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Skyscraper Index

Skyscraper Index

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The Skyscraper Index is a concept put forward in January 1999 by Andrew Lawrence, research director at Dresdner Kleinwort Wasserstein, which showed that the world's tallest buildings have risen on the eve of economic downturns. Business cycle
Business cycle
The term business cycle refers to economy-wide fluctuations in production or economic activity over several months or years...

s and skyscraper construction correlate in such a way that investment in skyscrapers peaks when cyclical growth is exhausted and the economy is ready for recession
Recession
In economics, a recession is a business cycle contraction, a general slowdown in economic activity. During recessions, many macroeconomic indicators vary in a similar way...

.

The buildings may actually be completed after the onset of the recession or later, when another business cycle pulls the economy up, or even cancelled. Unlike earlier instances of similar reasoning ("height is a barometer of boom"), Lawrence used skyscraper projects as a predictor of economic crisis, not boom.

Details


Lawrence started his paper, The Skyscraper Index: Faulty Towers, as a joke (emphasized by a title referencing a comedy show) and based his "index" on mere comparison of historical data, primarily from the United States experience. He dismissed overall construction and investment statistics, focusing only on record-breaking projects. The first notable example was the Panic of 1907
Panic of 1907
The Panic of 1907, also known as the 1907 Bankers' Panic, was a financial crisis that occurred in the United States when the New York Stock Exchange fell almost 50% from its peak the previous year. Panic occurred, as this was during a time of economic recession, and there were numerous runs on...

. Two record-breaking skyscrapers, the Singer Building
Singer Building
The Singer Building or Singer Tower at Liberty Street and Broadway in Manhattan, was a 47-story office building completed in 1908 as the headquarters of the Singer Manufacturing Company. It was demolished in 1968 and is now the site of 1 Liberty Plaza....

 and Metropolitan Life Insurance Company Tower
Metropolitan Life Insurance Company Tower
The Metropolitan Life Insurance Company Tower, also known as the Metropolitan Life Tower or Met Life Tower, is a landmark skyscraper located on East 23rd Street between Madison Avenue and Park Avenue South, off of Madison Square Park. in the borough of Manhattan in New York City...

, were launched in New York before the panic and completed in 1908 and 1909, respectively. Met Life remained the world's tallest building until 1913. Another string of supertall towers — 40 Wall Street
40 Wall Street
40 Wall Street is a 70-story skyscraper in New York City. Originally known as the Bank of Manhattan Trust building, and also known as Manhattan Company Building, it was later known by its street address when its founding tenant merged to form the Chase Manhattan Bank and today is known as the...

, Chrysler Building
Chrysler Building
The Chrysler Building is an Art Deco style skyscraper in New York City, located on the east side of Manhattan in the Turtle Bay area at the intersection of 42nd Street and Lexington Avenue. Standing at , it was the world's tallest building for 11 months before it was surpassed by the Empire State...

, Empire State Building
Empire State Building
The Empire State Building is a 102-story landmark skyscraper and American cultural icon in New York City at the intersection of Fifth Avenue and West 34th Street. It has a roof height of 1,250 feet , and with its antenna spire included, it stands a total of 1,454 ft high. Its name is derived...

 — was launched shortly before to the Wall Street Crash of 1929
Wall Street Crash of 1929
The Wall Street Crash of 1929 , also known as the Great Crash, and the Stock Market Crash of 1929, was the most devastating stock market crash in the history of the United States, taking into consideration the full extent and duration of its fallout...

.

The next record holders, World Trade Center
World Trade Center
The original World Trade Center was a complex with seven buildings featuring landmark twin towers in Lower Manhattan, New York City, United States. The complex opened on April 4, 1973, and was destroyed in 2001 during the September 11 attacks. The site is currently being rebuilt with five new...

 towers and Sears Tower
Sears Tower
Sears' optimistic growth projections were not met. Competition from its traditional rivals continued, with new competition by retailing giants such as Kmart, Kohl's, and Wal-Mart. The fortunes of Sears & Roebuck declined in the 1970s as the company lost market share; its management grew more...

, opened up in 1973, during the 1973–1974 stock market crash and the 1973 oil crisis
1973 oil crisis
The 1973 oil crisis started in October 1973, when the members of Organization of Arab Petroleum Exporting Countries or the OAPEC proclaimed an oil embargo. This was "in response to the U.S. decision to re-supply the Israeli military" during the Yom Kippur war. It lasted until March 1974. With the...

. The last example available to Lawrence, Petronas Twin Towers
Petronas Twin Towers
The Petronas Towers are skyscrapers and twin towers in Kuala Lumpur, Malaysia...

, opened up in the wake of the 1997 Asian Financial Crisis and held the world height record for five years. Lawrence linked the phenomenon to overinvestment, speculation
Speculation
In finance, speculation is a financial action that does not promise safety of the initial investment along with the return on the principal sum...

 and monetary expansion but did not elaborate these underlying issues. The concept was revived in 2005, when Fortune
Fortune (magazine)
Fortune is a global business magazine published by Time Inc. Founded by Henry Luce in 1930, the publishing business, consisting of Time, Life, Fortune, and Sports Illustrated, grew to become Time Warner. In turn, AOL grew as it acquired Time Warner in 2000 when Time Warner was the world's largest...

 warily observed five media corporations investing in new skyscrapers on Manhattan
Manhattan
Manhattan is the oldest and the most densely populated of the five boroughs of New York City. Located primarily on the island of Manhattan at the mouth of the Hudson River, the boundaries of the borough are identical to those of New York County, an original county of the state of New York...

