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Posted 2/7/2002
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The Speculator
The taller they are, the harder they fall
From Nimrod all the way to Enron, those who put up the tallest towers are often brought down. Why? An MIT professor says skyscrapers simply aren't economical and serve mainly as a showcase for towering egos.
By Victor Niederhoffer and Laurel Kenner
In the 21st century, as in the time of Cheops, there will undoubtedly be taller and taller buildings, built at great effort and often without real economic justification, because the rich and powerful will still sometimes find satisfaction in traditional ways of demonstrating that they're on top of the heap.
-- William J. Mitchell, "Do We Still Need Skyscrapers?" Scientific American
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Far too often, a company, country or civilization builds a tall, conspicuous building and experiences disaster shortly thereafter. Start circa 2,800 B.C., when the conqueror Nimrod attempted to build "a tower that reaches to the heavens, so that we may make a name for ourselves." The Lord, we are told by the Book of Genesis, threw the builders into confusion, halting the construction of Babylon.
Today, a new building expected to be the tallest in the world is under construction in China, and an even higher one is proposed for India. Investors in emerging markets should beware.
Between the Tower of Babel and the coming Shanghai World Financial Center, the landscape is littered with calamitous examples of the tendency to build high before a fall. The Dec. 28, 1999, christening of the world's largest video display -- the Nasdaq's $37 million Marketsite Tower in New York's Times Square -- came just three months before a 70%, 18-month crash in the Nasdaq Composite Index ($COMPX). Enron's Houston building, with its eight-story-high trading floor, was almost finished when the firm filed for bankruptcy. The world's current tallest buildings, the Petronas Towers, were completed in Kuala Lumpur in 1997, the year the Malaysian stock market fell 50%.
For insight into the phenomenon, we consulted William Mitchell, dean of the School of Architecture and Planning at Massachusetts Institute of Technology, in an interview and series of e-mail exchanges. In a seminal December 1997 Scientific American article called "Do We Still Need Skyscrapers?" Mitchell argued that the computer and telecommunication revolutions have reduced the need to keep centralized paper files and assemble office workers in expensive downtown locations. After the destruction of New York's World Trade Center on Sept. 11, his ideas seemed especially resonant.
We found Mitchell in an office stacked with skyscrapers of bookshelves twice his height, an intensive use of capital in the form of books that provided a nice illustration of one of the major findings of urban economics: the more valuable the land, the heavier the concentrations of capital and labor -- and the higher the buildings. It turns out that Mitchell is a man of many hats as well as provocative theories. He writes a book every year or two, serves as dean of the school, teaches a few classes and serves as architectural adviser to the president of MIT on a massive half-billion dollar campus construction program.
The WTC attack, Mitchell noted, highlighted yet another argument against skyscrapers: security concerns. Vulnerability to natural disasters also argues for decentralization.
Tales of meglomania
Sparks flew when Vic, who named four of his six daughters after heroes in Ayn Rand books, asked what Mitchell thought of Howard Roark, the architect character in "The Fountainhead." Mitchell responded by recalling the book's final scene, where Roark stands proudly atop of an immense skyscraper that he has designed, gazing haughtily at the lesser mortals below, as an example of absurd megalomania.
While Roark saw architecture as the pure, heroic expression of an individual's will, Mitchell said, "I'm more inclined to believe that great architecture comes from listening well, being sensitive to the nuances and messy complexities of everyday life, carefully solving real problems and showing a little humility. Not to mention a sense of humor -- which Roark most definitely lacked!"
We pressed Mitchell for examples that support his assertion that skyscrapers were becoming dysfunctional -- and to opine on lessons that architecture holds for investors.
Skyscrapers, Mitchell said, exist essentially to exploit concentrations of infrastructure and population in urban centers. Downtown land is expensive, so there is a motivation to build as high as possible to reap the maximum return on investment. "But the higher you build, the greater the proportion of each floor that must be devoted to structure (holding the building up and providing resistance to wind) and to vertical circulation (elevators, pipes, and ducts). No matter how valuable the site, you eventually reach a point where it makes no economic sense to add another floor. It is technologically possible to go beyond this point, but the reasons for doing so are ones of pride and prestige, or bragging rights about being ‘the tallest.' Manhattan's World Trade Towers and Kuala Lumpur's Petronas Towers are clear examples of skyscrapers that were pushed higher than the point of rationality in order to gain attention and prestige."
Investors, he said, should take a good look at organizations that seek the title of "the tallest." "I suspect you would find that going for the title of ‘tallest' is a pretty good indicator of CEO and corporate hubris. I would look not only at ‘tallest in the world,' but also more locally -- tallest in the nation, the state, or the city. And I'd also watch out for conspicuously tall buildings in locations where the densities and land values do not justify it. Skyscrapers make a lot more sense in Hong Kong than they do in Omaha."
When it comes to buildings," he concluded, "bigger may be better, but biggest usually isn't best."
Hubris in the market
Regardless of the plausibility of Professor Mitchell's theories, or the esteem that we felt for him, we agreed that a test was in order. The question is whether tall downtown buildings represent uneconomic hubris that will ultimately lead to comeuppance in the stock market, or merely a rational attempt to make the most of valuable land by maximizing the number of face-to-face meetings between bankers, lawyers, accountants and traders.
Thus the Speculators found themselves taking up their favorite weapons, the pencil and the back of an envelope, to do some counting -- always highly recommended, whether testing a theory on skyscrapers or a conventionally held view of the market. For our test, we used skyscrapers named for publicly traded companies in a list published by the Council on Tall Buildings and Urban Habitat of the 100 tallest buildings in the world. The results show that in the cumulative one-year, two-year and three-year periods after completion of the buildings, the stocks performed 9, 19 and 22 percentage points worse, respectively, than the Dow Jones Industrial Average ($INDU).
