have left the U.S. what you do not hear about is the new facilities opening all over the country. This is happening in all different sectors, even the automobile sector. The major players in the auto sector who are opening new manufacturing facilities are not U.S. based companies but foreign based auto makers. Honda being one of the more active auto manufacturers in the U.S. is now building a substantial amount of cars in the U.S., almost on par with their operations in Japan. Most of what I am seeing respective to new manufacturing in the U.S. are small to mid sized companies opening operations. These companies have concluded that it is much more efficient to manufacturer their product locally in the U.S. Yes, the cost is higher, however they are able to charge more for their product due to the fact they can more easily accommodate special needs of their clients and the delivery time is significantly less. The overseas manufacturing operations can still produce products at a lower cost, but their platform is based upon mass production so if a company needs something modified or manufactured to meet their specific needs which would not be on a mass production scale this is a challenge for them. Additionally, delivery time continues to be an issue with the overseas manufacturers, with the increase in ocean freight this is pushing back delivery times. These issues are slowing creating manufacturing opportunities locally in the U.S. Finally, as the overseas markets deal with their growing pains, this is putting pressure on their pricing so the days of low cost materials could be could be numbered. A recent announcement by China to reduce the export rebate on goods exported out of the country from 13% to 5% will push prices on goods coming out of China upward. Don’t count this sector out just yet; I am encouraged with what I am seeing and feel strongly that we will start to see a resurgence of manufacturing in the U.S. I do not think it will be products that can be mass produced, rather products that are more technical in nature where quality not quantity is the focus. ENERGY SECTOR SPOTLIGH Oil jumped past $80 per barrel this month, the highest price in the history of the sector. Even though prices dropped back down into the upper $70’s per barrel, you should probably get use to seeing oil prices hover right around $80 per barrel for the foreseeable future. I see no indicators which would lead me to believe oil prices will be coming down. The question I have had for some time is whether fuel pricing at the current level is sustainable. So far the consumer has absorbed the higher fuel cost and has maintained spending at a pace consistent with last year. How did they do it, mostly by using credit card debt which has been on the rise for some time. As I mentioned before, the consumer is king. What happens when the consumer slows down on spending, what will the oil companies do. My thought here is that pricing at the current level is sustainable so long as the consumer is willing to pile up credit card debt. The only thing that seems to slow down the consumer from spending is when consumer confidence starts to soften. That can be caused by a number of different things, but one is concern for job security. If the consumer feels that their job may not be solid, they will reduce spending. We may start to see this over the last part of the year. As I mentioned above, I am starting to see an increase in fear over job security, time will tell if that will slow spending but my guess is we will start to see the effects of that in lower consumer spending. When this happens, the oil companies will likely see the effects of lower consumer spending and will be faced with higher inventories of gasoline. If this happens, we should see fuel prices start coming down. No idea when or if that will happen, but either way I do not feel that gasoline prices hovering around $3.00 per gallon are sustainable long term.
	KC INDUSTRIAL REAL ESTATE UPDATE Steady as she goes, the KC market continues to chug along as we enter the fall season. The local market has remained solid through the first half of 2007. Vacancy levels remain at historic lows at just over 8%. Prospect activity remains steady despite slowing in the overall economy. As we are now entering the last half of the year, a comparison of the local KC industrial real estate market from this time in 2006 and current 2007; the market has preformed much better year to date 2007. Now having said that, I do expect to see some slowing of the market over the last half of this year. My position is based upon the comments I am hearing from my client base. While there remains consistency in business activity, there is some caution as we move into the last half of the year. There has been some real slow down in parts of the local business sector, but I think there is some uncertainty coming into play here. This is understandable, when you turn on the TV and hear that the economy is heading for a recession it is difficult not become unsure of what the rest of the year will bring. Here are some highlights for the industrial real estate market; lease rates have started to trend downward somewhat. I am seeing no rent growth now in either new or existing properties. Additionally, this is true for both flex and bulk warehouse properties. I have started to see some decrease in lease rates over the last two months. This is true in both lease renewals and new lease transactions. I felt this was an isolated event; we do have historically low vacancy levels so I really did not think falling lease rates could be a coming trend. However, based on what I am seeing right now, lease rates could start to come down over the next 24 months. I do not think this will be across the board but selective based upon how aggressive a building owner wants to get to land a tenant for their building. In any case, the needle has starting pointing at the tenant and away from the landlord. We could start to see incentives coming back into play sooner than I had anticipated. I am starting to see free rent offerings again. This should be welcome news for those companies who lease space and are in the market for more. Look for new construction to slow over the next 12 months. I know most of the active developers (including me) are being very cautious respective to bringing new inventory on the market right now. However, this is more geographic, some areas of the KC metro will still see new buildings coming on-line. Lenexa, Olathe and Shawnee will have new projects coming on line over the next 12 months. Lee’s Summit, KCI area and Independence will see new buildings popping up in these submarkets as well. The reason why these submarkets are seeing activity is that prospect interest in these submarkets continues to be active. As long as there is demand, developers will continue to provide inventory. If you are interested in purchasing a building, be prepared to pay at the top end of the pricing curve. Prices for existing buildings continue to move upward. I have been talking to several local brokers who are marketing buildings for sale. It is interesting that they are quick to compare the sale price of their listing to a newly constructed building with similar amenities. This is smart, new construction costs have been increasing dramatically over the last 3 years. As the cost for new construction moves upward, sales prices for existing buildings are following right along. Additionally, the gap between the price for a new building and an existing building continues to narrow. This makes the decision to buy or build a tuff one for many companies looking at both options. The market is at peak pricing right now, having some patience here and sitting on the side lines is what I recommend. Pricing on existing buildings will stabilize during 2008. I do expect to see much better pricing during 2008. New construction costs are starting stabilize so this will slow upward pricing on existing buildings. You will find the sales environment in 2008 to be much more favorable for the buyer. COMPANIES MOVING IN THE MARKET MIDWEST OFFICE TECHNOLOGY 20,776 SF LENEXA, KS QUALSERV CORP 76,948 SF NKC, MO CB, USA 21,600 SF NKC, MO EVEREST MIDWEST 27,775 SF LENEXA, 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.