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

[Colonâ„¢]

Kropotkin, interesting...

Dan, look at this list. Face it man, the Chinese are beating you hands down!

I think it's interesting how many of those Asian skyscrapers were build in the later years of the bubble. There seems to be a strong connection with real estate bubbles.

[Kropotkin]

Wasn't many of the early skyscrapers in the US built during the late 20s, early 30s? IIRC the empire state building was finished in 1931 and has since then had a chronic problem getting companies to hire their office space. That would put them in the same period as the boom days when people thought the sky was the limit in more ways than one.

I would also link it with the introduction of the NY subway as better and faster communications was needed to get the people to and from the buildings. That meant that the increase in real estate could lead to large buildings (a quantitative solution) instead of more expensive houses for the elite(a more qualitative solution).


(just some thoughts, I shall leave you grey foxes to your numbercrunching)

[Roland]

"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."

The question is if there was an economic rationale for the US towers in the 1920s. Empire state, Chrysler etc were mostly prestige things.

[DanS]

"IIRC the empire state building was finished in 1931 and has since then had a chronic problem getting companies to hire their office space."

Yes, until the '50s, the Empire State was a real loser. Today, it has a 15% vacancy rate, which is high. Much higher than the office market overall, which is I guess about 4-7% in NYC after the attack.

You bring up a good point about the densities involved here. I am guessing that the economic benefits to the community are pretty extreme for this density. But I would love to see the math from a developer's perspective.

[Kropotkin]

I've tried to find info on the internet that tells more about the economic reasoning of building skyscrapers. As the internet once again has shown that's it's not a good source for anything I've failed yo find much beyond what has already been said.

However, I found a quote that adds to the earlier reasons:

Eventually, in cities like New York, we began seeing the closing in of light and air to the point where you got blackened, lightless streets like Wall Street. Zoning laws began changing, where they limited the height of street walls and began to force the towers to set back. Then we had the 25 percent rule, where the tower beyond a certain street wall height could only cover 25 percent of the site, which is what drove them up very tall.

Thus not only land cost as the result of urbanization and public transports lead to a increased incetive to build up instead of out but legalization had its influence.

I would suppose that happened when the land value reached the level when the height had to be higher than the law permitted for it to cover the entire area. With a limited piece of land you had to go for skyscrapers quicker than would otherwise be needed to get enough space if the zonal laws had not been.

This from the assumtion that what's most important is the ratio between land costs and the office or living space needed to finance the purchase of the land as well as the building itself.

edit: To put it in plain english: after lets say 10 floors (for arguments sake) you would have to build 4 floors to get the same income as for any one of the first 10 floors as those can take up all the space at the ground level but beyond that you can only use 1/4 of it. So if you want 15 floors you would have to make it into 30 because of he 25 percent rule.

Don't have a clue if this is just about NY and if cities like Chicago has/had simular rules but it seems reasonable as the problem that caused the rule is/was the same.

[Colonâ„¢]

Roland, I've considered the prestige factor too, but that only explains why one wants to build the tallest, like the Empire State Building or the WTC, and not why developers built and keep building fairly ordinary skyscrapers (of say 40 stories). In a city like NYC that hardly gets even noticed.

And it leaves the question of why Europeans didn't build any skyscrapers for prestige. The least you can say is that it was easier to extract necessary funds from a relatively richer economy.

Kropotkin, I think that's very interesting, but it seems to me that it doesn't really explain why someone wants to build a skyscraper in the first place, just why they get a lot taller.

Washington is an interesting case in the skyscrapers issue as well, since you aren't allowed to build higher than 13 stories or so. That has as result the commercial district is very spread out and yet very dense (compared to Atlanta, but not to European cities) without open spaces between office buildings. The city doesn't seems to suffer from it though.

[Roland]

"and not why developers built and keep building fairly ordinary skyscrapers (of say 40 stories)"

Well that's not so unusual for a big city. There's even a couple of those in the 30/40 stories region in Vienna, and that despite a quite restrictive zoning law and the city having about the same population (numberwise ) since 1910.

[Kropotkin]

Originally posted by Colon
Kropotkin, I think that's very interesting, but it seems to me that it doesn't really explain why someone wants to build a skyscraper in the first place, just why they get a lot taller.

True, it was the best I could find. It still help to explain a reason why people build skyscrapers, just not ordinary but tall buildings. Depends on the definition I guess. That is when they chose to build on their propably overpriced piece of land. It do seem to be hard to understand why anyone would want to buy a expensive site and then build a expensive building.

Think it's hard to really get away from prestige and/or faulty predictions about the future. As far as I know the empire state buildings location isn't optimal so the land value alone shouldn't explain that one. But that's just one single case.

[DanS]

"Washington is an interesting case in the skyscrapers issue as well, since you aren't allowed to build higher than 13 stories or so. That has as result the commercial district is very spread out and yet very dense (compared to Atlanta, but not to European cities) without open spaces between office buildings. The city doesn't seems to suffer from it though."

In my view, the city does suffer for it, because the most dense areas are unable to realize their fullest value. This hinders rents and property taxes, increases traffic, makes public transport less efficient, etc.

It is true that people build outward instead of upward, but I wonder how long that will last. Put a ballpark downtown and you've almost run out of zoned commercial space. I guess it's possible to rezone and tear down some of the worst neighborhoods.

