LS Commercial E-News
JANUARY 29, 2010 VOLUME 1, NUMBER 1
This Newsletter is being provided to you free of charge by Paul Licausi, President of LS Commercial Real Estate
MORE GOOD NEWS
The Government is all over the good news regarding the performance of the economy over the last couple of months. New jobs created each month continues to be strong, GDP numbers are above average and the stock market in hitting new highs. What’s not to get excited about!! Well, I would agree that we are certainly seeing some real positive economic results and that is always welcome news. I am always suspect of the hoopla that comes out of Washington D.C. and the media, they are two groups that seldom give you the whole story and typically sell hype instead of substance. The economy has solidified, I say this based upon the real data I have seen over the last 60 days and the comments I hear on the street from my client base. For the first time in more than 24 months, I am seeing economic signs that show the economy now on solid ground. Comments from my clients have all been very positive; they are hiring again, their clients are active and many have plans for buying new equipment and expanding warehouse or production space. This is great news for me, it is a real signal of confidence in the market and there is much less fear of uncertainty for the near term. This is what drives our economy, small business taking forward steps; this has the greatest influence on the overall health of the economy than anything else. When small business (which represents the vast majority of the business sector and employs 70% of the workforce) moves one way or the other, this has a weighing effect on the overall economy. We hear everyday what GM or United Airlines is doing and this really has very little effect on the overall economy; rather, any effect that may occur is based primarily on emotion and not based on substance. What can we expect over the next quarter and for the remainder of the year; a strong 2nd quarter but look for the economy to slow down during 3rd and 4th quarter of this year. We will still finish the year with good economic results but the Federal Reserve actions over the remainder of the year will have a dampening effect on the economy and will slow things down as we enter the second half of the year.
Economic Snapshots: Unemployment 4.7% (National) New Jobs for April 138,000 Unemployment 5.5% (KC Metro) Housing Permits Moving up again
Mixed news coming out of the Fed camp over the last 30 days. Several Fed Governors have been out making statements on the state of the economy and they are sending mixed signals. It appears at this point that the Fed will raise the discount rate by .25% at the May meeting which will push the Fed Funds rate to 5%. Here is the where you have to navigate through all of the comments coming from the Chairman and these Fed Governors making statements; the economic data released over the last 45 days reveals the economy growing rapidly in 4th quarter of 2005 and 1st quarter of 2006;, but slowing starting in 2nd quarter of 2006 with an expectation of slower growth throughout the remainder of the year. However, employment levels and energy costs continue to create inflation concerns; which has the Fed in a trick box. If they continue raising rates at the same aggressive pace as they have been, there is a high likelihood they will kill the economic growth all together. If they
Quick Facts – KC Metro Area Air Freight 20
million pounds moved through KCI Airport Housing Permits in March – 1100 units Help Wanted up .09% compared to same time last year Passenger Traffic moving through KCI March 2005850,000 people March 2006920,000 people.
stop raising rates, wage pressure and energy costs could push inflation upward and they do not want that. All of the information I have seen so far indicates that there is a good possibility they will raise rates again at the June meeting then stop. This is not a given but I think their action at the June meeting will be based upon how the economy reacts following the rate increase in May. What should you expect over the next few months, an interest rate increase by the Fed in May and again in June so be prepared for that. I do think we are nearing the top of the rate cycle at this time. My thought is prime will remain in a range from 8% to 8.5% for the remainder of the year; then I expect we will start to see the Fed decrease rates again early to mid 2007. Why would I think this? The Fed has successfully slowed the economy down over the last 24 months; they have achieved an annual GDP (gross domestic product) number just above 3% which is what they want. If they continue slowing the economy the GDP number will drop below the 3% level which is not good. Therefore, I do not feel they have much choice but to take a break here in the next couple of months then decrease rates in the event the economy slows too much in order to stimulate growth again which I think could be a real possibility some time next year.
