THE world is in the
middle of a skyscraper boom. Last year nearly 100 buildings over 200
metres tall were built—more than ever before. This year China’s business
capital will welcome the Shanghai Tower, which will be the world’s
second-tallest building. Saudi Arabia is building Kingdom Tower, which
will be the world’s tallest (and twice the height of One World Trade
Centre in New York, the tallest building in the Americas). Does this
frenzy of building augur badly for the world economy? Various academics
and pundits, many of them cited by
The Economist, have long argued as much, but new research casts doubt on it.
In 1999 Andrew Lawrence, then of Dresdner Kleinwort Benson, an
investment bank, identified what came to be known as the “skyscraper
curse”.* Mr Lawrence noticed a curious correlation between the
construction of the world’s tallest buildings and economic crises. The
unveiling of the Singer Building and the Metropolitan Life Tower in New
York, in 1908 and 1909 respectively, roughly coincided with the
financial panic of 1907 and subsequent recession. The Empire State
Building opened its doors in 1931, as the Great Depression was getting
going (it was soon dubbed the “Empty State Building”). Malaysia’s
Petronas Towers became the world’s tallest building in 1996, just before
the Asian financial crisis. Dubai’s Burj Khalifa, currently the world’s
tallest building, opened in 2010 in the middle of a local and global
crash.
Skyscrapers can be hugely profitable, since by building upwards
developers can rent out more floor space on a given plot of land. But at
some point extra storeys are no longer a good deal, since marginal
costs—for more lifts and extra steel to stop the building from swaying
in the wind, for example—increase faster than marginal revenues (rents
or sales). William Clark and John Kingston, an economist and an
architect writing in 1930, found that the profit-maximising height for a
skyscraper in midtown New York in the 1920s was no more than 63
storeys. (The ideal height is probably not much different today.)
Record-breaking skyscrapers could therefore be seen as an indication
that gung-ho investors are overestimating the probable future returns
from new construction. Indeed, developers may be building
record-breaking towers even though they know they are economically
inefficient. There is, after all, a certain cachet to having a very tall
building with your name on it. In 1998 Donald Trump, a magnate,
presented a plan to build the world’s tallest residential building in
New York as the righting of a historical wrong, not a shrewd business
move. “I’ve always thought that New York should have the tallest
building in the world,” he proclaimed. If such vanity projects can
secure funding, the theory goes, financial markets must be out of
control and will soon suffer a sharp correction. Mr Trump’s tower opened
just as the dotcom bubble was bursting.
Historical analysis suggests that developers are prone to bouts of
irrationality. In a paper from 2010, Jason Barr of Rutgers University
looked at 458 skyscrapers (those at least 100 metres tall) completed in
Manhattan between 1895 and 2004. The number of skyscrapers built and
their average height depended in part on the growth in population and
employment in office jobs. But Mr Barr’s calculations suggest that the
height of towers was also shaped by those nearby, especially during
economic booms. In the 1920s, Mr Barr estimates, New York builders added
four to six more floors per project, just to stand out in the skyline.
Phallic sample
Until recently, however, there had been no formal analysis of the
skyscraper curse. A new paper by Mr Barr, Bruce Mizrach and Kusum Mundra
(all of Rutgers) investigates Mr Lawrence’s musings in detail. They
look at the building of 14 world-record-breaking skyscrapers, from New
York’s Pulitzer (which opened in 1890) to the Burj Khalifa, and compare
them to American GDP growth (which they see as a decent proxy for the
world economy).
If, as the skyscraper curse suggests, the decision to build the
biggest towers happens near the peak of the business cycle, then you
could use record-breaking projects to predict the future path of GDP.
However, the range of months between the announcement of the towers and
the business-cycle peak is large, varying from zero to 45 months. And
only seven of the 14 opened during a downward phase of the business
cycle (see chart). In other words, you cannot accurately forecast a
recession or financial panic by looking at either the announcement or
the completion of the world’s tallest building.
With such a small sample, it is tricky to draw firm conclusions. But
the paper expands the sample to 311 by looking at the tallest building
completed each year in four countries (America, Canada, China and Hong
Kong). The authors then compare building height to GDP per person. They
find that in all countries GDP per person and skyscraper height are
“cointegrated”, a fancy way of saying that the two things track each
other. In other words, developers tend to be profit-maximisers,
responding rationally to rising incomes (and thus increased demand for
office space) by making buildings bigger. While ego and hubris afflict
the skyscraper market, the authors argue, its foundations appear sound.
Sources:
“A nation of gamblers: real-estate speculation and American history,” by Glaeser, E.,
NBER working paper, 2013.
“Determining optimal building height”, by Chau, K.W., Wong, S.K., Yau, Y. and Cheung, A.K.C., in
Urban Studies, 2006.
“Skyscraper height,” by Barr, J.
Journal of Real Estate Finance and Economics, 2012.
“Skyscrapers and business cycles”, by Thornton, M.,
Quarterly Journal of Austrian Economics, 2004.
“Skyscraper height and the business cycle: separating myth from reality,” by Barr, J., Mizrach, B. and and Mundra, K.,
Applied Economics, 2015.
“The Skyscraper Index: Faulty Towers”, by Lawrence, A., Dresdner Kleinwort Benson research, 1999.
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