GDP, M&A, EBITDA, P/E, NASDAQ, Econo-thread Part 11

[Colonâ„¢]

I don't believe in the argument that you shouldn't worry about real estate price hikes because they would be caused by purely regional factors. For instance, if immigration into a certain region causes price hikes, emigration from another region depresses prices, thereby cancelling out the impact on macrolevel. This doesn't seem the case and that exactly is the issue here.
Besides, aren't estate booms always concentrated into a couple of hot spots? (Tokyo, London...) It doesn't seem to alleviate the hangover though.

[DanS]

When he was over here in the States, Colon and I were wondering about the economic basis for highrises and why we have them in the States and why they don't (by and large) in Europe.

Does anybody have some real-world numbers on why people build skyscrapers? For instance, how much land costs, how much it costs to build a high rise, what is the rent premium expected, etc.

[Roland]

Two problems: First building permits, second the market. They work in a few areas (London, Frankfurt etc), but recently they had a large development project in Vienna with towers (relatively small for US standards, I guess) and they are now giving them away at rockbottom rents.

[Colonâ„¢]

Well that just shifts the question, why are building permits more restrictive and why doesn't the market here encourage it a lot.

Of what I've seen the entire construction pattern in a relatively new city as Atlanta is completely different from European cities, with a fairly small downtown with skyscrapers and huge suburbs surrounding it. I'm wondering whether this is just cultural or whether it would occur in Europe as well if cities would be a lot younger.

BTW Dan, remember I mentioned La Defense?

[DanS]

I guess we were wondering more about why people would build them, other than that they are cool and distinctive. For instance, Atlanta is a very spread out city and downtown isn't much of a downtown. But sure enough, in Midtown there's the NationsBank Building with I guess ~80 stories.

Edit: Oops. We cross-posted, but were thinking the same thing.

[Roland]

"Well that just shifts the question, why are building permits more restrictive and why doesn't the market here encourage it a lot."

More restrictive is a cultural thing IMO as is that people do not want to live and work in those things. The old city thing is essential too - the central areas are those with the land prices where skyscrapers make sense, I suppose, and those are already occupied.

[DanS]

I might note that it is further puzzling, considering the the low population density of the US versus Europe. Also, the city of skyscrapers, Chicago, is in the midst of farmland and is only the third largest MSA.

Colon: That black obelisk is about as ugly as the Sears Tower in Chicago.

[Kropotkin]

The low population density is partly explained by the fact that compared to many countries in Europe for example it also includes wast areas of unusable land. Both today and in a historical perspective. One should also consider that the US was populated in a different way than Europe where many immigrants arrived in N.Y. that might have influenced the population in the area. There's also the fact that the relatively late arrival of cities in the country meant that there wasn't a premodern city in the way. Few cities in Europe are built like many in the US with long straight roads with numbered rather than namned streets. Old cities are infamous for stopping a modern city plan. There's of cource also the possibilty of cultural diffrences and the fact that the phenonomen was invented during the time when the US was becoming a leading nation.

That's just a few ideas out of my head.

[DanS]

I brought up the planned nature of American cities as well, with Atlanta being founded in 1840 or so. But we're really more interested in why people would build them, if given an economic choice, not why people would not want to build them (well, I would be interested in whether the reasons have changed and if that impacts future development--Sten hinted this circa 9/11/01).

[DanS]

An interesting interview...

http://www.techtv.com/news/specialreport/terrorism/story/0,24195,3399173,00.html

Klemencic: Even before 9/11, the economic situation in the country in regard to the technology sector and all of that had put a big damper already on tall-building development. Then the concerns of safety and security in tall buildings post-9/11 just kind of put fuel to that fire. The economics of building a supertall building start to fall apart once you get to about 80 stories. Once you get to 80 stories it's really hard to make an economic case. And so the financial entities that fund these buildings... are reluctant to participate financially. And so there is already a big pressure in the system to not really go supertall anymore.

Nine-eleven really closed the door I think from an emotional point of view. No one wants to take that kind of risk, financial risk, to begin with. But then even if you build this thing, it's not like the "field of dreams," where if you build it they will come. So, 9/11 kiboshed that for, in my view, probably the next generation or two. I don't think my generation or even the next generation's going to build a building in the United States that's that tall. There's no economic reason to do it.

So what's this economic case that falls apart after ~80 stories?

[Kropotkin]

So in this case economic reason was really a euphemism for penis enlarger...

[Colonâ„¢]

Colon: That black obelisk is about as ugly as the Sears Tower in Chicago.

Jealous that you guys aren't the only ones building big ugly boxes?

More restrictive is a cultural thing IMO as is that people do not want to live and work in those things. The old city thing is essential too - the central areas are those with the land prices where skyscrapers make sense, I suppose, and those are already occupied.

That's sort of my guess too, since European skyscrapers tend to be located in the peripheries of the city centre.

But I still wonder why we didn't build a lot of them before the second WW2, as did happen in the US. AFAIK people weren't as concerned about the value of old historical centres and buildings as we are now either.

A guess of mine is that when skyscrapers arrived on the scene, Europe was quite poorer relative to the US so that there was less of an economic rationale. A lot of skyscrapers were build or started construction in New York during the roaring 20's for instance. After the WW2, when Europe catched up relative to the US, skyscrapers did appear.

[Colonâ„¢]

Dan, the elevator issue probably makes it too expensive to build beyond 80 stories.

Kropotkin, when I was in Atlanta I didn't see much of that suchcalled planned nature. They began well but after that it all turned chaotic.

[DanS]

"Jealous that you guys aren't the only ones building big ugly boxes?"

If I had my way, we would build those big ugly boxes to 200 stories high. 2x the damn Chinese and Malaysians! Now that would be grand!

GP's going to have to invent a substitute material to steel and the elevators are going to have to go on the outside a la Minority Report. Sten's going to have to make the case for financing it.

Let's get to work.

"A guess of mine is that when skyscrapers arrived on the scene, Europe was quite poorer relative to the US so that there was less of an economic rationale."

Good point. Luxury has to be affordable to somebody.

[Kropotkin]

I came up with a new pseudo-economic reason why there might be a reason for tall buildings thanks to Colon.

Lets say that there's a solid economic reason to build X stories due to the landvalue and location. Then consider that if you add ten stories (thus a height of X+10) it would turn the buildning into the tallest building in the city, country, world, univerese etc. With that follows some free commerical in the form of fame and prestige. If there's enough fetichists of tall buildings like Colon out there it would be a solid economic reason to do so.