Return of the Skyscraper Curse?

Jeddah TowerInvestors are always looking for indications of an oncoming economic recession, whether it be electricity consumption, Super Bowl wins or even ladies hemlines. However, one indicator that seems to make some intuitive sense is the Skyscraper Index, also known as the Skyscraper Curse.

This theory states that the emergence of record-breaking skyscrapers presages economic recessions. If true, should we be worried that China recently capped the world’s second largest tower, while the world’s next record-breaker is currently rising near the Red Sea?

What Exactly is the Skyscraper Curse?
The Skyscraper Index began with research by property analyst Andrew Lawrence in 1999. He noticed that over the past 100 years in the U.S., record-breaking skyscraper construction correlated to economic recessions, panics and crises. He began his analysis with the Singer Building and Metropolitan Life building, completed in 1908 and 1909 respectively, which were concurrent with the panic of 1907.

How exactly do record-breaking skyscrapers coincide or even predict economic crises? Economist Mark Thornton extended this analysis in 2005, demonstrating that the link between the two is artificially low interest rates. Interest rates are suppressed or kept low due to monetary policies as well as fiscal policies designed to increase credit in an economy. This increase in credit is ‘artificial’ because it is not due to people saving more and consuming less in the present; rather it is effected through money-printing or legislation that distort credit markets.

These low interest rates affect the entire economy, but specifically they have three effects that encourage skyscrapers, according to Thornton. First, low interest rates increase the value of land, especially dense and urban land, incentivizing developers to build taller to maximize profits. Second, low interest rates increase the size and scope of firms, generating increased demand for office space and corporate headquarters in urban areas. Third, the low rate encourages the development of new technological processes needed to produce taller skyscrapers, such as high-speed elevators.

Overall, this makes intuitive sense – just as the low interest rates and easy credit in the early 2000s caused overinvestment and overbuilding of massive home and condo developments – so do low interest rates incentivize developers to build taller buildings.

A One Kilometer-High Tower
The latest tower to renew fears of a recession is the Jeddah Tower, formerly known as the Kingdom Tower, under construction in Jeddah, Saudi Arabia. The building was started in April, 2013, and is expected to be completed in 2019, with a total height of just over 1,000 meters, making it the tallest building in the world, and over twice the height of the Freedom Tower’s 417 meters.

To many, it is reminiscent of the Burj Khalifa in Dubai, currently the tallest building in the world. Construction started in 2004 and was completed at the very end of 2009, by which time the Khalifa was in the thick of the financial turmoil. The tower reportedly had trouble finding tenants to fill it immediately after completion, due to the economic conditions.

Should Investors Track Skyscrapers?
The question of whether the Skyscraper Index is robust or statistically significant has been debated in academic circles ever since it was introduced. Thornton and others have recently reviewed the latest empirical findings, taking issue with some of the methodology of the critics. Nevertheless, many of the subsequent literature is in agreement with the general ideas behind the Skyscraper Curse.

Personally, I believe low interest rates will induce unsustainable booms, and some of those booms will manifest themselves as record-setting skyscraper projects. However, each individual instance will also have a lot of other factors coinciding and affecting it, so a simple empirical or statistical relationship can probably not be found.

Therefore, investors would be wise to note it as another small factoid or data point to attune their outlook, but they probably shouldn’t be making market-timing decisions the next time they see a new skyscraper taking shape.

Chris Kuiper, CFA is currently a student and researcher at George Mason University, pursuing a Master’s of Economics. His previous experience includes asset management, investing and banking.