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LS Commercial E-News

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LS Commercial E-News

     LS Commercial E-News

    APRIL 2007 VOLUME 1, NUMBER 1

    Paul Licausi, President of LS Commercial Real Estate, is

    providing this Newsletter to you free of charge.

     SOLID OR SHAKEY GROUND

    Economic Snapshots: After outstanding news coming out of year-end 2006, the economy is

    ; Unemployment starting to show some signs of sluggishness as we head into 2007. 4.5% (National) Watching all of the media coverage, it is difficult to get a grip on just

    ; New Jobs for where the economy is going. One day the economic news is positive

    February 97,000 and the next day there are predictions of a recession later this year.

    ; Unemployment The media, as I have always said is selling hype, relying on the 4.7% (KC Metro) nightly news for the health of the economy will do no more than

    ; Housing Permits confuse you. I always look to some key indicators, which help me

    down this month understand where the economy is heading and what to expect in the

    coming months respective to overall growth. Given that, here is what stmy take is on economic performance over the remainder of 1 ndquarter and into 2 quarter. Slow steady growth, I have said this in

     the last two newsletters and I will continue to maintain this position.

    You may be wondering why I am maintaining this position. Here we

    go, key indicators are the crystal ball we should all be looking at, tops on the list is consumer spending which continues to remain steady.

     The consumer is king in this economy, if the consumer is out there

    spending money we will see economic growth, if not then you and I need to hold on because the ride will start getting rough. Looking

     forward at the trend in consumer spending, the outlook is positive.

    Personal income continues to increase which has been the trend for

    the last 8 months. As long as personal income continues to rise or remain stable the consumer will continue pumping money into the

     economy. Other key indicators to watch are energy prices, the

    housing sector and the manufacturing sector. There are several other

    indicators but watching the sectors I have mentioned herein will give you a good look into economic conditions. Comments on these sectors; energy prices will remain towards the

     high side of the pricing range but should not be a drag on the

    economy as was the case during 2006. The housing sector will Quick Facts KC

    Metro Area continue to be soft, average home prices across the country have

    been falling. Is this bad, it is if it the value of your house is dropping? ; Air Freight 21 Does this have an effect on the overall economy, you bet, the most million pounds

    significant impact would be a negative effect on consumer spending. moved through

    KCI Airport Thus far, this has not been the case and it appears the housing sector

    has reached the bottom of the cycle and has stabilized. Inventories of ; Housing Permits

    new homes are coming down which is the first sign that we could see in January 450

    units better times ahead for this sector. Do not expect too much from the

    manufacturing sector, this sector will struggle throughout the year ; Help Wanted

    but we should still see some growth during the year. down 50%

    compared to Here is the bottom line, we will see slower economic growth during same time last

    the year, but nonetheless it will be growth. Is there a chance we year

    could see a recession some time this year, I really see no chance of a ; Passenger Traffic recession but the Fed could be the wild card here. If the Fed moving through

    increases interest rates this year, then there will be a real risk of KCI January

    2006-720,000 stalling out the economy. I have not heard anything coming out of people January the Fed that would indicate that they feel there is a real need to raise 2007-790,000 rates; their position has been to remain neutral and maintain the people. status quo.

    FED WATCH

    Interesting month at The Federal Reserve, Chairman Bernanke spoke

    several times during the month reassuring congress and the market that the economy is not ready to fall of the edge of a cliff. The

     Chairman noted that weakness in the housing and automobile sectors

    was not as sever as first thought and that the housing sector was

    showing signs of stabilizing. Several other Fed Governors spoke during the month, all singing the same tune. However, former

    Chairman Greenspan spoke during the month as well; he has become

    the wild card in this economic game. In a speech to a high-powered group economist, he stressed the real possibility for a recession late

     in 2007; yes, later this year. His view is totally divergent from the

    Fed Board. They are very comfortable with the state of the economy

    and do not agree with his view of a coming recession. Be that as it may, Mr. Greenspan’s comments sent the financial markets into a

     panic and the DOW went into a nosedive and dropped close to 500

    points in one day. Don’t kid yourself, even though he is no longer sitting in the big chair, this guy is still extremely influential and his

     comments can still move the markets. Chairman Bernanke countered

    Mr. Greenspan’s comments and reassured the financial markets that

    the Fed does not share his same view. Additionally, one of the influential Fed Governors spoke late in the month and stressed that

     the Fed is ready to step in quickly if they need to in order to adjust

    monetary policy to shore up the economy.

