Mises Wire

Richard Cantillon Is Sleepless in Seattle

A Seattle resident told me last night she counted 50 high-rise construction cranes in her hometown. Seattle developer Kevin Daniel provides confirmation, “Seattle is definitely the pretty girl on the dance floor.” 

It turns out “there are currently 13 high-rise apartment or condo buildings of at least 24 stories in development or planning in the downtown area. The average is 39 stories. Another 24 high-rises are in the proposal pipeline, according to city and industry reports,” writes Paul Roberts for CrossCut.  

The woman from the Emerald City told me the tallest building in Seattle was soon to be built. Perhaps she was talking about Miami developer Sonny Kahn’s proposed 102-story 4/C project which has attracted adverse attention from the FAA.  

It’s believed that even if Kahn shortens the building it’ll cost $700 million and the top floor will command $15,000 a month in rent, for “a vertical mansion offering everything from 24-hour concierges to personal shopping and dog-washing, all linked by ‘intelligent mobile technology’ that allows staff to anticipate a tenant’s every need,” Roberts explains.  

No one will construct the world’s tallest building in Seattle. But, considerable clusters of cranes must mean we’re near a top.  

Mark Thornton explains in his seminal article “Skyscrapers and Business Cycles” that, “the basic components of skyscraper construction such as technology are related to key theoretical concepts in economics such as the structure of production. The findings, empirical and theoretical, suggest that the business-cycle theory of the Austrian school of economics has much to contribute to our understanding of business cycles, particularly severe ones.”

The number of units in downtown Seattle is set to explode, unless a crash gets in the way. Prior to 2010, the number of high-rise rental units in Seattle’s urban “core” was just 2,960. By 2020, the total is projected to be 16,543.

“Given the number of high-rise units expected by the end of the decade, this boom implies a downtown transformation that can strain even the most active imagination,” writes Roberts. “While most of the debate around these towers has centered on familiar questions about affordability, inequality, traffic, and our urban character, we also might want to ask questions of another sort.”

Andrew Lawrence, who invented the Skyscraper Index, found that in virtually all cases, the start of new record-breaking skyscrapers was a precursor to financial crisis. “Generally,” writes Professor Thornton, “the skyscraper project is announced and construction is begun during the late phase of the boom in the business cycle; when the economy is growing and unemployment is low. This is then followed by a sharp downturn in financial markets, economic recession or depression, and significant increases in unemployment.” 

However, Seattle academics and civic leaders view their downtown as the new Field of Dreams — “Build it and they will come.” And “once all of this intellectual power and capital, and corporate talent comes together,” says Peter Orser, who runs University of Washington’s Runstad Center for Real Estate Studies, “it just feeds on itself and now we’re exponentially growing, from what was once Bill Gates, Paul Allen and Bill Boeing … Now it’s a lot more guys like that.” 

Developers assume the new residents coming to rent downtown will live alone with their laptops. Roberts writes, “based on proposed projects, says [real estate consultant Brian] O’Connor, the studio/one-bedroom ratio for new towers will likely hover between 80 percent and 85 percent.”  

Normal folk are not wanted, “the towers are key to attracting a very specific category of newcomer — the ‘creatives’ widely seen as the secret sauce for a hot urban economy,” explains Roberts. 

As cheap money gushes in to finance new projects, even a journalist like Roberts can identify this skyscraper building binge as a “capital-fueled boom.”  

Richard Cantillon, widely credited as the first economic theorist, would be able see what’s going on in Seattle before he hit the Strait of Juan de Fuca. Thornton explains how the Cantillon Effect relates to skyscraper construction,  

Combined with a lower cost of capital brought about by a lower rate of interest, land owners will seek to build more capital-intensive structures and, at the margin, this will cause land to be put to alternative uses. In the central business district, this means more intensive use of land and thus higher buildings. Simplified, higher prices for land reduce the ratio of the per-floor cost of tall vs. short buildings and thus create the incentive to build buildings taller to spread the land cost over a larger number of floors. Lower rates of interest also reduce the cost of capital, which facilitates the ability to build taller. Thus, higher land cost leads to taller buildings.  

“Although many observers expect some sort of correction in the Seattle high-rise sector, the timing and severity are anyone’s guess,” Roberts writes. “The correction might be so modest that most of Seattle doesn’t really notice.”

Seattle, Mr. Cantillon would contend, you’ll notice.  

Reprinted from DouglasinVegas. Douglas French is former president of the Mises Institute, author of Early Speculative Bubbles & Increases in the Money Supply, and author of Walk Away: The Rise and Fall of the Home-Ownership Myth.

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