Building the Skyline

The Birth & Growth of Manhattan's Skyscrapers

by Jason Barr 10 Comments

The Economics of Skyscraper Height (Part I)

Jason M. Barr     December 17, 2018

Note this is Part I of a series on the economics of skyscrapers. The rest of the series can be read here.

Clark and Kingston

In 1930, W. C. Clark and J. L. Kingston (CK), an economist and architect, respectively, published a book called, The Skyscraper: A Study in the Economic Height of a Modern Office Buildings. In this work, they act as a hypothetical developer of a Manhattan office skyscraper. Their aim was to determine a height for the structure which maximized the return, given the rents, and the costs of land and construction.

In fined-grained detail, they laid out the various elements of erecting such a building, including floor plans, and the all the different types of costs a builder must pay, from bricks, to elevators, to steel. For their analysis, they chose a large lot across the street from Grand Central Station, in the heart of Manhattan’s midtown business district. 

The point of this exercise was to demonstrate that the supertall towers rising in Manhattan during the late 1920s were not “freak” buildings, but rather, were based on reasonable economic foundations.[1] They showed that when one did all of the accounting—comparing the income to the costs—the height that maximized the return was 63 stories. (Ironically, this is not that much different than today. One Vanderbilt, an office building currently under construction across the street from Clark and Kingston’s hypothetical lot, will rise 58 stories.)

Manhattan Skyscraper Rendering by Architect J. L. Kingston. At 63 stories is was considered the ideal height at the time. Source:
The Skyscraper: A Study in the Economic Height of a Modern Office Buildings (1930).  

 

Economic Height

In their book, they present a definition of what they called the Economic Height of the building, based on the writings of the engineer, J. Rowland Bibbins; and one that is still reasonable:

The true economic height of a structure is that height which will secure the maximum ultimate return on total investment (including land) within the reasonable useful life of the structure under appropriate conditions of architectural design, efficiency of layout, light and air, ‘neighborly conduct’, street approaches and utility services. (pps. 8-9)

Economic Height provides a useful guide (though not the only one) for understanding why skyscrapers get built, since this height is determined by the best balance between the revenues and costs. In general, going taller will generate more income, but will also add to the expense. In modern economics terminology, the economic, or profit maximizing, height is one where at the highest floor, the additional or marginal revenue from that floor just equals the marginal or additional cost to providing it. If built one floor higher, the cost of adding the floor will be greater than the revenue and will not be worth it. If less than that height, money is “left on the table,” since adding a floor would produce more income than it would cost to produce it.

It’s worth stressing is that a developer builds this optimal height to earn a profit. People and companies are willing to pay the high prices because of the needs they fulfill and the benefits they provide. Thus, Economic Height is a response to the demand; not the other way around.

Land Values and Building Height

As CK also demonstrate, there is a direct relationship between the cost of acquiring the land and the return on investment from a taller building. We can think of developers as a type of urban farmer; the more it costs to acquire a lot, the more they must intensely develop the land in order to receive enough income to compensate for the high cost of the location. Thus, around the world, we observe taller buildings in places that have higher land values.

Given this notion of Economic Height as a benchmark, we can then say that any building that is taller than this can be considered economically “too tall” in that it is higher than it “ought to be” for pure economic gain; and hence produces lower profits than a shorter building. The difference between the actual and Economic Height is what I call Symbolic Height.

Height in the 21st Century

Even though Clark and Kingston published their book nearly 90 years ago, the question of whether buildings are economically too tall remains as relevant today as it did during the Roaring Twenties. To look at the Economic Height at one location, Clark and Kingston 
(funded by the American Institute of Steel Construction) hired a stable of expert consultants to help them analyze the problem. The ability of someone like myself to determine the Economic Height for even one building must come from publicly available data; and it’s virtually impossible to calculate it for many structures. However, we can make statistical inferences if we collect a large enough data set.

