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LS Commercial E-News
FEBRUARY 16, 2013 VOLUME 1, NUMBER 1
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.
UP AND DOWN AND ALL AROUND
What a month; the credit markets are in a state of chaos, consumer
confidence is down, oil continues to rise and on and on and on goes the bad
news. These are perfect times for the media, lots of bad news to put out
there and hype it up to the average viewer. What should you believe; is the
economy at the end of the cliff as many have said? Or, is the economy simply
going through a natural slowing process and still on solid ground. I am
Economic Snapshots:
raising my hand for the latter, a natural slowing process but still on solid
Unemployment ground. As I have always stated, disregard the hype and emotion and look at
4.7% (National) the facts. Yes, there are issues within the economy. There has been an
New Jobs for July overall slow down in economic performance but this is not new information,
92,000 the economy has been slowing at a steady pace for the past 8-10 months. In
Unemployment
case you missed the numerous rate increases by the Federal Reserve, this
5.3% (KC Metro)
Housing Permits was a designed path to slow the economy. And guess what, it is working. So
down this to see slower economic growth is not a bad thing; it is a planned event which
month is designed to allow for the economy to slow gradually overtime, allowing for
what the economists call a “soft landing”. The Fed is responsible for
monetary policy which is designed to maintain our economy in a positive
position while limiting inflation. The current movement within the economy;
Quick Facts – KC Metro is a result of the Fed’s actions and are in line with their expectations.
Area
Now, as I stated above, look at the facts and this will always show you the
Air Freight 21 real picture of what is occurring. The facts are the economy is still on track
million pounds for growth this year between 2.2% to 2.4% which is right in line with
moved through
expectations. Monthly new job growth is averaging slightly below expected
KCI Airport
Housing Permits in levels, unemployment remains at historically low levels (4.6%) and the
July – 500 units manufacturing sector continues to show expansion month over month. These
Help Wanted down are the facts, the economy is slowing, new job growth will be lower than
35% compared to expected but none the less we will continue to see new jobs created each
same time last
month and the manufacturing sector will continue to hang in there with
year
Passenger Traffic modest expansion each month. Is this a picture of doom and gloom, no and
moving through notice I have not interjected any hype into the picture, just the facts as they
KCI July 2006- stand right now.
1,000,000 people
July 2007- Some comments regarding the credit markets, things could get much worse
1,100,000 people. in this sector before they get better. Initially, the problems in the credit
market had been isolated to the residential real estate sector (sub-prime
loans) but this problem is like a common cold and is now spreading into other
sectors of the credit market. Now, keep in mind, there are real problems in
the sub-prime mortgage market but apart from that there is a lot of emotion
going on here and much of the imbalance that is occurring as uncertainty
spreads across the other credit markets is fear and not fundamentals. Fear is
not sustainable and thus the spread of this uncertainty will have a short
duration and I do expect most of the credit markets to return to stability
soon.
Now, get back to business, know that our economy is not on quick sand and
get out there and make some money and do your part to support the U.S.
Meetings and economic machine.
Presentations – I am
happy to speak on the
state of the real estate Fed Watch
industry and business
economics to any group or The Federal Reserve has been flexing its muscle during the last 45 days. As
organization that you may the credit markets nose dived, the Fed entered the market and started to
be a part of. All this make some very aggressive moves to stabilize the situation. I am always
knowledge free of charge,
amazed at how much influence the Fed has over the economy and financial
happy to share my
thoughts and insights. If markets. The Fed took swift action over the past few weeks to shore up the
you would like to book a credit markets by injection over $50 billion in cash into the market. I have
time with me please talked to a lot of people regarding the actions of the Fed and most of us
contact me via e-mail or common people have little understanding of what they are doing, we just
phone and let me know
know they pumped a ton of money into the economy. In summary, here is
the date and time of your
event. I will make myself what they did, they watched the credit markets start to tail spin, with most of
available schedule the problems centered in the sub-prime mortgage market. This created some
permitting. panic within the banking industry which caused the banks to start to tighten
credit and increase spreads on loans (higher interest rates and higher
requirement for equity) to the borrowers. This action by the banks is not
good for the economy, any significant restriction of capital and significant
increase in the price of capital (interest rates) will have an immediate
negative impact on the overall economy. With limited access to capital
coupled with capital that is overpriced, the business sector will become much
less active and thus we will see that reflected in a much slower economy and
increased unemployment. What the Fed did was to inject money back into
the financial system by repurchasing Fed Notes from the banks. The Fed
Notes are debt issued by the Fed which the banks purchase and then receive
interest payments from the Fed. By repurchasing these notes, the Fed then
floods the banking system with fresh cash which the banks then have to
redeploy in the form of loans to put that money back to work. This is one of
the early steps the Fed takes to try and stabilize the credit markets by
increasing the liquidity of the banks. Will this work, no way to know initially.
