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The Economics of
Skyscrapers: New York City
Urban Economics
Prof. Barr
Land Value Model

Profits for corporate firms:
π=PQ-AQ-C-sQd-R(d),
which yields rent equation via zero profit condition:
R(s)=(PQ-AQ-C-sQd),
where s is “cost of travel” for office workers (i.e., cost of walking/traveling
to/from clients)
Bid
Rent
Office sector
Manu.
sector
Residential
Distance from
center
Model cont.
 This says that rent per acre is function:
–
–
–
–
Distance from center
Revenues
Costs
Wages
 Competition among firms distributes land
according to those who can and must pay the
most for it:
 i.e., land values and land use represent an
process of economic evolution.
 Steepest rents at the center.
NYC in the 19th c.
• Rising commercial activity, esp. from 1825
onwards (Erie Canal) and center of global trading.
• More and more firms competing for same space.
• Rising population growth.
• Increasing corporate and administrative activities.
• Manhattan is an island, with limited possibilities for
commercial expansion.
• (1865: 44th street northern-most development;
1883: The Dakota (W. 72nd Street) was ‘in the
Dakotas’)
City of New York
(does not include Brooklyn)
1790
1800
1810
1820
1830
1840
1850
1860
1870
1880
1890
Population
33,131
%
Change
60,515
96,373
123,706
83%
59%
28%
202,589
312,710
515,547
813,669
64%
54%
65%
58%
942,292
1,206,299
16%
28%
1,515,301
26%
NYC cont.
 Increasing competition:
–
–
–
–
Bids up value of land due to more profits of larger firms.
Large opportunity costs of travel for workers.
More agglomeration economies.
Greater need for face-to-face communications.
 Generates economic need for density and
economic demand for density.
 Rising land values drive technological innovations
that could enable more intensive use of existing
land.
 The skyscraper!
1811 Grid Plan




In 1811 NYC land arranged according to the grid plan.
Basic lot sizes were fixed at 25’ x 100’.
Avenues and streets were either north/south or east/west.
Plan was designed to ‘rationalize’ development (e.g.
contrast Wall Street area with north of 14th street)
 The effect was to aid business growth:
–
–
–
–
Real estate was made simple and easy to value.
Made lots a type of tradable commodity.
Gave clear property rights demarcations.
Notice that is also made assemblage of large lots relatively difficult
(also giving an incentive to build tall on smaller lots)
Manhattan Schist
• Unlike many geographies, in downtown
Manhattan bedrock is very close to the
surface.
• Bedrock is stable.
• As a result, costs of digging and laying
foundation are relatively low.
• No need for caissons.
Transportation Innovations and the
Rise of NYC CBD
 Before 1815: NYC was a walking city.
 Steam ferry service (Robert Fulton, 1817)
 Horse driven buses (omnibuses) (1820s1840s)
 Horse driven buses on tracks (1850s-1880s)
 Electric Trolleys (1885-1920s)
 Commuter Railroads (1837)
 NYC Subway (1904)
Technological Innovations and the
Skyscraper
 Iron and Steel Skeleton (1850s-1860s).
– Before that supporting walls were stone and brick. Too
expensive to build high b.c. needed thicker and thicker
base walls.
– 1855: Bessemer Steel process
 The Elevator
– Elisha Otis of Yonkers, NY developed safety break in
1851 (demonstrated at New York's Crystal Palace
exhibition).
– 1871: Hydraulic elevator replaces steam.
Skyscraper Technology cont.
 Heating and Cooling technology
– Steam and hot water systems were developed in 19th c.
 Wind-bracing technology.
 Artificial Light
– Edison laid electric lights in downtown NYC in 1871.
– 1938s fluorescent light bulbs on market.
 Steam powered construction tools
– cranes, shovels, etc.
Skyscraper Early Time Line
 1871: Great Fire of Chicago destroys downtown (The
Loop).
 1885: First Skyscraper, 10 story Home Insurance Building
in Chicago.
 1890: World Building Joseph Pulitzer's New York World
(Newspaper row, 26 stories, first building in NYC to
surpass 284’ spire of Trinity Church)
 1902: Flatiron Building
 1913: Woolworth Building (“Cathedral of Commerce”)
 1915: 42-story Equitable Building.
 1916: NYC Zoning Laws
Skyscraper Timeline Cont.





