ULI - Real Estate Trends Conference Is the sky the limit? Impact of Highrise Buildings & Densification Paul Cheshire LSE & SERC June 23 rd 2015
Some Strengths of the Prize Winning Paper Is the sky the limit? High rise buildings and office rents A good paper illustrates the strengths of academic research: To explain Rent per m 2 greater in taller buildings. Puzzles: 1. Tall buildings explained by land prices? A central feature of modern urban economics 2. But if so: why tall buildings next to low rise ones? Could be there are vertical agglomeration economies Agglomeration economies underlie the success of cities 1. BUT correlation does not prove causation: 2. So main focus is on ingenious chasing down of causal connections. What are the factors that explain why there is a premium for taller buildings?
Let s take the Con out of Econometrics (Leamer, 1983) Identifying causal role of vertical agglomeration economies Taller buildings have higher rents per m 2 But could be all sorts of reasons e.g. characteristics of their locations; characteristics of the buildings; landmark statements ; advertising; views Unless researcher can isolate role of a particular factor cannot hope to accurately estimate its impact Process of tracking causation. Plausibly quantifying resultant impact of vertical agglomeration economies is the real contribution; what makes their answer interesting and credible. The hallmark of quality academic research. Underlying problem is omitted variables many likely are correlated with what you are interested in identifying.
Solutions? Various methods.. 1. Find a natural experiment: but often not possible 2. Eliminate omitted variables: often not possible; how know? 3. Find variables which can stand in for what you are investigating (tall buildings) but realistically not correlated with other relevant variables (so-called Instruments) 4. Probe and conduct sensitivity analysis 5. Do not claim more than your results justify. This paper uses 3, 4 & 5 And concludes that most probably the premium paid just because a building is taller (+4% per 10 metres) is likely a combination of agglomeration, landmark and view effects But this is on assumption agglomeration economies DO NOT increase at increasing rate with height.
Results suggest there is a premium for height: so density But beware of assuming causation: in sense of I increase density so I will increase agglomeration economies Implicitly what Densification policie supporters assume Think CrossRail: will reduce average density but increase agglomeration economies; increase density near stations Why? Allows people to move further from Central London but reduces times & increase productive interactions; Sensible policy is to facilitate higher density, taller buildings where and only where markets signal it is productive. Firms/households pay for access i.e. agglomeration economies; but other variables important too e.g. space (think house!); congestion; pollution; costs rise with density But in Britain policy prevents tall buildings, higher densities!
Why does incidence of tall buildings vary so much? Sao Paulo less than half skyscrapers per person as New York but nearly 1.75 times as many high rise (35m+) buildings; Brisbane 6 times as many skyscrapers per person as Paris - 8 times as many as London. Topping all cities in the tall buildings league table is a real surprise: Benidorm in Spain! Only tall building league London tops is Trophy Architect (TA) designed City Bldgs >100m per million Population Total Bldgs >100m TA Bldgs TA Percentage London 7 57 14 24.56% Chicago 111 301 9 2.99% Houston 40 88 5 5.68% Brussels 15 17 0 0.00% Benidorm 384 26 0 0.00% Sao Paulo Source: http://www.emporis.com/ 20 231 1 0.43%
In London we regulate tall buildings & density away A long history London Fire Brigade - secured London Council Act of 1890 no building above 27ms Repealed in 1956; so absolute height limit until 1956 Post WWII planning legislation: plot ratios etc. In effect NO buildings higher than St Pauls until 1962 Then Conservation Areas and Listed Buildings + height protected areas & corridors; Development Control for decisions (not rules ) So decisions gameable : to persuade the planning committee or SoS use a Trophy Architect [the Minister] will only approve skyscrapers of exceptional design. For a building of this size to be acceptable, the quality of its design is critical the proposed tower is of highest architectural quality (John Prescott 2003, giving permission for the Shard )
Conservation Areas, Listed Buildings & height protected areas & corridors So even TAs can only build high where there is flexibility in the rules: just a few spots.
Conclusions So: Good news! Employing a TA for a non-height controlled site in London gains the developer an extra 18 to 19 floors on average; http://www.spatialeconomics.ac.uk/textonly/serc/publications/download/sercd p0154.pdf And: Bad news! But at a cost design and building costs; delayed and more expensive decisions, longer to rent out and significantly increased risk; appeals can be lost as well as won What London needs is not a densification policy; But more flexibility in policies that prevent densification where taller buildings would be efficient (and not destroy really valuable urban amenities); for example around CrossRail & mainline stations.