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LS Commercial E-News JUNE 2006 VOLUME 1, NUMBER 1 This Newsletter is being provided to you free of charge by Paul Licausi, President of LS Commercial Real Estate. STEADY FOR NOW BUT FOR HOW LONG The heading for this section has been a hot topic over the last month on several media outlets. Discussion between economists, analysts, investment bankers, community bankers, government representatives, etc. and a whole host of other people weighing in on this subject. All of the discussion focused on what will happen to the economy over 2nd, 3rd and 4th quarter of this year and the opinions have been all over the board from continued economic expansion to a slowing economy followed by a slip into a recession. Now, not that these opinions are not important and good for all of us to hear and consider, but the bottom line here is for you to consider the overall economic news coupled with what is happening in your world (your sector of the market). Here is my take on where the economy is going over the remainder of 2006. Overall economic growth will slow over the remainder of the year, the unemployment rate will level offer and tick upwards between .5% to 1%, energy prices will continue to be higher (gas between $2.40 to $2.80 per gallon) but stabilize and interest rates will level off and prime will be between 8% to 8.5% throughout the remainder of the year. This is my take on the big picture, I could be right or all wet on this, time will tell. What is the basis for my opinion, several factors ranging from economic data to what I get from the street. I have always stated, the consumer is king, when the consumer feels good they spend money, they have a significant impact on the economy. The consumer is getting squeezed right now from several different angles, gas/energy prices continue to remain on the high end of the scale and this continues to reduce disposable income so the consumer has less to buy other goods and services. Most consumer purchases are done via credit cards, as interest rates continue to increase this also creates a higher cost structure, which naturally will slow consumer spending. Finally, interest rates continue to increase which has adversely impacted the cost for home mortgages, a large percentage of the home loans in the U.S. are variable rate loans and as interest rates rise so do the monthly payments on these mortgages, this also will reduce the buying power of the consumer. Economic data released over the last 60 days shows consumer confidence dropping, what this really means is that the consumer is not spending money and when that happens, a slowing economy will soon follow. Further signs of this are a cooling housing market, this trend will continue as well over the remainder of the year. Given this information what do we do now, keep focused on your business activity and be proactive in decision making, if your business is doing well (which most of us are) keep pushing to capture as much revenue and profit as you can but keep an eye on the future (which is the next 12 months) and think about strategy for your operations if sales are not as robust as they are right now. The economy will always follow a roller coaster path that is the nature of our economic structure, the goal here is to keep a close on the indicators that are out there and anticipate the ups and downs. Economic Snapshots: Unemployment 4.8% (National) New Jobs for May 75,000 Unemployment 5.1% (KC Metro) Housing Permits Flat for the month Quick Facts – KC Metro Area Air Freight 18.5 million pounds moved through KCI Airport Housing Permits in April – 900 units Help Wanted down.09% compared to same time last year Passenger Fed Watch Traffic moving through KCI April 2005750,000 people April 2006-800,000 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. Federal Reserve was true to prediction with a .25% increase in the Federal funds rate at the May meeting pushing the Fed Funds rate to 5% and the prime rate to 8%. What happens next, the consensus was, prior to the May meeting the Fed was going to take a break after the May meeting and that we could expect some period of level interest rates. The Fed chairman has spoken several times after the May meeting and inflation continues to be a concern, which has prompted many to believe that the Fed will hit us again at the next Fed meeting. Can they be for real, you bet, I really believe that the Fed governors that vote on interest rate policy are so afraid of inflation that they are willing to stall out the economy to keep inflation a non-issue. I am just throwing this opinion out there, now, just look at their operating history over the last 20 years. They have over corrected on monetary policy in each cycle and have pushed the economy into recession every time. The buzzword is always a “soft landing” which means that they slow the economy just enough to tame inflation but not push it into a recession. That is a great idea and hopefully some day they will actually do that, but what really happens is they just cannot seem to restrain themselves when they get close to their goal; they just keep pushing rates up then wonder later why they stall out the economy. Here is an idea; stop-raising rates at each meeting, take a break, see how the economy operates after a series of rate hikes. At this point, they have effectively completed their goal, they have started to slow the economy, do you think they will stop raising rates, don’t count on it, my guess is that they will hit us at least two more times pushing rates up another ½ point which will really slow the economy down and put us in danger of another recession. When will realize they have gone too far, either is 2nd or 3rd quarter of 2007, they will have no choice at that time but to lower rates again to jump start the economy. My suggestion to the Fed, give us all a rest and maintain rates where they are right now until late 3rd quarter meanwhile they can watch economic conditions over that time period. Just my view, which is wishful thinking. You should consider past operating history by the Fed that is most likely to repeat itself. My recommendation to you, reduce short term debt into an increasing rate environment while cashflow is strong that way if we do start to see significant slowing economic conditions you will be in a solid financial condition and be ready to take advantage of opportunities at they come available. Industry Alert Corner Industry in the spotlight this month, Popcorn Industry. Who doesn’t like popcorn; billed as a great snack food it has a wide appeal from young to old. This sector of the food industry has been growing for the last several years. Although dominated by the big corporate boys, there are a number of regional and local players who are holding their own. The product is now being sold in a variety of forms such as; raw kernels, prepackaged kernels for microwave use, cooked product, cooked flavored product and on and on. The product is available to so many different variations and varieties it creates subsectors within this product category. Why has this industry caught my attention, demand continues to increase and that trend should continue. Outlets to sell this product continue to increase and there are no challenges from a supply standpoint for raw material (corn). Add these up along with continued aggressive marketing of this product and you have the ingredients for continued growth. Who can benefit from the goods things happening in the popcorn industry, a whole host of service providers such as; raw material suppliers (farmers), energy suppliers, equipment manufacturers, transportation