Jason M. Barr March 8, 2018
Imagine that one day, walking through a crowded business district, you discover that you have a new power: you can see directly inside a skyscraper office building, as if one of the glass facades had just been removed. Before you is your very own ant farm.
Five thousand men and women are going about their daily work routines, without knowledge that you are observing them. On the 10th floor, a cluster of cubicle dwellers stares at their screens. On the 20th floor, three men in a hallway are talking about basketball. On the 30th floor, a nervous college graduate sits uncomfortably in a leather couch, waiting for an interview. On the 50th floor, an executive looks out at the vast skyline from her corner office. All the while, six strangers stand awkwardly as the elevator shoots up in its shaft.
You could spend days filling notebooks with anthropological observations about homo operarius, but one question in particular pops into your mind: Who goes where? Do different types of businesses sort themselves on different floors?
The Vertical City
As a good social scientist, you must first conduct a literature review. To your surprise, you find two recent studies that investigate this very question. The first paper is called “The Vertical City: Rent Gradients and Spatial Structure” (2017) by Lui, Rosenthal and Strange; the second is “The Vertical City Revisited: Rent Premiums and Vertical Sorting in Amsterdam’s Tall Office Towers” (2017) by van Assendelft, Nase and Remøy.
Each asks similar questions. The first is whether there is a height premium within office buildings. That is, do businesses pay higher rents to be on higher floors? Second, if so, who is paying to be up there?
Lui et al. study over 1,900 office buildings throughout the United States; while van Assendelft et al. investigate 33 buildings in Amsterdam. Yet, their findings are quite similar. They both confirm the existence of a height premium. Across the U.S., on average, businesses pay around 0.6% more rent per square foot to be on a higher floor. For example, if one business is on the 10th floor and another is on the 30th floor, the higher one would be paying 12% more, on average, for the right to work closer to the clouds.
For Amsterdam, the authors find that on, average, firms on the 11th to 15th floors pay 9% more per square meter than those on the lower floors; while those on the 26th to 31st floors pay nearly 24% more than those on floors one to five.
My own investigation into the Manhattan office market yields results similar to those of Liu et al. However, I find that the rent premium varies across the island. Those firms in midtown pay, on average, about 0.6% per higher floor; while those in downtown only pay 0.3%, all else equal.
Why the Rent Premium?
This apparent universal phenomenon begs the question: Why do businesses pay more to be higher up? One can imagine both costs and benefits to working in the clouds. On the plus side are the greater views and cleaner air. On the downside is that more time is spent riding elevators. Fear of heights or terrorism do not help. Yet, based the strong statistical results, the benefits seem to outweigh the costs.
However, more than just great views is at work (no pun intended). Something deeper is going on, and whether it is an economic, psychological, or sociological phenomenon remains unknown. The differences that I find between midtown and downtown Manhattan rents also suggest views is only one part of the equation.
Who is paying the premium? Both studies find that one type of business systematically pays to be on higher floors. Can you guess who? Here are some choices:
- (a) Advertising
- (b) Law
- (c) Insurance
- (d) Finance
- (e) Management Consulting
The answer is…
(b) Law Firms.
Why the Sort on High?
For some reason, lawyers are much more likely to be found on higher floors, in both the U.S. and the Netherlands. In regard to floor choices, Liu et al. conclude, “Law offices dominate, however, and make up 43 percent of establishments above floor 40.” At this point, the reasons for the sort on high remain something a mystery. Nevertheless, here are several possible theories.
The Peacock’s Tail
The first is that of signaling. We can imagine that potential clients do not have full information about the quality of different law firms. If, to the random client, one law firms appears the same as the next, then particularly successful firms might use some of their large incomes to rent the higher floors to convey their success to would-be clients. This is analogous to the peacock’s feathers: the large and brightly colored tail signals fitness and strength, which is then used to attract a mate.
If fantastic views are an amenity, then those with more money will outbid the rest for the right to the prize. In the housing market, for example, a home with a pool might sell for thousands of dollars more. Only those households with large enough incomes can afford to pay. Perhaps it is the same with law firms and views—they use their large revenue streams to pay for the benefit.
There is a large literature in economics on the benefits of clustering and business density. Perhaps law firms, in particular, find that being up high makes them more productive. That is, there is something specific about the way lawyers work that allows them to better interact with each other and clients when they are high up. In this case, lawyers will pay to move up so they can get more work done. Then, what is the role of views? Does it make lawyers more contemplative or calm and therefore more productive? Or, is it something about the vertical nature of the working, separate from the vistas?
One important aspect of human behavior, springing from our evolutionary history, is that of power and status. Humans naturally form hierarchies. However, if there are multiple claims to be at the top, there must be some method to decide who gets to be king. In modern societies, these urges are resolved with currency not combat.
The legal profession–the interpreters of what society members can and cannot do–may draw those personalities eager to sit atop the social hierarchy. So in this case, the profession lures in the “alphas” who, by renting kingdoms in the sky, are then accorded the social status they seek.
This theory suggests that the height premium is, essentially, independent of the views. Lawyers would pay to be at the top of a windowless building, simply to get their props.
The View from Inside
Neither of the two studies investigates in a detailed fashion which theory might be the most important. Liu et al. do try to determine some of the factors that affect floor choices. They find, for example, that a key variable is sales revenue per worker. On average, across all firm types, a company that has double the sales per worker is likely to increase its floor height by 1.5%, all else equal.
And, there’s something special about law firms; they are even more sensitive to revenues—the larger the revenues of law firms, the greater their jump to higher floors, as compared to other types of businesses. But, beyond that, we don’t know the motivation.
To get an insider’s perspective, I first spoke with a lawyer, who has been practicing for over 40 years in Manhattan. His firm currently leases space on the 40th floor of a midtown tower. His view (no pun intended) was that being on a high floor was important for both recruiting purposes and impressing clients; which suggests both the signaling and amenities theories.
“Several years ago, I went to work for a startup law firm and we took a high floor—the 35th floor—in a building in midtown. We wanted to impress clients that we were a big league outfit and being on high floor was part of that strategy.”
This lawyer also suggested that things might be changing. After the financial crash of 2008, clients began scrutinizing law firms’ expenditures and their high fees. “Being high up can be good for advertising to clients—but there’s a real tension as you also don’t want to be seen as throwing your client’s money away.”
This sentiment was echoed by Bob Chodos of Newmark Knight Frank in Chicago. He’s been in the real estate business for 35 years and specializes in finding office space for law firms. Mr. Chodos says lawyers want to be high up because it produces happier lawyers. The amenities of natural light and views, combined with smaller floors up high, increases the fit between the built environment and the nature of legal work, which makes lawyers more productive. “Today the ideal office size is 28,000 square feet, with floor-to-ceiling glass, and are 40 feet from window to core.”
When asked about the “king of the hill” theory, he also said that law firms would not pay to be high up for that reason. “Clients want to know that law firms are not spending money on unnecessary luxuries.”
Based on my conversation with Mr. Chodos, the theories discussed above need to modified somewhat (at least for lawyers): those who pay are seeking a better match between building form and workers’ needs and wants. This can also explain the demand that high-tech firms have for old loft buildings in central cities–it’s to please their energetic millennials, who reject the glass box office.
But a question remains: Does being high up improve productivity or enhance reputations for other types of tenants? It may be that they are outbid because of lawyers’ larger revenues, despite wanting to also work in the clouds. This problem could be solved if someone invents a floating building in the sky, with views on every floor.