NPR reports on the planned opening of Shanghai Tower later this year. They report that the only building in the world that is taller is Burj Khalifa in Dubai. The project is also unlikely to break even for any private investor. Somehow a number of these large scale Empire State Building like projects don’t make sense from the point of view of a private investor. But do they make sense from the point of view of the city or country that is building them? Is it the economics or is it something else that is motivating such investment? A few ideas:
- High rise buildings lead to higher densities within metropolitan areas. Higher densities are generally leading to more innovation, creativity and exchange of ideas. See this paper for instance.
- Higher densities also lead to higher demand for local retail, generating a greater diversity of offerings.
- Higher densities lead to lower transportation times, length, and costs. Higher buildings lead to less urban sprawl and thus to fewer negative externalities for other residents of the metropolitan area. Urban sprawl is bad.
In particular, it is interesting that a city state like Singapore or the city of Abu Dhabi have chosen to allocate limited land for urban expansion, preferring to build vertically rather than expanding horizontally. The city of Singapore still has plenty of greenery, while Abu Dhabi is fairly vertical despite a potentially unlimited supply of land.
In many cases it is rather more efficient to limit the use of land, by precomitting to using only a limited amount of the physical space rather than expanding.
As the incentives of private investors are not to build vertically, it is good for regulators and institutional investors to put forward bylaws and land use regulations, and promote developments that lead to higher densities.
Nechyba, Thomas J., and Randall P. Walsh. “Urban sprawl.” Journal of economic perspectives (2004): 177-200.
Carlino, Gerald A., Satyajit Chatterjee, and Robert M. Hunt. “Urban density and the rate of invention.” Journal of Urban Economics 61.3 (2007): 389-419.