Is Chicago’s Skyscraper Boom a Sign of Impending Doom?

If you haven’t been living under a rock for the past few months you might have noticed a crane or two popping up around the city. Perhaps you were curious enough to browse a few sources to learn that not only will cranes continue to pop up, but Chicago is experiencing a construction boom that not only can be measured by the volume of towers under construction, but by the magnitude of future construction projects proposed.

Some, if completed, will change Chicago’s skyline. Examples include Chinese billionaire Dalian Wanda’s Wanda Vista Tower (1,151 feet tall), Helmut Jahn’s 1000 South Michigan (1,030 feet tall), Wolf Point’s South Tower (950 feet tall), and Rafel Viñoley’s 113 East Roosevelt (829 feet tall).

While many believe that these mammoth proposals indicate a “booming” or “rebounding” economy, one source (really a theory) indicates quite the opposite. The Skyscraper Index is a theory proposed by economist Andrew Lawrence in 1999, stating there is a connection between investment in large skyscrapers and an economy poised for recession.

Lawrence’s theory focused on the timing of enormous construction projects in comparison to large economic downturns. The following are examples of these connections:

Notable Buildings Under Construction Economic Event
U.S. Recession from 1873 to 1878
Panic of 1907
Wall Street Crash of 1929
1973–74 Stock Market Crash
1997 Asian Financial Crisis
2008 World Economic Collapse

The Skyscraper Index attempts to account for these connections by stating they result from a sort of economic domino effect:

  1. There is a decline in interest rates.
  2. The decline incentivizes people to borrow from banks to grow their companies (i.e. increase number of people they employ).
  3. This growth creates a demand for larger office space, driving up the price of the land, and creating a workforce with more money to buy and rent.
  4. This demand and price boom drive speculative behavior by developers to invest time and money into construction technologies allowing them to build taller projects spreading the cost of construction across more units.

Simply put, developers become convinced (and convince investors) that the rise in demand will continue and they’ll be able to charge rent to match that demand.

While you might already be on the phone yelling at your broker to “sell sell sell,” there is some comforting information on the horizon. First, there are exceptions to the theory.

For example, the Woolworth Building, completed in 1913, set a record height at 792 feet, but was not accompanied by any recognizable decline in the economy’s performance.

Secondly, three economists recently produced a study indicating there is no causal relationship between the timing of enormous construction projects and the cycle of the economy that would enable one to predict the future using the proposed height of new construction as their indicator. Interestingly, their study did show that while a proposed or under-construction building’s height cannot be used to predict the economy’s future, a nation’s current economy can be used to predict the height of future construction projects.  In other words, you can’t look at the height of a building under construction to decide how the market will perform, but you can look at the performance of the market and bet your friend how tall the next skyscraper constructed will be.

While The Skyscraper Index is certainly an interesting theory to ponder amidst Chicago’s construction boom, it’s important to remember, it’s only a theory.

Editor’s note: For further reading, see Talking Tall: The Skyscraper Index by Andrew Lawrence in issue II, 2012 of the CTBUH Journal.

 

 

Zachary Pollack

Author: Zachary Pollack

Zachary is a lawyer by day and architecture buff by night. At the office Zachary focuses his practice on working with commercial real estate developers and developers focused on subsidized housing projects. Although Zachary grew up in Kansas City, Kansas, he had his heart set on Chicago ever since visiting as a child and being in awe of the city's skyscrapers. Zachary lives in Old Town. On weekends you can find him strolling the streets checking out progress on all the construction sites. Feel free to get in touch with Zac at zpollack@krasnowsaunders.com

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1 Comment

  1. Well, one reason for the sudden rush of proposals over the past few weeks is because many of those developers wanted to get their documentation submitted to the city before the new affordable housing ordinance goes into effect. There’s seemingly no housing bubble on the horizon like in 2007-2008.

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