1929: Chrysler Building
1930: Empire State Building
1952: The Lever House
1961: New Zoning Resolution
1973: World Trade Center (Port Authority)
How High to Build?
 Key difference between engineering height and
economic height.
 There is virtually no engineering limit to height.
 Economic height reflects the maximum height (and
square footage) that generates the highest net
return on the investment.
 Economic height reflects various costs to
purchasing land, building and operating the
structure.
Economic Costs
 At some point (for floor height) the law of marginal
diminishing returns starts to kick in (i.e., additional
market rents do not cover additional costs):
 Taller buildings need:
–
–
–
–
Heavier foundations.
Extra wind bracing.
More space for elevators.
More and larger mechanical systems for ventilation and
heating.
1916 Zoning Law
 Was first comprehensive zoning law in the
country.
 Stated where different economic activity
could take place in the city (i.e., zones).
 Did not restrict height per se:
– Rules for how much of a lot could be used for
the building (e.g., 25% had no restrictions).
– Introduced ‘set back’ rules based on width of
street.
Skyscraper Epochs
Though architects have discussed different
aesthetic styles that have evolved over the
years, this discussion cannot take place
without also mentioning the larger
economic, technological and political forces
at work: “form follows finance.”
Skyscraper Epochs
 Period 1: 1890-1916
– Tended to take up whole lot.
– Occasionally had towers.
– e.g., Equity Building, Singer Building, Woolworth
Building.
– Arrangement of office space and building based
on need to maximize exposure to sun light.
– 20-30 stories were profit maximizing.
Epochs cont.
 1916-WWII
– 1916 zoning created ‘wedding cake’ style.
– 1920’s (“The Roaring Twenties”) saw a massive
speculative and building frenzy.
– Result: Race to the heavens.
– e.g. Chrysler vs. 40 Wall.
– Empire State Building
– Art Deco style.
– Depression and WWII put ‘kaybash’ on skyscraper
market.
Epochs cont.
 Post WWII – 1970s
– The International Style
– e.g. 1952: The Lever House (Skidmore, Owings &
Merrill), 1958 The Seagrams Building (Ludwig Mies van
der Rohe and Philip Johnson
– Glass boxes were not only in vogue but were more
profitable:
 Class less expensive than stone.
 A/C and florescent lighting allowed wide open (more rentable)
space.
– 1961 Zoning Resolution promoted the style.
1961 Zoning Resolution
(from NYC Zoning Handbook)
 “Incentive zoning" offered a bonus of extra floor space to
encourage developers of office buildings and apartment
towers to include plazas in their projects.
 Emphasized the creation of open space. A flexible
document, it was a product of the best planning, economic
and architectural skills of its time (nb: “we’re sorry, we
made a mistake”).
 “Resulted in tall buildings out of scale with their
neighborhoods. And the open space provided has not
always been particularly useful or attractive.”
 New approaches since 1961: incentive zoning, contextual
zoning, special district, air-rights transfer and restrictive
covenant techniques have been used to make zoning a
more responsive and sensitive planning tool.
Epochs cont.
 1970s – Present
– PoMo and Beyond
– e.g. Philip Johnson’s AT&T Building and “The
Lipstick” Building
– The Freedom Tower, 1776 feet tall.
– “Asian Tigers” take lead in world’s tallest
building.
– 60-70 max. economic height.
Avg. Number of Skyscrapers >100m built, 1895-2004
30
20
10
5 year MA
0
1895
1905
1915
1925
1935
1945
1955
1965
1975
1985
1995
Avg. Height of Skyscrapers Above 100m (1995-2004)
220
WWI
19171919
200
Great
WWII
Depressi 1940on
1945
19291939
1992
Recession
NYC Fiscal
Crises, 1975
1979 Oil
Crises
10 year MA
180
160
140
120
100
1895
1905
1915
1925
1935
1945
Year
1955
1965
1975
1985
1995
Height of World's Tallest Skyscrapers Over Time, 1889-2007
(meters)
800
Dubai
y=-7449+4x
600
Taipei 101
Sears
Empire State
Petronas
400
WTC 1
Chrysler
Woolw orth
Met. Life
200
World Build.
40 Wall
Singer
Park Row
Manhattan Life
0
1880
Home Insur.
1900
1920
1940
1960
Year
1980
2000
2020
Historgram: Meters per Floor Heightfor Skyscrapers in NYC 1895-2004
12%
Mean=3.83
St. Dev.=0.6
8%
4%
More
5.9
5.8
5.6
5.5
5.3
5.2
5.0
4.9
4.7
4.6
4.4
4.3
4.1
4.0
3.8
3.7
3.5
3.3
3.2
3.0
2.9
2.7
0%
References
 Gottman, J. (1965). “Why the Skyscraper?”
The Geographical Review.
 Landau, S. B. and Condit (1996). Rise of the
NY Skyscraper: 1865-1913.
 Willis, C. (1996). Form Follows Function:
Skyscrapers and Skylines in New York and
Chicago.