How stocks did after completion of tall corporate buildings
(cumulative 1-, 2- and 3-year change vs. Dow Jones Industrial Average)
| Company | Completed | Year 1 | Year 2 | Year 3 |
| Commerzbank (DE:CBK, news, msgs) | 1997 | -21% | -11% | -29% |
| DJIA | 16% | 44% | 36% | |
| NationsBank (Atlanta) | 1993 | -4% | 42% | 103% |
| DJIA | 2% | 36% | 72% | |
| NationsBank (Charlotte, N.C.) | 1992 | -7% | -10% | 33% |
| DJIA | 13% | 15% | 54% | |
| Suntrust Banks (STI, news, msgs) | 1992 | 3% | 9% | 57% |
| DJIA | 13% | 15% | 54% | |
| U.S.Bank (USB, news, msgs) | 1992 | 9% | 18% | 76% |
| DJIA | 13% | 15% | 54% | |
| Mellon Bank (MEL, news, msgs) | 1991 | 52% | 52% | 32% |
| DJIA | 5% | 18% | 21% | |
| AT&T (T, news, msgs) | 1989 | -35% | -14% | 12% |
| DJIA | -4% | 15% | 21% | |
| IBM (IBM, news, msgs) | 1988 | -23% | -7% | -27% |
| DJIA | 27% | 21% | 46% | |
| Bank One (ONE, news, msgs) | 1987 | -7% | 35% | 16% |
| DJIA | 12% | 42% | 36% | |
| NationsBank (Dallas) | 1985 | -49% | -61% | -40% |
| DJIA | 23% | 25% | 40% | |
| NationsBank (Houston) | 1984 | 26% | -35% | -51% |
| DJIA | 28% | 56% | 60% | |
| First Interstate Bank | 1983 | -3% | 26% | 24% |
| DJIA | -4% | 23% | 51% | |
| Transco | 1983 | 35% | 42% | 11% |
| DJIA | -4% | 23% | 51% | |
| Citicorp (C, news, msgs) | 1977 | -12% | -8% | -18% |
| DJIA | -3% | 1% | 16% | |
| John Hancock (JHF, news, msgs) | 1976 | -11% | -18% | -28% |
| DJIA | -17% | -20% | -17% | |
| Sears (S, news, msgs) | 1974 | -3% | 13% | -3% |
| DJIA | 38% | 63% | 35% | |
| First Interstate Bank | 1974 | 0% | 7% | 33% |
| DJIA | 38% | 63% | 35% | |
| Amoco (BP, news, msgs) | 1973 | 0% | -5% | 5% |
| DJIA | -28% | 0% | 18% | |
| (Transamerica | 1972 | -35% | -56% | -55% |
| DJIA | -17% | -40% | -16% | |
| USX (X, news, msgs) | 1970 | -13% | -11% | -9% |
| DJIA | 6% | 22% | 1% | |
| Bank of America (BAC, news, msgs) | 1969 | -17% | -10% | 17% |
| DJIA | 5% | 11% | 27% | |
| General Electric (GE, news, msgs) | 1933 | 0% | 18% | 40% |
| DJIA | 4% | 44% | 80% | |
| Chrysler (DCX, news, msgs) | 1930 | -29% | -43% | 1% |
| DJIA | -53% | -64% | -39% | |
| Woolworth | 1913 | 1% | -2% | 5% |
| DJIA | -31% | 26% | 21% |
The past decade's trend of building very tall towers in Asia provides further support for Mitchell's argument. In 1990, all of the 50 tallest buildings were in the United States; in 2002, with the Sept. 11 destruction of New York's World Trade Center, six of the 10 highest are in Asia. Out of deference to her distinguished collaborator, who suffered disproportionately in the latter part of the world in 1997, Laurel will refrain here from elaborating on just how miserable a decade the 1990s was for Asian stocks.
The situation is actually even more unfavorable to tallest-building companies than appears at first glance. Many skyscrapers that in their day were among the world's tallest have been torn down or destroyed. In most cases, this occurred in conjunction with the failure of the company that built them. Some notorious examples include the Singer Building built in 1908, the Manhattan and the Central buildings, both built in 1930, and the New York World building, built in 1890.
Taking one consideration with another, the results on tall buildings support the evidence we have assembled in previous columns showing that hubris is indicative of inferior subsequent stock performance.
No U.S. buildings now under construction will make the list of the 100 tallest. However, several office tower projects of 20 or more stories that will carry corporate names are under way or were recently completed. The builders include: AOL Time Warner (AOL, news, msgs), Trump (DJT, news, msgs), Bear Stearns (BSC, news, msgs), Staples (SPLS, news, msgs), Morgan Stanley (MWD, news, msgs), Bank of America (BAC, news, msgs), Phelps Dodge (PD, news, msgs), ABN Amro (ABN, news, msgs), UBS AG (UBS, news, msgs) and Calpine (CPN, news, msgs).
Final Note
As we write on Monday, the market has started the month off with a terrible two-day decline of 4% in the averages. The drop has been attributed to disillusionment caused by the disclosures of hubristic and secretive practices at many companies seeking to be No. 1 in their fields, including Enron, Tyco (TYC, news, msgs) and General Electric (GE, news, msgs). We believe that the disclosures and the horrible declines they caused in the stocks are quite healthy. Our numbers for the rest of this month, which has started out in such a humble fashion, are quite bullish. A study of what happens when the month starts out badly is available upon request from dciocca@bloomberg.net. (Also, anyone interested in a table of the 10 highest buildings outside of Asia can e-mail us here for it.)
At the time of publication neither Victor Niederhoffer nor Laurel Kenner owned or controlled shares in any of the equities mentioned in this column.
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