 (none of them, including the tallest New York Times Building
New York Times Building
The New York Times Building is a skyscraper on the west side of Midtown Manhattan that was completed in 2007. Its chief tenant is The New York Times Company, publisher of The New York Times as well as The Boston Globe, the International Herald Tribune, and other newspapers...

, broke any records).

The intuitively simple concept, publicized by business press in 1999, has been cross-checked within the framework of the Austrian Business Cycle Theory, itself borrowing on Richard Cantillon
Richard Cantillon
Richard Cantillon was an Irish-French economist and author of Essai sur la Nature du Commerce en Général , a book considered by William Stanley Jevons to be the "cradle of political economy". Although little information exists on Cantillon's life, it is known that he became a successful banker and...

's eighteenth-century theories. Thornton (2005) listed three Cantillon effects that make skyscraper index valid. First, a decline in interest rate
Interest rate
An interest rate is the rate at which interest is paid by a borrower for the use of money that they borrow from a lender. For example, a small company borrows capital from a bank to buy new assets for their business, and in return the lender receives interest at a predetermined interest rate for...

s at the onset of a boom drives land prices. Second, a decline in interest rates allows increase in average size of a firm, creating demand for larger office spaces. Third, low interest rates provide investment to construction technologies that enable developers to break earlier records. All three factors peak at the end of growth period.

Critics dismissed the skyscraper index as an unreliable tool: the post-World War I recession, recession of 1937
Recession of 1937
The Recession of 1937–1938 was a temporary reversal of the pre-war 1933 to 1941 economic recovery from the Great Depression in the United States.-Background:...

 and the early 1980s recession
Early 1980s recession
The early 1980s recession describes the severe global economic recession affecting much of the developed world in the late 1970s and early 1980s. The United States and Japan exited recession relatively early, but high unemployment would continue to affect other OECD nations through at least 1985...

 were not marked by any record-breaking projects. Construction of Woolworth Building
Woolworth Building
The Woolworth Building is one of the oldest skyscrapers in New York City. More than a century after the start of its construction, it remains, at 57 stories, one of the fifty tallest buildings in the United States as well as one of the twenty tallest buildings in New York City...

 (world height record 1913–1930) was marked by a local overbuilding crisis in New York City in 1913–1915 concurrent with a record construction boom in Chicago. Thornton argues that completion of Woolworth Building was followed by a third-worst-ever quarterly decline in gross domestic product
Gross domestic product
Gross domestic product refers to the market value of all final goods and services produced within a country in a given period. GDP per capita is often considered an indicator of a country's standard of living....

, thus it should not be considered an exception from the rule (as Lawrence himself did).

Cyclical patterns in real estate have been thoroughly studied before Lawrence, notably by Homer Hoyt
Homer Hoyt
Homer Hoyt was a land economist, a real estate appraiser, and a real estate consultant. In his long and accomplished life, he conducted path-breaking research on land economics, developed an influential approach to the analysis of neighborhoods and housing markets, refined local area economic...

 in 1930s. A 1995 analysis of New York and Chicago experience by Carol Willis estimated that historically, two-thirds to three-quarters of skyscrapers were conceived for rent alone; corporate "edifices" imposing their owners brand name (including most of historical record-holders) were a minority, and they too leased space to tenants. Speculative real estate markets cycle between two different behavior patterns.

In "normal" times when value of resources is predictable, performance of a building project can be estimated reliably through well-tested formulae. In boom times, rational pricing gives way to irrational buyers' behavior; buyers bet on ever-increasing demand and rents and are willing to pay more than they would normally. Willis said that "height is a barometer of boom", "the tallest building generally appear before the end of a boom, their height driven up by the speculative fever
Speculative fever
Speculative Fever is a term used in the housing market which represents the frequent action of buying and selling housing properties. In the case of Speculative fever, the buyer and seller has no intention of ever occupying the house, only purchasing it for the sole reason of selling it off for a...

 that affects both developers and lenders", citing cyclically inflated land values as the principal factor for increases in building height, but did not elevate this fact to become an "index".

A related concept, Skyscraper Indicator, was popularized by Ralph Nelson Elliott
Ralph Nelson Elliott
Ralph Nelson Elliott was an American accountant and author, whose study of stock market data led him to develop the Wave Principle, a form of technical analysis that identifies trends in the financial markets...

 in 1930s.

In some ways this appears to be an elaboration of C Northcote Parkinson's theory that only organizations in decline have sleek, well-planned buildings. His favorite example was, not a skyscraper, but the city of New Delhi (particularly the area now referred to as Lutyen's Delhi) - built shortly before India became independent of the British builders.

The recently constructed Burj Khalifa may join this list. In October 2009, construction company Emaar announced that it had completed the exterior of the building; within two months, the Dubai government came close to defaulting on its loans. Stephen Bayley from The Daily Telegraph
The Daily Telegraph
The Daily Telegraph is a daily morning broadsheet newspaper distributed throughout the United Kingdom and internationally. The newspaper was founded by Arthur B...

commented, "For all the ambition of its construction, Dubai's new Khalifa Tower is a frightening, purposeless monument to the subprime era."

See also