    For the moment, interest rates will remain stable so do not expect

    any movement in the prime-lending rate. Unless something substantial occurs with the economy, the Fed will sit tight and take

     no action one way or the other. I really do not see any chance of an

    interest rate adjustment until late summer. If there is an adjustment, there is a much greater chance that the Fed will decrease interest

     rates.

     INDUSTRY ALERT CORNER

    Industry in the spot light this month, Transportation. Meetings and

    Presentations In case you are not aware, the BNSF railroad will start constructing a

    new rail hub in Gardner, Kansas in 2008. In studying this project, I I am happy to speak on

    the state of the real was very amazed at the changes in the freight industry. The BNSF is

    estate industry and responding to a shift in the way freight is being moved in the U.S. business economics to today. The railroads are quickly coming back into favor again. Once any group or known for transporting large bulky materials, they are now moving organization that you

    more trailers across the county than are moving over the highways in may be a part of. All

    this knowledge free of a standard over-the-road truck. Why the shift? It all begins with charge, happy to share materials, which is the products being delivered. These products, my thoughts and once manufactured in the U.S. are now being manufactured insights. If you would overseas. This is old news, however, given the fact that these like to book a time with

    materials are now coming in on a TEU (twenty-foot equivalent me please contact me

    via e-mail or phone and container) container which is stacked on a large ship along with let me know the date thousands of other TEU’s arriving at a U.S. port, the game has and time of your event. changed. These containers are now off loaded at the port, stacked on I will make myself a train and moved inland to a rail hub similar to what BNSF will be available schedule

    building in Gardner, Kansas. The fundamental shift is that more permitting.

    freight movement across the country will be via rail than standard truck. This was hard for me to believe at first, but once I studied this

     in more depth, the numbers do not lie. The number of TEU’s coming

    into U.S. ports is growing significantly. What do I call significantly,

    how about 50%+ per year. It is off the chart, and I might mention inbound traffic into the U.S. is expected to continue to increase.

     Growth in the railroad sector business is not coming from their

    standard product base (agricultural, aggregate and coal) but TEU movements. This is why these rail hubs are starting to pop up. Major

     rail hub development is occurring in Chicago, Dallas and soon to be

    Gardner, Kansas.

     What does this mean for us business people, why would we care

    about this, most of the TEU containers are for large corporations and not mid to small business. As always, I like to try and identify a trend

     early, I believe that this will create a number of service opportunities

    in many different sectors. Just to name a few; you transportation

    providers, their will be a number of new service opportunities for you as the BNSF operation comes on-line. You have no idea how much

     merchandise will be coming into this hub which will all need to be

    delivered to the end user. I see opportunities for material handling

    providers, security providers, construction services, just to name a few. The fact that this shift is occurring now, you should jump on this

    and find out if you can plug your service and realize some new

     revenue.

    MANUFACTURING CENTER

    Suffering a setback last month, the manufacturing sector got back on Snapshot a positive course again during February, moving back to an Manufacturing Sector

    expansion mode. After a poor performance in January, the sector had ; Back Log Orders a nice surge in activity during February. What happened that pushed up the sector into an expansion mode again. There was a jump in new

    ; New Orders up orders and production. As I stated in last month’s newsletter, the

    manufacturing sector had been slowing production over the last ; Inventories up

    several months and reducing inventory levels. I noted that ; Export orders up maintaining historic low inventory levels was not sustainable long

    ; Employment up term given any increases in new orders. Well during the month of

    February; there was an increase in new orders (up 4.6%) and the ; Production up manufacturers responded by increasing production to bolster

    ; Supplier inventories. When the sector jumps up production, there are other deliveries down key indicators that are affected as well. Employment is almost always

    ; Prices up affected; during February the manufacturing sector employment

    increased 1.6%. This is all good news for the sector and we should ; Customer

    see more of the same during the coming months as well. inventories up

     Now, this was certainly good news, but don’t jump up and down yet.

