‘Unhealthy Correlation’ Between the Building of Skyscrapers and Financial Crashes

According to Barclays Capital, there is an "unhealthy correlation" between the building of skyscrapers and subsequent financial crashes.
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Jan. 31, 2012 - PRLog -- Examples from history include the Empire State building, built as the Great Depression was under way, and the current world's tallest, the Burj Khalifa, built just before Dubai almost went bust.  The world's first skyscraper, the Equitable Life building in New York, was completed in 1873 and coincided with a five-year recession. It was demolished in 1912.

Other examples include Chicago's Willis Tower (which was formerly known as the Sears Tower) in 1974, just as there was an oil shock and the US dollar's peg to gold was abandoned.   Malaysia's Petronas Towers in 1997 coincided with the Asian financial crisis.

China is currently the biggest builder of skyscrapers, which is currently building 53% of all the tall buildings in the world.  India has only two of the world's 276 skyscrapers over 240m in height, but over the next five years intends to build 14 new skyscrapers.
The findings might be a concern for Londoners, who are currently seeing the construction of what will be Western Europe's tallest building, the Shard, which will be 1,017ft (310m) tall when completed.

Commenting on this ‘unhealthy correlation’ Tony Key, Professor of Real Estate Economics (http://www.cass.city.ac.uk/courses/masters/courses/real-e...) at Cass Business School  said:

“On an anecdotal basis, it’s easy to make a list of many of the tallest and most famous office towers that were completed in economic and property market slumps: in New York the Chrysler Building and Empire State Building (known at the time as the Empty State Building) in 1930-31, the Twin Towers in 1970-71; in Chicago, the Sears (now Willis) Tower, Aon Building and John Hancock Tower were all completed in the early 1970s. In London, the Natwest (now 42) Tower was finished in 1980, Canary Wharf in the early 1990s, the most recent set of big towers (Bishopsgate, Ropemaker Place) in the late 2010s. Of course, it would be easy of find quite a lot of counter examples of big buildings completed into booms: the Heron Tower, for example, completed in 2011 did catch an upturn in the London office rental cycle.”

“The coincidence of large volumes of building with economic downturns is a natural tendency of the property cycle. It takes a lot of finance and confidence to put up mega-projects, both of which are most abundant in economic booms. It takes several years – say 2 to 4 – to put them up. If the economic cycle tends to run 2-3 years from peaks to troughs, too often building started at peaks will be finished in troughs. The phenomenon is not confined to big towers – at applies to the total volume of construction.”

“So while it makes an eye-catching story to focus on the towers, if I were worried about (say) India I’d be looking at the total volume of buildings not just skyscrapers. If I wanted to worry, I’d note that the next set of office towers likely to be built in London will be completed 2013-2014. But on the other hand, they’ve also been started at a fairly low point in the economic cycle. You might argue that developers have learned from the history, and this time are trying to second-guess it. If the economic cycle doesn’t turn out to be quite like history – for instance we just don’t get much of a pick up in London financial services – they’ll be wrong again, but for a different reason.”

To speak to Professor Key who teaches PhD students  (http://www.cass.city.ac.uk/courses/phd/areas-of-study) at Cass Business School, please call Helen Merrills, Press Assistant at Cass on 0207 040 4191.

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