Skyscrapers around the World

For convenience, let’s define a skyscraper as a building that is 150 meters (38 floors, on average) or taller (and just focus on 1960 to 2017). Now imagine that you were a giant and could “harvest” all the world’ skyscrapers and put them into a jumbo pile—like a child might make a pile of sticks of various lengths.  Now in our little game, we pick up each skyscraper (stick) and measure its height. Then we place it in one of several bins or buckets. The first bucket will contain buildings that range from 150 to 199 meters. The second contains buildings 200 to 248 and so on. The last bucket ranges from 788 to 836 meters, and which contains the Burj Khalifa at 0.828 km tall.

Which bucket has the most buildings? And what does this suggest? According to the CTBUH, there were 4,162 skyscrapers built between 1960 and 2017. It turns out that the vast majority of tall buildings are less than 200 meters (68.3%).  Only 23 are 400 meters or taller. Statistically speaking if you were to randomly pick a skyscraper constructed since 1960, the probability that you would select a building greater than 400 meters is about one-half of one percent. The vast majority of buildings are “regular-talls” (under 50 stories); while the number of “super-talls” is minuscule, in comparison. The super-giants, while most visible from media accounts and their appearances in skylines, only make up a tiny, tiny fraction of the world’s skyscrapers.

 

Skyscraper Heights Histogram. Each blue bar shows the fraction of skyscrapers (≥150 meters) around the world in that height category (completed between 1960 – 2017). For example, 68% of all skyscrapers are less than 200 meters. The orange line is the fraction in a category or lower. 99% of the world’s skyscrapers are less than 350 meters. Source:  CTBUH.

The Drivers of Economic Height

The evidence suggests that the bulk of the world’s skyscrapers are consistent with the notion of Economic Height. This is not to say that all skyscrapers reflect the best balance between the costs and benefits, but it is to say that the majority of the world’s skyscrapers have a strong economic rational, in that they are catering to a demand for building height. So what are the key economic drivers of skyscrapers?

Economic Growth

Most important is the process of economic growth and urbanization. The more economic activity there is in a city or region the more central locations become vital because people and business need to cluster near each other to more efficiently produce the goods and services that our modern economies require. The skyscraper shrinks space so that hundreds if not thousands of people can be at the same geographic coordinates at the same time. The tremendous demand to be in the central city creates a kind of “battle for place”—if more people want to be at a central location than can be accommodated, the price of that location rises. As land values rise, so does Economic Height, and skyscrapers rise as a result.

The ability of a country to build skyscrapers is directly related to the size of its economy. Once a country hits a threshold, in terms of its gross domestic product, there is then a very strong relationship between both the number of skyscrapers it has and the height of its tallest building. Arguably the greatest predictor of the height a country’s tallest building is the number of highrise buildings it has; and the greatest predictor of the number of tall buildings is the size of its economy.

 

Left: Number of Highrise Buildings in a Country versus its Gross Domestic Product ($PPP2011). Right: The Height of a Country’s Tallest Building versus the Number of Highrises. The figures show that there is a strong relationship between national income and number of highrises, and the more highrises the taller is a nation’s tallest building. Note: All variables in natural log form. Sources: GDP,  #Highrises, Tallest Building.

The Cost of Construction

Today’s skyscraper technology is the result of a 130-year learning curve. Innovations in design, materials, and engineering, combined with lower labor costs in the developing world, make them attractive investments. While there has been no systematic research on the evolution of (inflation-adjusted) marginal or per-floor costs over the entire 20th and early 21st centuries, the evidence we do have suggests that these costs have been declining.

In Manhattan during the early years of skyscraper construction, between 1900 and 1920, I estimate that the marginal or additional cost of adding another floor averaged about 7%; between 1921 and 1931 this cost dropped to about 3%.  In other words, in New York City, during the Roaring Twenties it was getting much cheaper to add extra floors. Builders were responding accordingly by adding more floors; this can explain, in part, the building boom of the era.

