TheSkyscraper Index is a concept put forward by Andrew Lawrence, a property analyst atDresdner Kleinwort Wasserstein, in January 1999,[1][2] which showed thatthe world's tallest buildings have risen on the eve of economic downturns.[3]Business cycles and skyscraper construction correlate[4] in such a way that investment in skyscrapers peaks when cyclical growth is exhausted and the economy is ready forrecession.[5] Mark Thornton's Skyscraper Index Model successfully predicted theGreat Recession at the beginning of August 2007.[6][7]
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.[5] Unlike earlier instances of similar reasoning ("height is a barometer of boom"),[8] Lawrence used skyscraper projects as a predictor of economic crisis, not boom.
One statistical study found that the height of buildings is not an accurate predictor of recessions or other aspects of thebusiness cycle, but thatGDP can predict the height of building construction.[9]
Lawrence started his paper,The Skyscraper Index: Faulty Towers, as a joke (emphasized by a title referencing acomedy show[1]) and based his index on a comparison of historical data, primarily from the United States' experience. He dismissed overall construction and investment statistics, focusing only on record-breaking projects.[10] The first notable example was thePanic of 1907. Two record-breaking skyscrapers, theSinger Building and theMetropolitan Life Insurance Company Tower, 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 ofsupertall towers –40 Wall Street, theChrysler Building, theEmpire State Building – was launched shortly before theWall Street crash of 1929.
The next record holders, theWorld Trade Center towers and theSears Tower, opened in 1973, during the1973–1974 stock market crash and the1973 oil crisis. The last example available to Lawrence, thePetronas Twin Towers, opened in the wake of the1997 Asian financial crisis and held the world height record for five years. Lawrence linked the phenomenon tooverinvestment,speculation, andmonetary expansion but did not elaborate on these underlying issues.[10] The concept was revived in 2005, whenFortune warily observed five media corporations investing in new skyscrapers inManhattan[3] (none of them, including the tallest, theNew York Times Building, broke any records).
The intuitively simple concept, publicized by the business press in 1999,[11][12] has been cross-checked within the framework of theAustrian Business Cycle Theory, itself borrowing onRichard Cantillon's eighteenth-century theories.[10]Mark Thornton (2005) listed threeCantillon effects that make the skyscraper index valid. First, a decline ininterest rates at the onset of a boom drives land prices.[13] Second, a decline in interest rates allows the average size of a firm to increase, 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 the growth period.[14]
Critics dismissed the skyscraper index as an unreliable tool: thepost-World War I recession, therecession of 1937, and theearly 1980s recession were not marked by any record-breaking projects.[5][15] Construction of theWoolworth Building (world height record 1913–1930) was marked by a localoverbuilding crisis in New York City in 1913–1915[16] concurrent with a record construction boom in Chicago.[17] Thornton argues that completion of the Woolworth Building was followed by a third-worst-ever quarterly decline ingross domestic product, thus it should not be considered an exception from the rule (as Lawrence himself did).[15]
Cyclical patterns in real estate have been thoroughly studied before Lawrence, notably byHomer Hoyt in the 1930s.[18] A 1995 analysis of New York and Chicago's experience byCarol Willis estimated that historically, two-thirds to three-quarters of skyscrapers were conceived for rent alone;[19] corporate "edifices" imposing their owners' brand name (including most historical record-holders) were a minority, and they too leased space to tenants.[20] Speculative real estate markets cycle between the two different behavior patterns.[21]
In normal times when the 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.[21] Willis said that "height is a barometer of boom",[8] "the tallest buildings generally appear before the end of a boom, their height driven up by thespeculative fever that affects both developers and lenders",[19] citing cyclically inflated land values as the principal factor for increases in building height,[22] but did not elevate this fact to become an "index".
A related concept,Skyscraper Indicator, was popularized byRalph Nelson Elliott in the 1930s.[23][24]
In some ways this appears to be an elaboration ofC. 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 construction of theBurj Khalifa may follow this pattern. In October 2009, the 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 fromThe Daily Telegraph commented, "For all the ambition of its construction, Dubai's new Khalifa Tower is a frightening, purposeless monument to thesubprime era".[25]
A study byBarr, Mizrach and Mundra (2015) aims to see if there is, in fact, a correlation between skyscraper height and economic growth.[9] The study looks at two types of data. First, the paper looks at the announcement and completion dates of the world's tallest buildings and the peaks and troughs of the United States business cycle, as measured by the National Bureau of Economic Research. They find that there is virtually no relationship between the timing of record-breaking buildings and the business cycle. Second, the authors investigate height and economic growth using the time series techniques ofvector autoregression andcointegration tests. They investigate the time series relationship between the tallest building completed each year and the level of per capita GDP for the United States, Canada, China, and Hong Kong. The authors find that the two series are co-integrated, which means that they move together over time. That is to say, the tallest building completed each year in these countries does not systematically move away from the underlying income of the country, which provides evidence that, in general, skyscraper height is not fundamentally based on height competition among builders. Finally, the vector autoregression methods allow the authors to see if skyscraper height can predict changes in gross domestic product (GDP) (i.e., if heights predict recessions). The authors find that height cannot, in fact, be used to predict changes in GDP. However, GDP can be used to predict changes in height. In other words, the study finds that extreme height is driven by rapid economic growth, but that height cannot be used as an indicator of recessions.
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The U.S. has a new tallest building—One World Trade Center in New York—and that has conjured up some novel reading of economic tea leaves.