What Happens To Tall Buildings? 

12th of August, 2018

As technology improves we become more and more productive. Which in turn means that each square metre of land becomes more and more valuable.

Given that we have the propensity to ensure that land is used for the most productive purpose, by definition our cities must become more and more dense as we continually build higher and higher.

Land will seek to be used for the highest productive value. As land becomes more scarce (and hence more expensive) it pays to amortise this cost by building higher and higher. That is the more floor space you build up, the less the amortised cost of the land becomes. Technology, zoning (government legislation) creative thinking, and available cash will determine how high we reach to the sky.

But to build persistently skyward, means that old buildings must be demolished to make way for new larger modern and more technologically advanced buildings.

However, it’s important that we view these redundant buildings within the context of the time in which they were first built.

Case in point was New York’s 33 storey City Investing Building and its neighbour, the 47 storey Singer Building, that during the early part of the 20th century, were both among the tallest buildings in the world. In fact, at 187m tall, the Singer Building was the tallest building in the world when it was built. So it’s fair to say that both these buildings represented MAJOR construction achievements of the time.

However, by 1968 they had outlived their usefulness and were both demolished to make way for the 210,000m2 building, “One Liberty Plaza”, that was opened 1973.

The picture to the left shows the New York Skyline C1909, with the Singer Building (tallest tower in the centre of the image) and City Investing Building (second tallest, with slanted roof), providing some context to their size and importance.

As a side note I hope you students of Economic History have noticed the dates these monoliths were opened? 1908 completion, one year after the 1907 Bankers’ Panic. And 1973 as the Oil crisis and market panic hit. It’s a recurring theme throughout this Blog.

It’s really interesting to notice the effect that the real-estate cycle has on these construction decisions.

Another example is One Meridian Plaza which caught fire in 1991, right at the real-estate bottom and remained vacant for 8 years.

Think about this for a minute. In the centre of Philadelphia’s business district, occupying a 2072m2 lot, sat a vacant and damaged building, for eight long years.

“The 1991 fire at One Meridian Plaza had left its current neighbourhood, the area around 1500 Chestnut St. and South Penn Square, a commercial void. Businesses have moved out and property values have declined since the high-rise became an eyesore.” Said Cliff Swain, Drinker Biddle’s CFO in a 1996 article.

For us it makes complete sense due to the cycle timing.

One Meridian Plaza was a BIG building and the fire removed a massive 140,000m2 of lettable floor space from the Philadelphia market.

It took until 1999 for the building to be demolished. However, due to a continuing zoning feud with the neighbours, the land was transformed into a parking lot!

With the real-estate cycle and our 5 Underlying Drivers continuing to work relentlessly, eventually in 2009 (DATE ALERT!) Philadelphia’s tallest residential tower the Ritz-Carlton opened on the site.

But it’s not just Old or Low buildings that sit on land that can be put to more productive uses. Often new buildings don’t last long either!

In keeping with our Ritz-Carlton theme, one was opened up in Hong Kong, 1993. But this 142m building only lasted a mere 16 years before it was ripped down in 2009 and a beauty nearly 3 ½ times the size replaced it. At 484m, the Ritz-Carlton Hong Kong is the world’s highest hotel with a bar and swimming pool on the 118th floor!

Please don’t think that this sort of stuff only happens on the other side of the world in exotic locations.

Our very own Sydney boasts the history of a 30-storey skyscraper, that upon completion had a short 15-year life similar to the story above.

CAGA House, completed in 1977, was the 10th tallest building in Sydney at the time. However, economics dictated that this building should be reduced to rubble making way for the Grocon built Governor Phillip Tower. Completed in 1994 (bottom of the real-estate cycle) this iconic Sydney building visually dominates the CBD skyline and is often dubbed the milk-crate because of its steel-bladed roof feature.

The Cantillon Effect describes why architects understand more about the economy than most economists. It also explains why some buildings can have such a short shelf life.

Let’s get started

If you want to avoid the mistakes of not understanding the dangers of investing without an understanding of the Economic Cycle, then why not have a chat to us about how we can help?

You have nothing to lose except a few minutes of your time and everything to gain.

So… let’s get started.

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