Costs around the World

Fast forwarding to the 21st century, it’s instructive to look at a few recent examples. In January 2010, the world’s tallest building, the Burj Kalifa (163 stories) was completed. Its total construction costs was only $1.5 billion, or $9 million per floor. The comparatively expensive 128-floor Shanghai Tower, completed in 2015, cost $2.4 billion, or $18 million per floor. Contrast that with the 2009 58-story Bank of America Tower in Manhattan, which cost $1.76 billion, or $37 million per floor. While a few examples do not prove anything, it does illustrate that Asian countries can pay less to get more, in terms of building height. In New York and other U.S. cities, it seems to be the case that the cost reductions from technological progress are offset by the rising cost of labor and materials. In Asia, rapid economic growth, and intense urbanization, combined with lower building costs and an eagerness to employ innovations in design and construction, are driving building booms in their cities.

Are Megatall Buildings Good or Bad?

But what about the megatall giants like the Burj Khalifa, the Shanghai Tower, or the Taipei 101? They must be wasteful projects, with little economic rational, right? I would argue that the answer is not so clear, and that maybe we should not be so hasty to judge. Stay tuned.

Continue reading. The rest of the series can be read here.

 

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[1] I would add a few caveats to their conclusion. First, they only analyze one hypothetical building on a very large lot of land in the center of midtown. So their ability to generalize is some what limited. And, second, to the extent that land values and office rents might have been inflated because of over-optimism and an overheated stock market in the late-1920s, means that their resultant height might have been too high.

by Jason Barr 1 Comment

Why Was 2017 Another Record-Breaking Year for Skyscrapers?

Jason M. Barr   January 2, 2018

The Council on Tall Buildings and Urban Habitat (CTBUH) recently issued its 2017 Year in Review for skyscraper construction around the world. As in prior years, the report has lead to a flurry of excited headlines. From The Times UK: “Taste for High Life Gives Rise to More Skyscrapers”; from ArchDaily.com: “The Results Are In: 2017 Was Another Record-Breaking Year for Skyscrapers,” and from CNN: “World Skyscraper Construction Hits All-time High.”

Implicit in these statements is that something is not quite right; that the world is being flooded with supertall structures must be due to nefarious, decadent, or irrational objectives. But, the truth, alas, is quite mundane. The increase in supertalls is a direct response to global economic growth.

This fact holds as true today, in the early 21st century, as it did a century ago. If we take a step back and look at the long history of skyscrapers, we can get a better perspective on when and where they are constructed. The first skyscrapers were built in Chicago and New York City starting in late-1880s as a way to accommodate the demand for office space in their respective central business districts.

The skyscraper was invented as a “machine that makes the land pay.” That is to say, land prices in New York and Chicago were so high at the time that developers aimed to build taller structures as a way to recoup the expense of paying for the land. However, the reason that land values were so high was that the Loop and Wall Street were booming at the end of the 19th century. These two cities were growing rapidly to accommodate the increasing trade and commerce that were contributing to America’s wealth.

The Threshold

Once a city or nation achieves an economic threshold, it then has the resources and economic demand to build a skyscraper. Technological progress over time makes the definition of “tall” creep up, but the logic of tall has not changed. It emerges from the supply and demand calculus. Increasing business, trade, and urbanization draw people to cities. Because of the strong forces of agglomeration, some locations become very valuable. This then incentivizes developers to build tall, which further increases the value of these central locations, increasing demand for more skyscrapers.

We can see this in America in the early 20th century. Figure 1 shows, for 72 cities, large and small–from Albany to Youngstown–the relationship between a city’s population and the number of tall buildings it hads. The left graph shows the number of structures that are 10 stories or taller in 1929 versus its 1920 population; the right graph shows the number of 21-story or taller structures versus its 1920 population (all variables are in natural log format).

Number of tall buildings in 72 U.S. cities in 1929 versus their 1920 populations. Sources: Number of taller buildings is from Weiss, M. A. (1992). “Skyscraper Zoning: New York’s Pioneering Role.” Journal of the American Planning Association, 58(2). Population data is from Gibson, C. (1998). “Population of the 100 Largest Cities and Other Urban Places in The United States: 1790 TO 1990,” or from a respective city’s Wikipedia entry.

While the relationships are not one-to-one, it is clear that larger, more productive cities have more tallr buildings (the same would be shown with each city’s gross city product, but I could not find such data). On average a 10% increase in population lead to having an 8.6% increase in the number of 10-story or taller buildings. Furthermore, a 10% increase in population increased the probability of having a 21-story or taller structure by 2.5 percentage points. Once a city’s population hit about 315,000 there was a 100% chance it had at least one very tall structure (except for Washington DC, which had strict building height laws).

