Skyscraper boom means economic downturn?

[TBone7281]

http://finance.yahoo.com/news/china-...095904234.html

MUMBAI, India (AP) — A skyscraper building boom in China and India may signal an impending economic correction in two of Asia's largest economies, a new report says.
Barclays Capital has mapped an "unhealthy correlation" between construction of the world's tallest buildings and impending financial crises over the last 140 years.
Today, China is home to half of the world's skyscrapers — defined as buildings over 240 meters (787 feet) tall — currently under construction.
India, which has just two skyscrapers, is seeing its first skyscraper building boom, with 14 under construction, including the world's second-tallest tower, in the financial capital Mumbai.
"Building booms are a sign of excess credit," Andrew Lawrence, director of property research at Barclays Capital in Hong Kong, said Wednesday.
Historically, skyscraper construction has been characterized by bursts of sporadic, but intense activity that coincide with easy credit, rising land prices and excessive optimism, but often by the time skyscrapers are finished, the economy has slipped into recession, Lawrence said.
The Great Depression hit as the finishing touches were being put on three record-breaking buildings in New York: 40 Wall Street, the Chrysler Building and the Empire State Building, which were all completed between 1929 and 1931, Barclays noted in a Jan. 10 report.
The economic and oil crises of the 1970s coincided with the completion of the twin towers at New York's World Trade Center, in 1972 and 1973, and Chicago's Sears Tower in 1974.
The Asian financial crisis hit as Kuala Lumpur's Petronas Towers were finished in 1997.
Dubai's $4.1 billion Burj Khalifa, completed in 2010, is now the world's tallest building. As it was being built, Dubai nearly went bust and the world slid into the Great Recession.
"Thankfully for the world economy, there is not currently a skyscraper under construction that is planned to overtake the height of the Burj Khalifa," the report said.
However, signs of trouble are escalating in China and India.
Today, China gets the dubious distinction of being the world's "biggest bubble builder," as it erects ever more and ever higher towers, Barclays said. Home to 53 percent of the 124 skyscrapers now under construction globally, China is primed to increase its stock of skyscrapers by 87 percent.
About 80 percent of new buildings are going up in tier two and three cities, away from developed coastal areas of the Pearl River Delta and Yangtze River Delta, which Barclays called "evidence of the expanding building bubble."
Lawrence, who was lead author of the report, said China's property market is already wobbling.
The number of residential property sales has decreased 40 to 50 percent in Beijing and Shanghai and developers have slashed prices 5 to 20 percent, he said.
India, which has just two skyscrapers but is building 14 more, takes top honors for hubris: The second tallest building in the world, the Tower of India, is now under construction in Mumbai.
Nonperforming loans in India — a substantial number of them to real estate ventures — grew by nearly a third in the first half of this fiscal year, more than triple the average annual growth rate since 2006, according to the Reserve Bank of India.
"If history proves to be right, this building boom in India and China could simply be a reflection of a misallocation of capital, which may result in an economic correction for two of Asia's largest economies in the next five years," Barclays said.

[babybackribs2314]

It is quite apparent that the boom has gone much too far and that optimism is unchecked at the moment... when you have random cities in the middle of nowhere building 1,000' buildings, there is a serious problem.

The article does get one thing wrong, as the Kingdom Tower is planned to pass the Burj Khalifa, possibly by a significant margin (1KM total height; now we're talking near-Coruscant territory).

The one key difference between now and previous recessions is that cities like NYC and Hong Kong (and no others; well ok, maybe London, but the approval process for huge buildings is incredibly arduous there) have legitimate and actual demand for buildings in excess of 1,000 feet. They have grown to a point where supertalls are no longer built as showpieces but actually out of demand; take a look at NYC's diagram here and you'll see the parade of massive buildings soon to be underway.

[Chicago103]

Originally Posted by babybackribs2314

The one key difference between now and previous recessions is that cities like NYC and Hong Kong (and no others; well ok, maybe London, but the approval process for huge buildings is incredibly arduous there) have legitimate and actual demand for buildings in excess of 1,000 feet. They have grown to a point where supertalls are no longer built as showpieces but actually out of demand; take a look at NYC's diagram here and you'll see the parade of massive buildings soon to be underway.

I would argue Chicago is also in this category, the Sears Tower for instance was built on estimates for corporate growth for Sears in the early 1970's, I mean of course there was a showpiece factor as well but it's construction was still far closer to the demand model than a Burj Khalifa showpiece model.

