The Return of the Skyscraper Index
In December of 1999, as a whimsical exercise to entertain stockbrokers during the Christmas lull, a Hong Kong-based property analyst named Andrew Lawrence created the Skyscraper Index, which sought to correlate the periodic naming of the world’s tallest buildings with spectacular market crashes.
That should sound familiar in November of 2008, with the planet’s bourses capsizing even as virtual thickets of gigantic buildings rise into the sky, many of them to be stopped halfway up or destined to remain without tenants into the future. In fact, of a list of the world’s tallest 20 buildings compiled by the website about.com, 14 remain unfinished.
The study by Lawrence, a director with what was then the British investment bank Dresdner Kleinwort Wasserstein, has been the subject of scholarly papers published in English, German and Czech as well as scores of newspaper articles.
In the first part of the decade, however, it appeared that Lawrence’s theory wasn’t working, as country after country after country reported the new tallest building in the world. Taipei’s 101 Tower, completed in 2004, appeared to have escaped as Taiwan’s economy burbled along. The Shanghai World Financial Center, a mixed-use skyscraper at 101 floors, topped out in 2007. (Ominously, it was scheduled much earlier, but its construction was delayed by the 1997-1998 Asian financial crisis.) The Wuhan International Securities Building in Wuhan topped out in 2007 at 1,097 feet. Australia’s tallest building, the Q1 Tower built on the Gold Coast, was finished in 2005 at 1,058 feet and bills itself as the tallest all-residential tower in the world.
But history is history after all. Lawrence started tracing the correlation of the world’s latest tallest building with the construction of the Singer Building in New York, completed in 1908 just after the Panic of 1907, also known as the Banker’s Panic, in which the New York Stock Exchange fell 50 percent from its peak a year earlier.
In 1929, Lawrence wrote, 40 Wall Street Tower was completed – we recall what happened in that year – followed by the Chrysler Building in 1930 and the Empire State Building in 1931, which remained nearly empty for years. In 1973, the ill-fated World Trade Center in New York and the Sears Tower topped out just in time for the recession of 1973-1975, considered to have been the most severe since World War II. They finished the Petronas Towers in Kuala Lumpur, then the world’s tallest buildings, and the Baiyoke Tower in Bangkok, Thailand’s tallest, in 1997, just in time for the Asian financial crisis.
As Lawrence pointed out, the world’s tallest buildings obviously don’t cause economic collapses. But inevitably hubris catches up with businessmen at the end of long booms and they can’t resist. It is usually a time of overinvestment, rampant speculation and monetary expansion – all of which the world had in spades at the start of 2008.
Mark Thornton, a senior fellow at the Ludwig von Mises Institute in Auburn, Alabama in the United States, took Lawrence’s theory seriously in a scholarly paper, Skyscrapers and Business Cycles, published in 2005.
Thornton found a bunch of buildings that Lawrence had overlooked. The Woolworth, originally planned as a “modestly tall” building in 1910, was replanned to become one of the world’s tallest at 750 feet. The opening ceremonies, Thornton writes, were held in April 1913, in time for the US economy to peak and begin to contract. It continued to contract through the fourth quarter of 1914 in the worst quarterly decline in real gross national product in 43 years. The Masonic Temple in Chicago, Illinois, the first building to exceed 300 feet in 1892, was preceded by the beginning of the largest contraction in recorded US history. The completion of the Park Row Building in New York in 1898 coincided with the largest quarterly decline in real gross national product, he writes, from 1875 to 1918.
The common pattern that correlates skyscrapers with economic disasters starts first with a period of easy money, Thornton wrote, which “leads to a rapid expansion of the economy and a boom in the stock market. In particular, the relatively easy availability of credit fuels a substantial increase in capital expenditures. Capital expenditures flow in the direction of new technologies which in turn creates new industries and transforms some existing industries in terms of their structure and technology. This is when the world’s tallest buildings are begun. At some point thereafter negative information ignites panicky behavior in financial markets and there is a decline in the relative price of fixed capital goods. Finally, unemployment increases, particularly in capital and technology-intensive industries.”
So where has hubris taken the world’s master builders in 2008? Directly into what has been called the biggest economic crisis since the Great Depression of the 1930s. And if the Skyscraper Index has any validity, the current situation is validating it.
The Burj Tower in Dubai at 2684 feet, some 1,000 feet taller than the next tallest building, is slated for completion this year. It was officially named the world’s tallest building the day the New York Stock Exchange started a descent that has cost 50 percent of its value. This week, the United Arab Emirate announced plants to bail out corporations and consolidate distressed lenders despite the fact that Dubai had confidently announced it would weather the economic storm.
"We will see more consolidation, especially with third-party developers, who may be facing some lending difficulties, an official said. “We are rationalizing our expenditure and consolidating our activities."
The Tower of Russia in Moscow, at 2,129 feet, was “just an ambitious fantasy for eight years,” according to a press release. “Now, it is scheduled to completion in 2010, and will be the world's tallest building.” Construction of the tower, designed by Sir Norman Foster, was suspended this month.
The 133-story International Business Centre (IBC) to be built in Sangam-dong, in Seoul Korea, at 1902 feet, remains on the drawing board although the Koreans say they are still intending to build it, along with four or five 100-plus storey buildings including one called the Dream Tower with 150-155 storeys in Yongsan.
Hong Kong has its own International Commerce Centre, 118 storeys and 1587 feet of skyscraper rising into the sky right now, and expected to be completed in 2010, in the depths of what promises to be a long recession.
“It would be very easy to dismiss the skyscraper index as a predictor of the business cycle, just as other indicators and indexes have been rightly rejected,” Thornton wrote. “However, the skyscraper has many of the characteristic features that play critical roles in various business cycle theories. It is these features that make skyscrapers, especially the construction of the world’s tallest buildings, a salient marker of the 20th century’s business cycle; the recurring pattern of entrepreneurial errors that take place in the boom phase that are later revealed during the bust phase.
“In the 20th century the skyscraper has replaced the factory and railroad, just as the information and service sectors have replaced heavy industry and manufacturing as the dominant sectors of the economy. Therefore it should not be surprising that the skyscraper is an important manifestation of the 20th century business cycle, just as the canals, railroads, and factories were in previous times.”
And so it goes.