That was nearly a century ago. Let us scale this up to nations today. Barely any poor countries have skyscrapers. North Korea, which has been trying to finish the Ryugyong Hotel since the late 1980s, stands as a monument to the exception that proves the rule. Skyscrapers, rather, emerge in rapidly growing countries.

Not every rich country embraces skyscrapers—there are none in Norway or Denmark, for example—but again they are the exceptions. By and large, most rich countries find they have a need for them. Figure 2 shows the relationship between the number of 150-meter or taller buildings in 177 countries versus their respective GDPs (again in natural log format).

Number of skyscrapers (150m+ buildings) versus gross domestic product (GDP) for 177 countries. Source: Skyscraper data is from the Skyscraper Center. 2016 GDP data from the World Bank. Note GDP is adjusted for purchasing power parity.

The figure strongly suggests that there is a threshold, here about $34.5 billion, which, once passed, leads to more skyscrapers. Once hit, there is very strong relationship between the size of an economy and the number of skyscrapers.  In fact, on average, across countries, a 1% increase in a country’s GDP leads to a nearly 1% increase in number of skyscrapers.

The Global Growth in Skyscrapers

We can, in fact, zoom out one step further and look at this from a global perspective. Imagine that planet earth was one country. We can look at how the total number of skyscrapers completed on the planet each year is affected by global income growth.

To this end, I collected data on the number of tall building completed each year since 1960 (where here a tall building is one that is 190 meters or taller), and three other important variables: global gross domestic product (GDP), global population, and the fraction of the human population that lives in urban areas. I have created detailed notes on the data sources and analysis for the interested reader.

In short, global GDP, population growth, and urbanization can account for 92% of the variation in the number of skyscrapers completed each year. In other words, these three variables are the key to understanding why tall buildings are becoming both more numerous and taller. I find that, at the global level, a 1% increase in global economic growth leads to a more than 1% increase in skyscrapers, on average.

In 1960, global GDP was $11 trillion; today it is $72 trillion. What’s more, since 1960, global GDP has only declined in one year (in 2009 after the Great Recession). This is worth stressing again: despite the ups and downs of national economies, such as that of the U.S. and those in Europe, planet earth, as a whole, has experienced a rise in incomes every year for the last 56 years, save one. Each year that the world increases its income means that it will continue to add more and more skyscrapers.

 

by Jason Barr 4 Comments

Growing Up: Skyscraper Heights over the 20th Century

By Jason M. Barr    October 20, 2017

In the year 1848, a stroll down lower Broadway in Manhattan would have revealed a decidedly low-rise town. The reason was simple:  the only way to get to the top floor was to climb the stairs. Humans, unlike birds, do not have the anatomy to defy gravity (what would offices for birds look like anyway?). As a result, property owners had no incentive to build taller, since few would pay to be on higher floors.

If, for your whole life, five-story buildings were the tallest you knew, save for church spires or bell towers, imagine how shocked you would be when eight-, nine-, and ten-story buildings started to emerge. They would truly appear to scrape the sky.

Lower Broadway, Manhattan circa 1848. Left is south, right is north. Source: Valentine’s Manual of Old New York (1919).

As discussed in a previous post, after the Civil War, buildings started to grow taller, due to both economic demand and new technology. By 1890, the Skyscraper Revolution was in full swing in that the key technological barriers to building tall had been broken. No longer did church and state have a monopoly on building height, but now it could also be provisioned by the private sector. By 1900, 25- to 30-story tall buildings started to appear; and by 1908, 47 stories was Q.E.D. when the Singer Building was completed in New York. Today, lower Broadway is known as the canyon of heroes.

Looking north from Bowling Green along Lower Broadway, the “Canyon of Heroes”, Manhattan, circa 1920. Source: Getty Images.