My sense is that there's a certain point in land value where it becomes much more advantageous to build upward than to buy add'l land. It doesn't make sense to me to try to manage down that advantage. Why throw away the value that steel has made possible? Steel and glass structures must be relatively cheap to build.

Of course, I want to see a real-world example. Maybe Sten can help us out here.

In my web travels the other day, it was stated that Paris is by far the most dense city in the Western world. Interesting...

Krop: New York has been doing a public space/extra stories trade-off with developers for 10 or 15 years. If you create a public space in the lobby, open to anyone, you can build a couple of extra stories. Post 911, I'm not sure if there are any restrictions, but some of the public spaces were quite nice a couple of years ago.

[Roland]

Paris ? Only within the administrative borders of the municipality I'd assume, and that is just 20 % of the agglomeration's population...

[DanS]

OK, here are some numbers...

Pritzker Bldg. -- Chicago (Planned) = 50 storeys, 1.3m ft^2, $300m --> $230/ft^2
Empire State -- NYC (1931) = 102 storeys, 2m ft^2, $45m --> $22.5/ft^2
Petronas Towers (1998) -- Malaysia = 88 storeys, 8m ft^2, $1.6b --> $200/ft^2

For comparison purposes...

The Pentagon is 6.5m ft.^2.

A typical American suburban house will cost about $100/ft^2 (DanS WAG) in construction costs, furnished.

For context, class A office space can run over $100/ft^2 per annum, not built out, but including services. Consider maybe 1/4 of the space unusable. Apartment rents may run about $65/ft^2 per annum in NYC with fewer services, but more built-out. My rent runs about $15/ft^2 per annum.

The Pritzker Building will sit on 1.4 acres of land.

It seems pretty apparent to me that high rises are good buys. Maybe 2x or 2.5x the construction costs, true.

[el freako]

Very similar costs per sq ft there.

(adjusting the Empire State figures using the GDP deflator gives $230/ft^2)

[DanS]

Hmmm... So I guess using the numbers given above and some assumptions (2,000 ft^2 houses sit on 1/4 acre lots, etc.), the towers/suburbs trade-off common in some place like Atlanta intersects at land values of about ~ $1.1 million per acre.

Anybody want to correct or add to this? Anybody have a sense on how common are $1.1 million per acre values? I think that some of these subdivision house mills charge about $200k per acre. I guess it's less, if you consider unused space, etc.

ef: Yeh, that's really interesting. Hmm....

[Sten Sture]

On the tall building cost issue I have very limited wild ass guesses that I could throw out, but no real info... I'll look around and see what I can find.

On the housing vs rental values front I can lend ( ) a bit more of a hand. Because housing is essentially a cost of carry instrument - ie: what matters most is the monthly payment - low inflation actually can increase the asset "value" of real estate because it lowers the monthly cost of any given property. Much like a bond! When interest rates decline, bond prices increase.

Because of the myriad of financing structures open to home buyers in the States Utd, the well developed secondary market for packaged loans, and the decline in interest rates, it is no surprise that housing values have increased substantially over the past twenty years.

Instead of a local bank offering me a 30 year fixed rate loan, I can now borrow from anyone of 50 originators, at say a 5 year fixed (then adjustable at UST3mos+275bp) rate, and the loan is packaged up for sale in the secondary market.

Because of the steepness of the yield curve and the cheaper hedge risk, the interest rate on a short ARM (adjustable rate mortgage) is much lower than a long fixed rate loan. Therefore a borrower can pay the same monthly rate and buy a house ~40% more expensive than the used to do.

Is this a fake, bubble type of market though? Not necessarily; I believe it is a permanent structural improvement in the method of financing a home. Since the average homeowner in the States only lives in their property ~7 years, a shorter average life loan option, benched to a shorter part of the yield curve makes a great deal of sense to a large number of borrowers.

Sure there are pockets of unsustainably high residential real estate values, my area certainly included. But we aren't talking about a level of magnitude suffiecient to qualify in my mind as a bubble. A couple of zero revenue companies with a market cap of billions is a bubble. A slew of 25% over values homes in a small geographical area is just a bump.

As an interesting footnote, I have attached a chart showing the affordability of the median home in the states, compared to the median income. A higher number means housing is more affordable on a monthly payment basis.

[Roland]

"Is this a fake, bubble type of market though? Not necessarily; I believe it is a permanent structural improvement in the method of financing a home."

And I think it is a Fed and GSE induced flood insurance game.

"Instead of a local bank offering me a 30 year fixed rate loan, I can now borrow from anyone of 50 originators, at say a 5 year fixed (then adjustable at UST3mos+275bp)..."

And that is new how ?

"what matters most is the monthly payment - low inflation actually can increase the asset "value" of real estate because it lowers the monthly cost of any given property. Much like a bond! When interest rates decline, bond prices increase."

That's a bit oversimplified - lower interest rates yes, but they are artificially low. I'm not sure what you mean by the lower monthly cost due to lower inflation - from a pure inflation pov:

Asset 100, rent it out at 10. Inflation is 10 %, So next year it will be 110 at 11.

Inflation now drops to 0. What happens according to your reasoning ?