My guess here is that it will take another month of so to see if the Fed can
settle down the markets. If increasing the money supply within the banking
Snapshot – Manufacturing system does not do the trick, there becomes a real possibility that the Fed
Sector will have to start reducing interest rates. Everything that I have heard over
the past 60 days indicates the Fed will only reduce interest rates as a last
Back Log Orders resort. A Fed interest rate cut has not been expected until early 2008 so I
down
assume they will be resistive unless they absolutely have to cut interest rates
New Orders down
Inventories up to support the economy. Now, having just said that I am hearing that there is
Export orders up a 50% probability that the Fed will reduce the Fed Funds rate by .25% at the
Employment down September Fed Open Markets meeting, keep your fingers crossed for this
Production down one.
Supplier deliveries
up Lots of data and opinion out there right now regarding the credit markets.
Prices down
What really matters is what your banker is telling you right now. My advice
Customer
inventories up here is to be very cautious right now if you are going to take on more debt. I
do believe that interest rates will be coming down but when that will happen
is a guess at best right now. If you are considering an acquisition or
purchasing equipment that will require financing, get out early and talk with
your banker. The banks are making loans, but the terms and pricing of that
capital may be different than what you are used to. I have been advising my
clients to go to the bank first and get a feel from their banker respective to
what they can expect. Given the emotion in the market, you just do not know
how the lenders will respond.
Industry Alert Corner
Industry in the spot light this month, Residential Construction Materials
Suppliers.
I usually cover in this section what I consider an emerging industry sector
but I felt it was important to cover the residential construction sector and
point out some significant concerns I have but also some real opportunities
that I feel are there as well.
As all of you know, the housing sector has been performing poorly for some
time. The slow down in this sector is affecting every industry in this sector
from raw material suppliers, contractors, and service providers (mortgage
companies). The beating has been spread out across the entire sector and no
company has been insulated from the pain. I have several tenants who are
serving this sector and they are having a tuff time right now. A word of
caution here, you should be very cautious with any clients you serve who are
operating in this sector. The slowdown has and will affect the companies
operating within this sector and this could create some exposure for you as
well. Caution and communication are best in this case.
Cost breakdown at the
Now, enough about the obvious challenges within this sector. As with any
pump for diesel fuel
downturn there is opportunity. I really see some positives here respective to
future business opportunities. This sector is taking a beating right now and I
Taxes – 19%
think it will get worse before it gets better. However, if you look inward
Distribution/Marketing –
within this sector, you will find some real service opportunities. The sector is
15%
filled with small, mid and large size companies who are battling to stay alive.
Refining – 14%
This is where I see the real opportunity, many of these companies are being
Crude Oil – 52%
pounded by their service providers and what they need right now is a helping
hand to get them through the tuff times. No I am not suggesting anyone do
something that is not smart here, but the service provider that can step in
DIESEL PRICING
and work with companies in this sector during this period of tuff times will be
U.S. Weekly Average
positioned well to take advantage of that relationship when this sector comes
Per Gallon
back to life. In case anyone was wondering when this might happen, a guess
is just a guess right now, but I am well satisfied that the sector will come
08-06-07 - $2.898
back. Keep in mind, there are numerous service opportunities for this sector,
08-13-07 - $2.847
transportation, financial services, distribution, assembly and the list goes on.
08-20-07 - $2.868
This sector is worth some consideration and certainly some research if you
are not currently providing service to this sector. Be cautious, but be open to
the possibilities that could come out of jumping in here. As I said, I have
several tenants who are operating in this sector and I will continue to work
with them and will consider further relationships with other companies in this
sector. When this sector turns around, and I know it will, I will be there with
these companies as their businesses improve and will benefit from their
growth.
Wheeler Downtown Airport
I would be happy to discuss this sector further should you have questions
feel free to call me with any questions.
Number of Flights
July 2006 – 71,000
July 2007 – 90,000 Manufacturing Sector
Another positive month for the manufacturing sector during July. The PMI
index reading for July was 53.8 which was slightly lower than the June
reading.
The sector has been a bright spot in an economic market filled with
challenges. Coming off a strong 2nd quarter, manufacturers continued to see
progress during the month, there was some pull back in activity compared to
last month, but that is very normal for this time of year. During July and
August we typically see a slow down in the activity level. It is a time of year
that families are preparing for back to school and taking end of the season
vacations. The index readings are in line with this trend and I do expect to
see an increase in the index over the next couple of months.
Some interesting comments contained within the ISM report this month.
