The Skyscraper Index: a prediction for the next recession?

Posted by Gavin Chau

It’s 2:20 pm on Monday the 14^th of August as I finish writing this blog. The weather looks ominous outside and Marsya our graphic designer is hassling me to finish the blog so she can get the images ready. Anyway, I hope you’ve all had a good start to the week! Today we’re going to have a look at The Skyscraper Index. It was a concept created by Andrew Lawrence, a property analyst at Dresdner Kleinwort Wasserstein, in January 1999. It showed an uncanny correlation between the completion of the world’s tallest building and economic downturns. That is to say that skyscraper construction and business cycles are correlated.

While initially started as a joke, the index does seem to have a decent amount of predictive power and is based on Austrian economics principles. Giant construction projects tend to get approved at a point in time when there’s a heap of easy money sloshing around the economy, and everyone feels optimistic about the future. That always happens in every upswing.

However, these projects are rarely economically viable. The higher a building goes, the more floor space in the upper levels is required to house structural supports, elevators, and service ducts. At some point, there is a diminishing return to adding extra floors. When you get high enough, each additional floor starts to become a net cost.

While these ambitious projects are started when the economy is good, money is cheap, and asset prices are flying, due to the time required to complete these projects, they invariably tend to be completed in a recession (at the end of the cycle). Quantitative easing and low-interest rates give the market a distorted signal, and rational pricing gives way to irrational buyers’ behavior. In a weird way, our emotions actually begin to shape the physical environment around us.

Let’s have a look at some historical evidence to support Lawrence’s concept.

The New York Tribune Building, one of the world’s first skyscrapers, opened in 1874, coinciding with the 1873 financial crisis.

The Manhattan Building and the Pulitzer Building, both of which held the title of the world’s tallest building at the time, opened in 1890 and 1891, respectively, during one of the worst economic depressions of that time.

The Singer Building and the Metropolitan Life Insurance Company Tower, which were also the tallest buildings in the world at the time, opened in 1908 and 1909, respectively, after the Panic of 1907.

The trend continued into the 20th century. The World Trade Center, which held the title of tallest twin towers in the world, opened in 1973, the same year as the 1973–75 economic recession.

The Sears (or Willis) Tower, which was the tallest building in the world at the time, opened in May 1973, also during the 1973–75 recession.

The Petronas Towers in Malaysia, which surpassed the World Trade Center as the tallest twin towers in the world, opened their doors to tenants in 1997 during the Asian financial crisis.

Taipei 101 in China, which was the first to exceed half a kilometer and held the title of the world’s tallest building, opened in the early 2000s during the dot-com bubble and bust.

And the Burj Khalifa in Dubai, the current tallest building in the world, opened in 2009 during the subprime crisis.

What’s next?

In 2022, Dubai launched the biggest tourism project in the middle east. It’s building a 735-foot-tall replica of the moon, containing spas, an event center, restaurants, nightclubs, 300 luxury residences, training services for various global space agencies, and a lunar surface simulator that will let guests experience the sensation of space exploration firsthand. When is this project expected to be completed? In 2027.

Now let’s have a look a bit closer to home.

The STH BANK project in inner-city Melbourne by Beulah was approved in 2020, and if it is completed, it will be the tallest building in the southern hemisphere at a height of 366 metres. It will boast the tallest vertical garden in the world, a 3,500 sqm international art gallery, Australia’s highest sky garden, and 30,000 sqm of world-class retail space.

What is the estimated completion date? In 2028.

This happens to coincide precisely with the cycle peak for the east coast in our own modeling. Personally, I don’t know what to make of this, but I thought it was an interesting little piece of data to share with you all.

Posted by Gavin Chau, on 14th Aug 2023