    As I have said before, we will see this seesaw effect for most of this year. The PMI index for February was 52.3%, which indicates

     expansion. Keep in mind that any reading in the index over 50%

    reflects expansion; anything reading below 50% indicates

    contraction. I still believe that we will see the index averaging from 48% to 54% throughout the remainder of this year. The sector will

     remain sluggish and will mirror the performance of the overall

    economy. Given many economist last year predicted we would be

    heading into a recession at this time in 07, this outlook for the sector Cost breakdown at is certainly welcome and is diverse from the predictions levied last the pump for diesel year. fuel

    Results from the key indicators in February we much better than last

    month but still the sector are fighting to keep moving forward. New Taxes 19% Orders, Production, Employment, Prices and Backlog Orders were up. Distribution/Marketing Also showing an increase were both Manufacturers inventories and 15% Customers’ Inventories. This is a sign, that both the manufacturing

    level and distributor level are increasing inventory levels, which is a Refining 14%

    welcome sign. The only indicator that was down was Supplier Crude Oil 52% Delivers, which was only down slightly and should have a better

     reading next month given the increase in both new orders and

    production.

    DIESEL PRICING ENERGY SECTOR SPOTLIGH U.S. Weekly Average

    Per Gallon Oil prices spiked during the month and heading past $60 per barrel

    before dropping down into the high $50 dollar per barrel range. This

2-26-07 - $2.551 is going to be the norm for the next several months; we will see oil

    jumping up and down moving in a range from the low $50 per barrel 3-5-07 - $2.626 range to the low $60 dollar per barrel range. I really thought that we 3-12-07 - $2.685 would see some price relief in oil but it appears that the traders will

    not let the pricing come down below $50 per barrel.

     What does this do for gasoline and diesel, pricing for these fuels will

    follow the same up and down price movement as oil. My guess is we will see lower pricing during March, April and into mid May. Once the

     summer travel season starts, gasoline prices will start to trend

    upward. Respective to Diesel, depending on how quickly the low

    sulfur fuel is introduced into the system this will put pressure on KC Local Business pricing as the low sulfur diesel is a more expensive product. Many of Owners by Age the states are moving towards requiring low sulfur diesel in an

     attempt to cut emissions, but this will be a slow process to switch

    over from the current diesel fuel product. Under 25 - 1%

    25 to 34 - 8% Energy pricing for electricity and natural gas continue to be stable,

    keep in mind that most of these products are regulated and the utility 35 to 44 - 24%

    providers must apply to the State public service commissions for rate 45 to 54 - 32% increases. This has allowed stability in pricing for electricity and

    natural gas, however, I have noticed most of the utility providers I 55 to 64 - 21%

    have been watching are stepping up to the plate and asking for rate 65 & over 10% increases. Even if approved, pricing will only increase slightly.

    Overall, nothing new to expect in the next 60 days respective to

    energy prices. Your best weapon here is to aggressively manage your

    company’s usage and look for ways to minimize that usage as best as

    you can.

     KC INDUSTRIAL REAL ESTATE UPDATE

    st Interesting start for 1 quarter of 2007, lots of activity in the market, Summary Info which has been well above the pace compared to this time last year. I 1. Vacancy Rate wondered why the change in activity, there was much more hype 8% regarding the economy last year, yet this year is much more active 2. Average Retail than last year. I have noticed significantly higher confidence in the Rates Bulk business climate from the prospects out in the market and from my Space-$3.65 psf clients as well. Business is good thus far and there seems to be some / Flex space-real stability. One thing I watch, respective to companies in the $8.71 sf both

    market looking for space, is the basis behind that need. Two simple are modified gross industrial things I look for; are they expanding or contracting. This helps me get

    lease types a feel for the overall market and where it is going locally. So far, the 3. Transaction companies looking to expand represent 80% of the prospect base I volume for have seen in the market place. That leaves 20% looking to contract February (smaller space to downsize). This is a very positive sign and shows a steady. great deal of confidence out there, which is a positive for all of us, 4. Average real estate people. transaction size

    22,089 sf

    5. 10 months is the

    average

     Looking at the real estate market data, several interesting points,

    even with all of this leasing activity, the inventory of available space has actually increased. Second generation space (older space) made

     up the balance of the increased inventory. This space is older space

    and typically less efficient space than newer space but has an appeal

    because of lower lease rates. This is a clear indication of increased

     movement within the industrial real estate market. Lease rates have

    increased slightly, overall for bulk warehouse product (18 foot or

    higher warehouse ceiling height, 10,000 square foot spaces or larger) lease rates are up slightly. I do expect for lease rates to continue to

    increase but at a slow pace. Lease incentives are all but gone. I am

    not seeing any tenant improvement allowances offered, minimal free rent if any and very little movement from the quoted lease rate.