[yankeesfan1000]

Here's a good article from the NYTimes about China's case in particular. Definitely worth a read.

I'd put Chicago in that group as well, Trump Tower as the most recent example. But yeah, the real big difference between the Chicago's of the world and the Dubai's of the world, beyond the governments role in the construction and planning of skyscrapers, is that the Chicago, Hong Kong, New York, were major economic centers before the high rises, and had been for a long time.

Quick google search, as of this time last year, Burj Khalifa has an 8% occupancy rate in its residential units. You have to wonder what buildings like that are going to look like in 20 years when the maintenance bills start to increase, and they're in need of just general repairs. The occupancy rate almost has to increase from 8%, but rents were cut by 40% in October 2010. I don't know, I find the question of how they're being financed today as interesting as what they're going to look like in 25 years.

[MonkeyRonin]

Absurd. Its not skyscraper construction that leads to an economic downturn, its overbuilding that leads to a bubble. I'd guess that there are a whole lot more subdivisions sitting empty or unfinished in the US right now than there are empty skyscrapers.

[TBone7281]

Originally Posted by MonkeyRonin

Absurd. Its not skyscraper construction that leads to an economic downturn, its overbuilding that leads to a bubble. I'd guess that there are a whole lot more subdivisions sitting empty or unfinished in the US right now than there are empty skyscrapers.

I believe the article's intent was that skyscraper booms are symptoms of economic issues (due to an over-availability of credit) but are not causal in nature.

[MolsonExport]

since when does correlation mean causation?

[ssiguy]

I think bubbles occur more whne there is huge skyscraper construction but it greatly depends on the KIND of skyscraper.
Building skyscrapers to meet need is both sustainable and logical. It is when cities start building skyscrapers of massive height and design for no other reason than to get their names in the history books that you begin to cross the bridge between rationality and ego. Those sort of building rarely have anything to do with the local markets and more to do with prestige and showmanship. When you get that kind of mentality you move from a business case to a showcase where the needs of the local market are no longer the primary reason for construction.
When that happens you begin to see a total disconnection between the local economy and the construction boom..........that is what causes the bubble to burst.

[Owlhorn]

Originally Posted by MonkeyRonin

Absurd. Its not skyscraper construction that leads to an economic downturn, its overbuilding that leads to a bubble. I'd guess that there are a whole lot more subdivisions sitting empty or unfinished in the US right now than there are empty skyscrapers.

They're talking about overbuilding. A bunch of empty versions of super expensive office space is economically unsustainable. These buildings are not built on cash, they are built on credit. The capital is based on the promise that the space is leased to create cash to pay back the debt. No tenants, no cash. The problems with trying to throw the subdivisions in, is a.) Even with foreclosures, their occupancy rates are usually much higher than 10 or 20%, b.) these subdivsions are usually bought for much less money(low hundred millions vs billions) This is simply a much larger scale of money, and c.) China and some other places are having a bigger problem with totally ghosted subdivisions that are much larger than what you see in the US and are totally empty. Its not sour grapes, its just something other parts of the world have experienced. This is just on a much, much bigger scale than any of those booms and was based on pure speculation that hasn't come close. Perhaps some day these buildings will be filled, but it will likely be at far reduce prices and will take a long, long time. Even after 10 or 20 years, office space demands often change dramatically and these spaces will have to be renovated to properly serve clients and even to keep up basic maintenance.

[Jelly Roll]

Originally Posted by Owlhorn

Even after 10 or 20 years, office space demands often change dramatically and these spaces will have to be renovated to properly serve clients and even to keep up basic maintenance.

You bring up a good point.

[Zapatan]

If this were true poor african countries would be building skyscrapers like crazy, the USA would as well... where are our skyscrapers? Our economy sucks

[mhays]

That makes no sense. To build, you need to have the right economic conditions for a few years in the beginning. Most of Africa doesn't have these conditions.

[austlar1]

I think that when there are lots of planned projects announced and seemingly ready to commence construction at the same time when a large number of other projects are already under construction, it is highly likely that there will be an economic downturn not too far down the road. I think that may prove to be the case here in Austin where there are hotel, condo, and rental apartment projects underway and even bigger projects on the boards. The only thing NOT happening around here is downtown office construction.

[SpawnOfVulcan]

I'm glad I'm not the only one that realizes the dire consequences that China's uber-super-duper-construction creates. I don't think ordinary people realize just how bad things could get once a real economy catches up with China's construction plans. True, the PRC's economy is nothing like America's, but a rapidly expanding middle class and growing market for imports indicate a likelihood that things could... "dry up." However, their economy could prove controlled enough that it could just wait it out. Considering how massive their construction binge has been, the jury is still out on how any potential economic downturn could affect the world. That's what we're really looking at; if a seventh of the entire population of the Earth is thrown into a recession, what happens?

