Being an economist can be similar to being a journalist -- no one forgets when you’re wrong. Of course, this no longer bothers Rajeev Dhawan. He long ago developed a thick skin, and his assessments and forecasts tend to be on the mark.
Dhawan joined Georgia State University from UCLA in 2000 as director of GSU’s Economic Forecasting Center at the Robinson College of Business. You don’t have to spend too much time with Dhawan to observe his passion for economics and interest in how economics ties in to most everything, from real estate, to the consumer economy to dietary trends and patterns.
Since he’s the go-to guy on the Atlanta economy, we thought we’d catch up with Dhawan and pick his brain on the overall economy and how it relates to Atlanta commercial real estate.
APN: Is Atlanta's job and economic growth sufficient to support the current level of office construction?
Dhawan: This is a tough question because you can build a new building and attract the tenants from the other buildings. So, for the current builder developing Class A property it’s never a problem. The trouble is for the existing property owners. What are they going to do to fill the void? For example, you have a number of law firms leaving downtown for Midtown. That’s trouble for downtown, but it’s a bonanza for Midtown developers. It all depends on what kinds of businesses are moving and where they’re moving.
When you look at it overall, in the great ‘90s Atlanta was adding about 80,000 or 90,000 jobs per year, and those were really space-demanding jobs in technology and other fields. They were not people working from home or working from their garages. They were real jobs.
Now we’re beginning again to add 50,000 to 70,000 jobs, but the quality of those jobs is really poor. They’re not high-paying, and even if they are, people are working from their homes or working in satellite offices. So the demand for office space goes down. My conjecture is that if you really want to use up all the office space, instead of the 80,000 job growth that we had in the ‘90s, we may need 160,000 before we can fill it in the sense of office-related jobs, especially when you consider telecommuting and flexible work arrangements.
I hear a lot of stories about people working for a company and they have that room but they’re only there once a week. They use it that day, and someone else uses it at other times. It’s kind of communal. The company may be expanding and hiring new people, but they may not be expanding their needs for more office space in the traditional sense.
APN: Overall, how will/is inflation affecting the Atlanta economy?
Dhawan: There is no direct measure on a regular basis for inflation’s effect on the local economy, so what you have to figure out is what’s happening with inflation and the national economy.
If you go by the CPI index, inflation is very tame by historical standards. If you go by the Producer Price Index, inflation is very high. So the issue is what number are real estate people going to use in their lease negotiations? If I want to say that inflation is not a problem, I’ll start looking at the core inflation and say, “It’s only 2.2%. That’s not too bad.” But if I’m worried about escalating clauses in my contracts, then I’ll look at the overall CPI, which is affected by higher oil prices. It (CPI) is 3% to 4% depending on which month you look at. But if you compare it historically to the early 1980s, this is nothing.
So, inflation is a problem to figure out if you’re writing a seven-year lease and it’s 1981 and you need to make a guess vs. writing a lease now for seven years. Now, you have to make a guess and have a boundary of maybe a minimum of 1% inflation and a maximum of 5%, whereas the boundary in 1981 could be anywhere between 1% and 30% because people didn’t know what was happening in those crazy times.
When people worry about inflation, they have in their mind four years ago when they were writing leases, and they would only use a boundary of 1% to 3%. Now, they have to expand the boundary, and they also may not be able to get the same terms and conditions. In the go-go ‘90s, nobody cared about inflation because the rate increases from the normal demand were so high that you didn’t have to put in those clauses to collect the rents down the road. That makes a difference in the valuation of the building -- what kind of clauses you have in the contract with the tenant.
I’m not an expert in that area. I don’t deal with it on a daily basis. I’m looking at it from an economist’s point of view.
What kind of a bracket between which inflation varies is what they need to think about. Now that bracket is bigger than it was about four years ago, but it’s not horrendous. From my perspective, looking at the overall economy, inflation is not a major problem. It’s a minor one.
But the Federal Reserve is basically at a pause right now. They’ve done it (raise rates) 17 times. The issue is: are they about to do it another five times, and the answer is no. That is when inflation becomes an issue. If you think they’re going to do it another five times, then you’re thinking inflation is going to be in the upper end of the range of what we were talking about, 5%. The Fed may raise rates, and you’ll figure that into your clauses. But if you believe that the Fed is done then you’re not worried about 5% inflation over the long term.
APN: How will rising materials and energy prices affect Atlanta commercial real estate, especially in a market where competition can make it difficult to increase rental rates for commercial properties?
Dhawan: This is an important problem for those who are building new buildings. One of the assumptions is that you’ll be able to get tenants from the other places, but if you can’t raise the rent on what they were already paying at the other place and your cost of materials has gone up 25% to 30%, it’s going to eat into your profit margins.
This is a problem the new builder faces, not the current owner of the building who can entice tenants back by telling them, “I don’t have to raise the rates because my costs haven’t gone up in terms of construction.”