Commodity prices for raw materials are starting to stabilize. This is certainly
welcome news for the sector. When commodity prices are in flux it is very
difficult for the manufacturers to anticipate price levels of their raw materials
and that puts pressure on earnings if the commodity prices move upward too
quickly. They cannot incorporate those increased costs into their pricing
which is reflected immediately in their bottom line. Oil continues to have an
impact on the plastics and the rubber industries, pricing in this sector
continues to be in flux and there does not seem to be any end in sight for oil
price movement.
Looking at the key indexes for July, there were several of the indexes that
were slightly down compared to last month. However, the readings were still
very strong. Manufacturers continued to build inventory during the month,
Customer’s inventories were down significantly which was an indication of
increased sales on their end. They will be rebuilding their inventory levels
which will cause the manufacturers to increase production to meet that
demand. Back log orders were slightly down from last month but still very
strong as well. Although several of the index readings were slightly down
from last month, they are very strong and show a trend of stability which
should equate to a strong 3rd quarter for the sector.
The overall report was positive, despite what we are seeing in other parts of
the economy, the manufacturing sector continues to be a bright spot.
I was at a conference recently and one of the discussion points was on the
U.S. manufacturing sector and the effect of globalization. I am sure all of you
have heard one of these presentations and they all seem to be playing the
same record, U.S. jobs continue to leave our country and head to Asia or
other parts of the world. The speaker was giving the audience a play-by-play
of his recent trip to China and how their economy is on fire and the amount
of development going on the throughout the country. He was very impressed
with the progress, how they can build a bridge in ½ the time it takes in the
U.S. and how they are out ahead of the industrial development of plants and
distribution centers with the construction of infrastructure and roads. This is
the same old story and right before I turned the guy off (having heard this
same story for the 2,000th time) he took a breath and said; you know this is
the same thing we saw years ago with Japan and people were saying the
same thing back then about our economy and manufacturing base, that all of
the good jobs were heading overseas to Japan. He commented further, look
back at what really happened; yes, lots of manufacturing ended up in Japan
and they had a great run, followed by years of dismal economic performance.
Meanwhile, the U.S. economy plugged along and continued to expand. Now
Japanese companies are locating plants back in the U.S. and the U.S. is
where they are expanding their manufacturing capacity not in Japan. He
makes a great point, no one is telling that story and there is a reason why
Japanese companies are locating plants in the U.S., it is a great place to
produce product. He closed with another very good observation about his
travels in China, even though he was impressed with their progress, he said
the jury is out on their ability to sustain the pace of growth they have
experienced. They are a communist country which will complicate the process
for them. Further, they have migration of over 30 million people each year
relocating from rural parts of the country into their industrialized cities. He
said try keeping pace with that influx of people each year (equal to the
population base of a large state in the U.S.) just housing alone is a
monumental financial challenge. Interesting comments, one other thing that
came to mind for me, all the talk about Chinese products and how cost
efficient they can manufacture widgets; I am not starting to hear discussions
about quality. If you want to know how they can produce products so
inexpensively, just review the news clips over the last 6 months and that will
give you all the answers on this question you need, lead in toys, plastic
residue in wheat based products, and on and on. Next time you hear
someone talk about how all the manufacturing jobs are heading to China,
remind them about Japan, who by the way can manufacture a toy you did
not have to worry about.
ENERGY SECTOR SPOTLIGH
Oil remains north of $70 per barrel and I do not see any indication that the
pricing will change soon. I was talking about energy prices with some clients
during the month and heard an interesting take on gasoline pricing. The
prediction was that prices would be coming down starting in mid August and
moving down throughout 3rd quarter. I contended this was just a theory and
my client responded with “no, this is a fact”. I just had to press this and
pushed for supporting data for this fact. The response from my client, the
summer season is coming to end and vacations are over as the kids return to
school. My client added that the oil companies will now start dropping prices
given the end of the summer season anticipating a drop in demand. Pretty
compelling position and there is some historical data out there that would
support this. Nonetheless, I still contend his position is more of a guess but
he could be right on the mark, gasoline prices have starting coming down.
As a side note, I have been harping about our need to reduce our
dependence on oil as quickly as possible. Everyone I talk to about this makes
the same comment, have I noticed the revenue numbers coming from the big
oil companies recently and how strong their lobbyist are in Washington. Well
all that aside, we need to do something. I have been reviewing information
on coal industry. You know that other stuff that fuels most of our power
plants that you never hear about. I wanted to share some interesting data on
the coal industry. Interesting fact; if you combine the energy production level
of wind, water, nuclear, oil, natural gas and solar all together they produce a
fraction of the energy that coal produces annually. Production costs are also
worth noting, the cost to produce 1 million BTU from oil is $8.66; the cost to
produce the same equivalent energy from coal is $1.66. What are we missing
here, look at the cost difference. Finally, last year in the U.S. producers
consumed more than 1 billion tons of coal, that sounds like a massive
amount of this mineral, how much more can be left to extract for our use.