Industry Alert Corner
Industry in the spot light this month, Printing Industry. The printing industry has gone through some significant changes over the last several years. There have been several factors that have contributed to the change in this industry; the internet, color printers, etc. has taken a portion of the market away from traditional printing. Most of the printers I have talked with over the last several months report a resurgence of their business. My basic question was why? The answer predominantly was a changing and adapting to market needs. Changing, adapting to market needs, we all have to do that why is this industry any different. Capital intensive, skilled labor requirement, ect. all make for a difficult time changing the direction of this ship. However, in talking with several printers over the last several months, the position of most was very positive for their industry. Yes all mentioned the challenges that they continue to face but overall it was a positive outlook for most. I am currently working with several companies within this industry, apart from production facilities and warehouse/distribution needs I do see that this industry has a whole host of other service needs. Transportation, raw materials, equipment, hardware/software are just some of the services that I see are opportunities for business with this industry group. Many of you may already serve this industry, if not; it is worth your time to do some research here. The printing industry is highly competitive so I am sure there is always a willing corporate ear to listen to any ideas or processes that could be more efficient and offer cost savings so see would be worth your time to look closely at these companies and see if you can provide a value add opportunity to them and make a buck in the process.
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.
The manufacturing sector reported a 35th month of continued growth. The sector improved in April and the reading was the highest since November of 2005. The April index reading was 57.3 which was higher than expected but very welcome news. This report showed some real strength in some key indicators which will equate to further expansion of the manufacturing sector over the balance of this year. The report this month was very encouraging; it contained several signs of real strength within the sector. Most of the key indicators were up; production, employment, supplier deliveries, inventories and prices. The one key indicator that I was most encouraged with was the inventory index. For the first time in 12 months, inventory levels increased. This is significant news; it is a signal that the manufacturers are finally willing to increase inventory levels. Why is this significant? I have commented in several past news letters that manufacturers inventory levels continued to remain at historic low levels, pre 2000 manufacturing inventory levels were typically 90 days, and post recession manufacturing inventory levels have been typically 30 days or less. This was a direct result of lack of confidence in the economy by the manufacturers; they have continued to maintain low inventory levels and have been unwilling to build inventory until April. This is brightest part of the positive overall report for the month, it is a clear indication of renewed confidence in the economy by the manufacturing sector and my hope is that this will continue. As I have said in the past, when this sector decides to move inventory levels up, it will have a ripple effect throughout the entire economy. Most of the business sectors will see an increase in activity and this will further bolster the overall economy. Now, the report contained predominantly good news but there was two key indicators that were not positive; new orders and exports. I do have some concern regarding new orders but I think this is more seasonally related and not a precursor to some long term downward trend. This key indicator has been trending upward over the last several months and I expect that we will see it bounce back next month.
Snapshot – Manufacturing Sector Back Log Orders down New Orders down Inventories up Export orders up Employment up Production up Supplier deliveries up Prices up Customer inventories down
ENERGY SECTOR SPOTLIGHT
This sector continues be a roller coaster ride and I do not expect any changes soon. I did catch some interesting developments coming out of congress; there has been some talk among several Senators regarding an excess profit tax on the oil companies. This has been just idle talk with no real support. However, one Senator has now come forward with a proposed bill that would tax excess profits from the oil companies unless they reinvest those excess profits back into new oil wells and new gasoline processing facilities. I really did not give this much credence but he has pushed this proposal from idea to discussion which this proposed bill could get into a committee within the coming months. Now, I think this is not the approach to take; these politicians are beating on the oil companies and blaming them for high oil and gas prices. Let’s not forget; tight environmental regulations have prohibited any new drilling for oil in the U.S. and there has not been a new gasoline processing facility built in this country since the 1970’s. Now the government wants to pound the oil companies but they have not proposed easing any of these environmental restrictions which would allow for more gasoline processing facilities to be built and allow oil drilling on U.S. soil again. One interesting point here, the government is making significant income from these high fuel prices from taxes
collected at the pump. I saw a summary on gas taxes in New York that showed the government was collecting taxes of $.63 per gallon on gasoline. I have not heard any suggestion from any politician to lower taxes on gasoline; that would be immediate cash right in your pocket. Keep hoping! The commodity markets did react to this news regarding the excess profits tax, gasoline commodity prices dropped significantly but oil prices showed little to no reaction. At least we did get some instant relief out of this, all be it short lived I am sure.
