Scraping Skies, Hitting Bottom

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The recent news that Dubai may make a stunning financial belly-flop probably shouldn’t be surprising. After all, Dubai is now finishing construction of the world’s tallest building.

If you said, “Huh?” here’s the explanation: There’s a correlation between tall buildings and falling fortunes. A Deutsche Bank economist 10 years ago came up with the Skyscraper Index, in which he postulated that unusually tall buildings tend to get built (or announced to be built) just before recessions, depressions and financial panics.

Examples abound. The Metropolitan Life Tower in New York was the world’s tallest building for a few years; its construction was announced a couple of years before the Panic of 1907. Three buildings in New York – the Chrysler Building, 40 Wall Street and the Empire State Building – were constructed about the same time and each had a claim as being the world’s tallest, although the claim was brief for two. All three flung open their doors just in time to usher in the Great Depression.

When the Sears Tower opened in Chicago in May 1973, it became the world’s tallest building. A recession officially began six months later.

We have our own local examples. L.A.’s U.S. Bank Tower – the tallest building west of the Mississippi River – opened in 1989. A recession began in July 1990.

The L.A. Live complex (whose tallest building, a 54-story hotel-condo tower, has yet to open) officially opened a year ago, and you know what’s happened to the economy since. And plans for Park Fifth, which would be the tallest residential tower west of Chicago, were announced more than two years ago, but it’s an open question as to whether it will ever get built.

Is this just a coincidence, like the Super Bowl indicator that supposedly predicts the stock market’s direction by whether the American Football Conference or National Football Conference wins? No, according to Chris Sheldon, who’s director of investment strategy for BNY Wealth Management (and who three years ago wrote presciently about Dubai and the Skyscraper Index). He pointed out that tall buildings tend to get approved at the end of long periods of economic growth. That’s when credit is easy, optimism is at its peak and prosperity is assumed. That’s also when the seeds of recession take root.

Which brings us back to Dubai. You can’t rightly call what’s happened there a building boom; it’s more like a construction Krakatoa.

The 160-floor Burj Dubai office building isn’t even open yet, but it is so high that it became the world’s tallest building more than two years ago when it was only half built. But that wasn’t awesome enough for Dubai. It also built the tallest hotel (the one that looks like an immense sailboat), and that crazy residential complex on artificial peninsulas that, seen from space, form what looks like a big palm tree.

Dubai even exported its building blitz, helping to bankroll such projects as the big Grand Avenue project that’s on ice in Los Angeles and the CityCenter project now opening in Las Vegas, which, at $8.5 billion, cost more than three times as much to build as L.A. Live.

Yes, there are good reasons to believe in the Skyscraper Index. And if you believe it, you already know Dubai’s splashdown will be spectacular.

Charles Crumpley is editor of the Business Journal. He can be reached at [email protected].

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