The new developer offers a nicer, newer building, but he suffers from the problem that the existing owner can offer to cut rents.
The fundamental issue is why did the companies who were downtown leave for Midtown and Buckhead. Was it the prices? Probably not.
APN: What do you think are some of those issues?
Dhawan: I heard from some of my sources at the law firms that they’re saying, “Most of my associates now live in Midtown or Buckhead, and commutes are getting more and more difficult.”
It depends on where you live and where you work. If they’re coming from far away, outside the Perimeter, then another 15 minutes from Midtown to downtown can make a big difference in someone’s life, especially if they’re on the billable hours clock.
APN: What do you think are the prospects for large, mixed-use development and redevelopment in Atlanta's suburbs, especially regarding high-rise condo development? Do you think residents of Atlanta's suburbs will buy in?
Dhawan: I think mixed-use will go there, especially as land availability is more and more limited and prices continue to rise.
There, you have to be careful with the tenant mix and the mix of uses. How much office? What are your anchors? I’ve been hearing a lot of proposals about building mixed-use, and everybody seems to be anchoring a Target store. How many Targets do we need? You have to plan these kinds of developments very carefully. It’s comes down to executing the strategy. The strategy is correct, but execution will be very important.
But remember, being the first one in and being bold and aggressive is going to get you the return. If you are later in the stampede, you’re going to get normal returns or nothing at all. The ones who go bold and aggressive initially may look like they’re being too aggressive, but that’s the whole key. Some will fail, but the ones who work it out will reap big returns.
One thing that people have to worry about on this issue is the business cycle. Are you starting at the peak of the previous business cycle and by the time you come into play you’re at the bottom? Or are you starting at the bottom of the down time so that by the time you hit the market two years later you’re moving up? That’s going to be key for the mixed-use.
APN: Do you think that suburban Atlanta is ready to buy in, especially with high-rise condos?
Dhawan: I’m not the expert on that demand, but I’d say one thing: if their jobs are downtown, then you have to have the condo downtown. If their jobs are in Midtown, then you have to have the condo building in Midtown. If these people work in that area and they have that option, they’ll go for it. Again, it’s a case of trying to figure out the demographics of that localized area, doing market surveys, etc. I presume they’ve done that and see something there, but again you have to roll the dice and be bold and aggressive.
There’s never been one built before, but if developers believe that people shopping at Gwinnett Place Mall are all coming from the nearby area and are saying, “we work here and we’re going to play here and we want to live over here,” then it will work out. It’s a bold move, doing a high-rise in Gwinnett, but I presume that when the first high-rise was built in Midtown people thought that was a bold move, too.
The first one in this business, the front runners who are bold and aggressive, some of them are going to get burned, but they’re also the ones who are going to make the biggest returns.
Again, the difficulty is executing that vision. Even with the right start at the right time but you totally mis-execute in terms of the retail or office, it’s like you’re at the goal line but you drop the ball -- it’s not a touchdown.
APN: What are some of the key economic/economic development factors to continuing downtown's revitalization and helping downtown office owners backfill vacant space?
Dhawan: To fill the space created by vacating law firms and other businesses, the only obvious candidate would be the smaller lease, the smaller firms and enticing them. The days when BellSouth and other big companies would be expanding are over. You don’t hear of expansion coming from our bigger corporate users here. It’s the unknowns, and the issue is which one is going to be able to reach this unknown. They also usually don’t have the traditional real estate department, and you may not have a relationship with them. So, those who are able to ford this break, this gap, quickly will be able to more quickly fill their buildings.
The market, the tenants, do exist, but you have to go and find them. The tenants exist, but you’re not going to find them using your existing strategy. That rulebook may not work that well. You may have to innovate to find them.
APN: What are some of the lessons you learned from earlier in your career?
Dhawan: In my business when I started, there was this issue that if you make a statement and take a stand, most likely you will get the brick bats, not the bouquets. Is it worth doing it? At that point, my mentor figured it out and said, “You know what? It’s water off a duck’s back. Don’t expect bouquets over here. You’re never going to get the thanks. You’re going to get the brick bats, and you’ve got to have the skin to take it until it blows over.”
One of the criticisms we get is that we open our mouths and make a statement and people remember the wrong ones. My only intent is that, when people come to my conferences and other meetings, I like to tell them, “Whether I’m right or wrong, it doesn’t matter.”
If you can remember that I was wrong for the right reasons, that it was my explanation, my logical sequence of thoughts and one of them was flawed and you knew why it was flawed, what made me make that statement, then I have done my job. If I explain my forecast and give you the logical reasoning behind it and I turn out to be wrong and you can quickly figure out why I was wrong, I have done my job. It’s not being wrong that’s necessarily the fault. It’s why you were wrong, and why you were right that’s important. I have a couple of forecasting awards that I can always put up to show the times I was right. That buys the political mileage, but the customer will not come back to you repeatedly if he or she does not believe that you made the pronunciation based on logical reasoning.