[ardecila]

Originally Posted by Chicago103

I would argue Chicago is also in this category, the Sears Tower for instance was built on estimates for corporate growth for Sears in the early 1970's, I mean of course there was a showpiece factor as well but it's construction was still far closer to the demand model than a Burj Khalifa showpiece model.

No.

Maybe Sears was projected to grow into a corporate goliath and needed all 3.8 million square feet. But housing them all in a supertall instead of several buildings around town added substantial amounts of cost and was most definitely an ego move.

Hong Kong has severe restrictions on buildable land because of how it's squeezed between water and mountains. London has severe restrictions because of the world's most powerful NIMBYs preventing tall buildings in many parts of the city, with historic districts and viewsheds preserved. New York has both types of constraints.

Chicago has neither. If the demand were there, skyscrapers could expand pretty much indefinitely.

[novawolverine]

Originally Posted by ssiguy

I think bubbles occur more whne there is huge skyscraper construction but it greatly depends on the KIND of skyscraper.
Building skyscrapers to meet need is both sustainable and logical. It is when cities start building skyscrapers of massive height and design for no other reason than to get their names in the history books that you begin to cross the bridge between rationality and ego. Those sort of building rarely have anything to do with the local markets and more to do with prestige and showmanship. When you get that kind of mentality you move from a business case to a showcase where the needs of the local market are no longer the primary reason for construction.
When that happens you begin to see a total disconnection between the local economy and the construction boom..........that is what causes the bubble to burst.

I agree. I think a number of parties involved in the design, approval, and build process get an ego and also attach all sorts of claims on some of these more extravagant projects that happen to coincide with when the economy is in a bubble. Some of these mega projects require are partially publicly financed and usually, the benefits to the public are advertised, but if it was purely demand, than publicly financing would be very minimal.

[jg6544]

Real estate is a business in which manic depression is the norm.

[Cashville]

China is out of control, they are building ghost towns can house millions of people. Their economy growing for now, but that thing could crash like nothing we have ever seen.

[osmo]

Toronto is the classic case of this. The majority of the Condos being built have no correlation of demand.

The Empire State Building (Great Depression), Sears (Willis) Tower + WTC (73' oil shock and recession), and Burj Khalifa (Dubai proerty collapse), Petronas Tower (Asian financial crisis) we're all constructed before their Countries economies went bust into recession, panic, or depression.

But yes with the above post in reference to the TYPE and KIND is very much true. Sheer volume or Size of certain constructs can give tell tale signs of out of control of the rails "growth".

[Abolition-of-Man]

As a general (but not necessary) rule, there seems to be something to Andrew Lawrence's "skyscraper index."

The Panic of 1907 had the record-breakers Singer (1908) and Metropolitan Life (1909). The Great Depression had 40 Wall Street (1929), Chrysler (1930), and Empire State (1931). The Stagflation of the 1970s had the World Trade Center (1972 & 1973) and Sears (1974). The Petronas Tower (1997) went with an East Asian crisis.

Correlation doesn't imply causation. Nonetheless, to be sure, it's still logically left open if there is causation or at least an indirect interconnection. There is nothing in the laws of nature that would make this connection any kind of necessary relationship, but it does appear that there is a predictive indirect interconnection. Exceptions are to be expected. There appears to be a unintentional, general rule.

Building a record-breaking supertall skyscraper can't itself bring about a crisis. It's just----the hypothesis is----that they are more likely to be built in a period right before a crisis.

A monetary expansion of credit, argue some economists, lead to overinvestments in projects beyond the economy's production possibilities frontier. These particular projects during the boom period tend to be long-term which only profitably payoff in the long-term. (A supertall easily fits the bill, or could at least.) Hence these particular projects need a lot of credit, and if it's available in greater but artificial amounts (detached from prior savings but built from credit or fiduciary expansion), it would more easily allow the building of record-breaking supertalls during the boom period that will eventually end in a bust (recession). Other economists find the linkage weak. However, even if the linkage is weak, it's still arguably a phenomenon, though weak, that has appeared (see historical examples above) and could reappear if there are the right receptors to the boom incentives (that is, an easy credit environment with artificially low interest rates).

But whomever is correct, it's something interesting to research from all sides of the debate.