A key point is that when building height finally became a variable in the real estate equation, it opened up possibilities for developers to choose different heights based on their own motivations and access to financial resources. When this happened, things began to get interesting because humans need to express themselves, and the tall building, after say 1890, became a great means of expression. Pioneering skyscraper architect, Louis Sullivan, promoted this idea in 1896, when he wrote:

What is the chief characteristic of the tall office building? And at once we answer, it is lofty. This loftiness is to the artist-nature its thrilling aspect. It is the very open organ-tone in its appeal. It must be in turn the dominant chord in his expression of it, the true excitant of his imagination. It must be tall, every inch of it tall. The force and power of altitude must be in it the glory and pride of exaltation must be in it. It must be every inch a proud and soaring thing, rising in sheer exultation that from bottom to top it is a unit without a single dissenting line….

As I will discuss in another post, we can understand the building height choices of developers as some function of economics (the financial costs and benefits of building) and the symbolic component (advertising and height competition), and which, fundamentally, spring from urbanization, population and economic growth, and globalization.

These forces have driven skyscrapers to grow taller over the 20th century. Before World War II, there were pronounced height cycles in that height would rise and fall, on average, with the business cycle. However, after the War, there has been a steady uptick in the average heights of the tallest completed buildings (though they are not immune to business cycles).

In the 1950s, the tallest buildings were typically above 175 meters (45 stories), by the 1990s, buildings greater than 300 meters (65 stories) were common. In the last 10 years, 500 meters (100 stories) is the new benchmark for tall. This evolution can be seen in the figure below, which shows the height of the tallest building completed each year around the world. The Council on Tall Buildings (CTBUH), the de facto arbiter of building height, provides definitions for the various forms of tall:

A “supertall” is a tall building over 300 meters (984 feet) in height, and a “megatall” is a tall building over 600 meters (1,968 feet) in height. As of today, there are 125 supertalls and only 3 megatalls completed globally.

The height of the tallest building completed each year across the world and the height of the world’s tallest building from 1900 – 2017 (Oct.). Source: Graph created by Jason Barr using data from skyscrapercenter.com and emporis.com.

Horse-Racing Height

When looking at a megatall structure like the Burj Kalifa (828 meters, 2010) one can’t help but think it’s a monstrous giant—a “freak project.” But is this true?

Burj Khalifa (Dubai, 2010). Source: Wikipedia Photo Commons.

The answer is both “yes” and “no.” Yes, in that the Burj is much taller than the next tallest building by 319 meters. But ‘no’ in the sense that its height represents a logical progression since 1890.

Consider a “horse race” thought experiment.  Imagine it is January 1, 1900; you had $119 to invest. At the same time, you see the world’s tallest building is 119 meters (the Park Row Building in New York City). If you had invested that $119 how much would it have been worth by say January 1, 2017? Comparatively, how tall would be the world’s tallest building? Who would have won the race?

Further, let’s say you have two options for your money. First is that you can “invest” in the American economy. That is, how much is your $119 worth today in terms of national income (Gross Domestic Product)? Or, if you can invest $119 in the Standard and Poor’s (S&P) stock index. How much would you have today?

After adjusting for inflation, $119 worth of GDP in 1900 has grown to about $4464. In other words, the American economy has grown by a factor of 37.5 since 1900. This gives an average annual growth rate of about 3.1%.

The inflation-adjusted value of the S&P index would have increased in value to $1,453, a factor of 12.2, or an annual average rate of about 2.7%; assuming no reinvestment of dividends.

Growth of the world’s tallest building comes in third, going from 119 meters to 828 meters, a factor of just shy of seven, or an average annual growth rate 1.67%.

This comparison only uses the U.S. economy; we could have measured the growth rate of the fastest growing economies in the world, in which case the comparison would favor economic growth over skyscraper growth even more.

Starting in the 1990s, skyscraper construction has been, for the most part, an Asian phenomenon, with China and the Arabian countries taking the lead. These countries have seen growth rates far above the U.S.

In this horse race—the world’s tallest building versus the U.S. economy—one can’t help but ask, not why are skyscrapers so tall, but rather why aren’t they even taller? We will return to this question in future posts.

 

Shanghai Skyline (Pudong neighborhood, 2014). Source: Wikipedia Photo Commons.

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