Based on the latest calculations, how about 243 years. Oh and by the way,
all of this resource is located within the U.S. Why is coal such a bad word, we
the have technology that allows for a clean burn of this mineral, lets push the
use of this energy resource and cut down on the use of oil. This would make
good politics as we could reduce the amount of money we are piling into the
Middle East. Just a thought here.
KC INDUSTRIAL REAL ESTATE UPDATE
Summary Info Temperatures in KC have been hot enough to cook a steak on the sidewalk.
1. Vacancy Rate We are in the midst of the hottest part of the summer season and we are
8% seeing temperatures averaging in the upper 90’s to low 100’s. The heat along
2. Average Retail with end of summer vacations has slowed the activity in the market. This is
Rates Bulk typical but based on how active the market has been, I did not think we
Space-$3.38 would see any real slow down this year.
psf / Flex
space-$8.50 sf
both are
modified gross
industrial lease
I do expect to see things pick back up during the month of September. I am
already seeing movement back in the market, mostly discuss at this point but
that will lead to action in the short term.
The KC market has been the focus of a lot of press lately. The buzz is about
the resilience of the market despite the slowing national economy. I wrote an
article for a trade publication that I am a contributing editor for called
Heartland Real Estate Journal. The editorial editor wanted me to elaborate on
why the KC market is solid amidst softening that has occurred in other parts
of the country. In the article, I covered several positive aspects of the KC area
that contribute to our stability, which included; central U.S. location, work
ethic, affordability, diversification of our local industry base, outstanding
logistics (highway system, airport, rail, air cargo, barge), available skilled and
unskilled workforce, pro-business municipal environment. All these in addition
to several other key aspects that combined make the KC market attractive to
outside companies. The interest in KC from corporate America is real; you will
continue to see more companies establish locations in the KC area which is
great for current business base. This will create further business opportunities
for those companies doing business here now.
Given the stability of our local industrial real estate market, do more
companies locating in the KC area have an affect on the overall real estate
market? The answer to that is yes, the real question is, how will we see this
affect. As the industry base in the KC area expands, the residual effect will be
lower vacancy rates and possible increase in lease rates. I are starting to see
some of this now, the vacancy rate has remained at historically low levels
(just above 8%) and I do not expect that to move much for the remainder of
this year and into early next year. Lease rates have increased slightly. We are
seeing more upward movement in lease rates for flex space (smaller bay
space sizes with ceiling heights below 18 feet). I am not seeing the same
increases in lease rates for bulk warehouse space (larger bay sizes with
ceiling heights above 20 feet), but I am seeing inventory levels remain very
tight and vacancy rates at 8%. I do think there could be some upward
movement in rents for bulk warehouse space but not until later this year.
There are some new bulk warehouse buildings being built, this will affect
inventory slightly but not enough to move the vacancy rate upward.
The market remains weighted towards Landlords at this time. Lease
incentives are not common and there is competition for good distribution
space that is currently available, from more than one prospect. Having said
that, Landlords are still anxious to get the deal so I am still seeing aggressive
lease proposal out there so that is good from the Tenant’s perspective. I see
no change in this trend for the remainder of the year.
The areas in metro KC that are seeing the greatest activity of new building
activity are; Lee’s Summit, Blue Springs, KCI, South KC, KC North and
Independence on the Missouri side. On the Kansas side; Olathe, Gardner,
Shawnee, Edwardsville and Lenexa are seeing the most new building activity.
These areas have available industrial land zoned and ready to build on. These
areas will continue to see activity for the remainder of this year and into next
year.
I have not commented much on the “for sale” market in the last two
newsletters. The market remains a sellers market; building prices continue to
move upward. I am seeing average sale prices for existing buildings less than
100,000 square feet at $45 per square foot and moving upward. Given the
state of uncertainty within the credit markets I am finding it hard to
understand why so many buyers are active in the market, but there are a lot
out there right now. I am not recommending that a company make a move at
this time to pursue buying a building. The market is at the top end of the
pricing scale and anyone buying right now will be paying a premium.
Additionally, the cost of capital and the loan structure banks are requiring are
not favorable. Put these two together and you have a receipt for overpaying
for a building. I do look for the “for sale” market to improve. Pricing should
come down slightly over the next 12 months; however the larger issue will be
the trend downward of interest rates which we should see starting in 3rd
quarter of this year. This is a much more significant impact on the cost of
ownership and in this case a little patience will pay off in the long run.
COMPANIES MOVING IN THE MARKET
EVEREST MIDWEST 27,775 SF LENEXA, KS
PISTON AUTOMOTIVE 75,000 SF LIBERTY, MO
SPC DISTRIBUTORS 41,000 SF LENEXA, KS
GH IMPORTED MERCHANDISE 120,000 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.