     Now, is there any way that you can achieve some incentives from a

     Landlord, here is where you get the inside scoop from a Landlord’s

    perspective. Some very important points for most Landlord’s; length

    of lease, financial stability of the Tenant, the improvements requested

     by the Tenant are they beneficial to the space or are they very

    specific to the Tenant’s operation, principles guarantee of the lease or

    corporate guarantee of the lease and investment in the space by the Tenant. Most prospects when approaching a Landlord to lease a space

    ask the Landlord to pay for all improvements needed to the space by

    the Tenant, ask for a short lease term and then want to limit in every way any financial risk respective to the lease. Now no Landlord

     begrudges a prospect from asking for everything. However, it does

    not allow for much a foundation for a positive lease transaction to occur. If you have identified a space that works for your operation,

     the best way to approach structuring a fair lease agreement is to

    recognize the Landlord’s focus points (which I listed above). You are going to have a much greater likelihood of achieving an advantageous

     lease structure if you consider things like offering a longer lease term

    (at least 3 years, 5 years is much better). Additionally, If you are

    requiring Landlord to pay for improvements within the space that are

     for your operation, show willingness to pay for a portion of those

    improvements, this goes far with most Landlord’s, they have great

    comfort knowing that the Tenant has some skin in the game. Finally, regarding the topic of a personal or corporate guarantee of the lease,

    keep an open mind here. It is unreasonable to assume, that if the

    Landlord is being required to invest in improvements to the space for your use, that the Landlord receives no financial commitment beyond

     just signing the lease. Think of this investment as a loan because that

    is exactly what tenant improvements are; they are alternative financing for the Tenant. Given you follow my suggestions, you will

     find that you have a much better opportunity to structure a lease that

    will allow you to obtain more advantageous lease terms, and by the

    way the Landlord will be happy as well. Put these two ingredients

     together and this makes for a successful long-term relationship. Keep

    in mind, the real work starts after you move in to the space, you will

     living with this Landlord for several years so it is best to start things

    out on a successful note, it will make the rest of the deal go smoothly.

    If you are interested in acquiring a building, no real change from my

    comments last month. Pricing has been holding steady ($30 to $40

     psf depending on the building type and location); inventory level of

    existing buildings remains unchanged so no real movement one way

    or the other in this sector of the market. Expect interest rates to be ndstable into 2 quarter of this year, I do not anticipate any interest

    rate risk. An owner/user is still on the top of the wish list for the

    bankers so access to capital should not be issue. For small business owners who are interested in buying a building, spend some time

     talking to your accountant and lawyer to determine the best structure

    for you to own a building. I always encourage small business owners who want to buy a building to purchase the building personally (using

     a Limited Liability Company structure) then lease it back to the

    company. This will allow you to use this structure as a retirement

    vehicle in the future. A small business purchasing and owning real

     estate corporately will make far less return on that invested capital as

    compared to investing that same capital and putting it to work

    internally within the business.

    Paul Licausi COMPANIES MOVING IN THE MARKET

    LS Commercial CRAMER PRODUCTS 19,539 SF GARDNER, KS Real Estate

    RIVACOR LABS 25,000 SF LEE’S SUMMIT, MO th8301 W 125 St.

     RANPAK 50,296 SF KC, KS Suite 210

     MIDWEST MATERIAL MGMT 50,000 SF SUGAR CREEK, MO Overland Park,

    KS 66213 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 (P) 913-681-5888 completing the transaction. Also, if you are interested in selling your building (F) 913-681-7869 now is a good time and I can assist you in establishing market value for your licausi@lscr.com

    building and selling your building for you. Thank you for your time and I hope this information has been helpful.

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