providers, Snapshot – Manufacturing Sector Back Log Orders down New Orders down Inventories down Export orders up Employment down Production down Supplier deliveries down Prices up Customer inventories down warehousing/distribution (logistics companies), back office service providers (software, telecommunications, etc.) and logistics consultants. These are just a few of the service providers who could benefit from doing business with companies who are involved in the popcorn industry. I am sure I left out a whole host of other service provider groups who could step in and assist these companies, it is worth some of your time to do some research here to find out if your company is a fit for a service companies in this industry need. Manufacturing Sector The manufacturing sector reported a 36th month of continued growth. The sector, although the expansion weaken in May comparative to April. The May index reading was 54.4 which was lower than expected. The summary on the key indicators was not positive for the month; most of the key indicators were down compared to last month. I do not think this is the start of a softening trend in the manufacturing sector, but it merits watching how this sector performs over the next 60 days. The report this month was a reversal of the April report. We had a great month in April all of the key indicators were up and activity was robust. One key indictor that I watch closely each month is new orders; which was the only key indicator that was down for the month during April. New orders and backlog orders are two indicators that typically are a gauge of future activity to come. New orders reflect current inbound activity to the manufacturers from customers ordering product for immediate delivery. Backlog orders reflect orders received by the manufacturers that delivery to the customer is delayed due to an inability of the manufacturer to produce the product at this time. It is always a very good sign when new orders are up and back log orders are up, that is an indication that inbound orders are increasing and the manufacturer is busy and cannot produce the product fast enough to meet established delivery dates to the customer thus causing back log orders to rise. If either of these indicators are down for an extended period of time (over 60 days) that typically is a sign of some softening in the sector. I am not ready to assume that softening is occurring right now, I think this is more of a seasonal issue as we transition into summer season. I do look for things to rebound in June or July. I am sure that energy prices and interest rates are having some effect on this sector, but not to the extent that we would start to see a slow down in this sector now. I think we have a much greater risk of this early next year as we see this will be the time in which I feel the economy will be most affected by the higher interest rates and energy costs. ENERGY SECTOR SPOTLIGHT I read an interesting article regarding global oil inventories. The article cited a recent meeting of OPEC members and several members conceding that global inventories of oil were at an all time high and that they were having trouble selling current production coming out of their oil production facilities. If you apply simple supply and demand principles to this latest news, you would assume that with greater supply of oil the price should drop. My guess here is that will not happen. Why do I believe this, based upon a recent discussion with an energy sector player who gave me the “fear factor” theory that the energy markets have grabbed hold of and are playing this tune as much as possible to anyone who will listen. Here is the fear factor, “it is not so much about current demand or current inventory levels, but the coming demand from China and India who both have 1+ billion populations and have fast developing economies. You will see millions of Chinese moving from a bike to a car which will jump the demand for oil far beyond the current demand”. Get that, not as much about today’s demand but future demand, there you have it the “fear factor”. Better worry about tomorrow and pay for that worry today. If the energy markets can get us riled up and get emotion into the pricing equation then they can very easily prop up prices. The fallacy about this fear factor is that there is no way to gage future demand; there are just too many factors that will influence future demand. Second, the larger OPEC members have already indicated that they intend to produce to meet demand and are building more facilities right now to accommodate a jump in future demand. The goal here for the energy markets is to keep us guessing and continue to inject that fear so that pricing will remain on the high end of the range. With that being said where will gas prices be during the coming months. We should see gas pricing stabilize over the next several months; my guess here is that we will see gas in a pricing range from $2.40 to $2.80. KC INDUSTRIAL REAL ESTATE UPDATE Summary Info 1. 2. Vacancy Rate 8% Average Retail Rates Bulk Space-$3.36 psf / Flex space-$8.32 psf both are modified gross industrial lease Activity continues to be up in the KC industrial real estate market. This trend has continued for the past 90 days and sentiment on the street is very positive. I do believe that the market has finally taken a turn for the better and I expect the market to remain healthy throughout the remainder of the year. In talking to several clients over the past 60 days, I have been trying to determine why the increase in activity now and for what reason. I have noticed one prevailing commonality with the clients that I have talked with, business activity is up and there are no signs of softening. I see this across the board on user types; distributors, manufacturers, service companies, etc. I have not found a user class that is not experiencing increased activity. What does this mean for the industrial real estate market as a whole, low vacancy rates for one. The overall vacancy rate has dropped into the 8% range, which is historically low. The users in the marketplace looking for space continues to increase, however, there is significantly less inventory coming back on the market or being built so the supply side is not keeping pace with the demand side. This is a great trend for building owners/landlords but not users looking to lease or purchase a building. This trend will cause lease rates to increase. This is beginning in selected parts of the metro area but will eventually be metro wide. I do not expect lease rates to increase dramatically but they will be up in a range between 5% - 8% by early next year. Look for bulk warehouse and production spaces to lead the way on rate increases with flex space following shortly behind. Given the vacancy trend and the probability of an increase in lease rates, if you are looking for space, pick up the pace and get something done. Your best pricing will be from now through end of 3rd quarter of 2006. Building “For Sale” inventory levels will continue to remain low. Building pricing will continue to trend upward; however, as interest rates continue to increase this will push more companies out of the market to purchase a building and they will opt to lease instead. This should increase inventory levels over the next 12 months and pricing should flatting out at that time. COMPANIES MOVING IN THE MARKET GUITAR CENTER RIBACK SUPPLY DAL-TILE CORP FUTURE GRAPHICS 700,000 SF KC, MO 16,928 SF LENEXA, KS 43,532 SF LENEXA, KS 31,250 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.
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