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
There was a significant increase in the activity level during April. I have made past comments regarding the lack of consistency with respect to the activity level in the local industrial real estate market, I believe the market may have finally turned the corner. Over the past 60 days the activity level has been very consistent and based upon discussions with several of my clients I feel strongly that the market will remain active for the next several months.
Inventory levels in the overall industrial real estate market have been trending downward for the past 12 months. Bulk warehouse product has been very active for some time and inventory levels in this product type continue to remain on the low end of historical levels. Flex warehouse product was much slower to come back from the last recession. The Flex market really only started to see some reduction in inventory levels within the past 8 months. However, activity in this product type has picked up measurably over the last 4 months and vacancy levels in this product type are just above 10% which is down significantly from 22% which where they were just 18 months ago. The current state of the industrial real estate market has moved from a Tenant’s market to a Landlord’s market. However, there are several new projects starting construction or are slated to start yet this year which would add needed inventory to the market but will not push the needle over to the Tenant’s side anytime soon. These projects are located throughout the KC metro area; on the Missouri side they are, Executive Park, Northland Park, North Kansas City, Blue Springs, Lee’s Summit and at KCI Airport. On the Kansas side they are; Lenexa, Shawnee, Olathe, Gardner, Edwardsville, and Kansas City, KS. The new projects will include both bulk and flex warehouse product so this will add needed inventory to both of these product types. Expect for some existing building space to come on the market for lease, we will see some larger blocks of space come on line towards the end of this year in Executive Park and Fairfax (KC,KS). I am expecting around 350,000 to 400,000 of existing space to come on the market in Missouri and about 300,000 to 450,000 square feet of existing space to come on the market on the Kansas side this year as well. The vacancy level in the flex warehouse product type will continue to trend downward throughout this year and should level out at around 9% vacancy. There will not be as much new Flex warehouse product built this year but we could see that change in 2007. Bulk warehouse space will be the predominant product built during 2006, but I am anticipating less of this product type completed during 2007. Even given the downward trend of inventory levels, lease rates remain substantially unchanged. I do expect to see some increase in lease rates for bulk warehouse space during the 2nd half of this year. But this increase should be minimal. Depending on how well the bulk warehouse market performs during 2006, this will determine if rates continue to increase into 2007. My thought right now is that we will continue to see rates increasing over the next 12 months; my crystal ball becomes cloudy beyond that. Lease rates for flex warehouse space have started to move up slightly. This is significant given the fact they have not moved for over 18 months. I do expect to see some upward movement in lease rates over the next 12 months but at a very measured pace. I do expect vacancy levels in this product type to continue to decrease over the next 12 months. There has been little to no new flex warehouse product built over the last 24 months so demand should continue to outpace supply for some time to come. I continue to see a high interest in companies wanting to purchase a building and move away from leasing. Sale prices continue to trend upward, I do not expect this trend to change any time soon. With short term interest rates increasing, this continues to make purchasing a building more difficult. In realty, as short term interest rates increase, sale prices on buildings should decrease to justify the risk in buying a building to keep investment returns in balance with debt. However, this is seldom the case, in every up cycle for interest rates I have seen it is always followed by an upward trend in building sale prices. This always seems to happen in an economic upswing and sellers hear everyday how
good the economy is and react by raising the sale price of their building. Meanwhile, interest rates continue to rise and increase the overall cost of ownership. This will slow the demand side down and increase the inventory level of existing buildings being offered for sale. Historically, this trend will reverse when short term interest rates start to drop. Economic news becomes negative and the Fed lowers rates, sellers hear the negative economic news and react by lowering the sales price which will at some point increase will bring the buyers back. Given this trend, make sure you are entering the market to buy at building at the right time in the cycle, don’t buy when the sellers feel good, wait until they perceive economic conditions are not so rosy, patience in this case will pay off. COMPANIES MOVING IN THE MARKET GUITAR CENTER GRANDSTAND SPORTSWARE DAWN FOODS FUTURE GRAPHICS 700,000 SF KC, MO
25,476 SF LAWRENCE, KS 70,000 SF KC, MO 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.