Nathan Myhrvold in Shanghai

Nathan Myhrvold, the former chief technology officer of Microsoft, now running Intellectual Ventures (which describes itself as “the invention company”), guest-blogs on Freakonomics. Here’s an excerpt:

The infrastructure is all new, from the airport to the expressway leading into the city (or you can take an ultra-high-speed maglev train and be there in 12 minutes). The downtown section of Shanghai is called Pudong, and it is full of gleaming new skyscrapers. The other side of the river has the Bund, the center of Shanghai’s 19th-century economic boom. It too is replete with interesting architecture, albeit smaller and older. Amusingly, none of this architecture is Chinese. The closest thing I found to ancient Chinese culture was a fast food-chain called Kung Fu. Maybe that is the point of the place; Shanghai has long prospered by embracing and adopting the foreign.

Pudong is clearly a work in progress — cranes hover over building sites everywhere. Most places that have tall buildings do so because they first had shorter buildings. The only reason to build high is that you’ve already exhausted the possibilities for building low. The economic value of density forces buildings up, because out is not an option.

The only places in the world that violate this rule are “instant” downtown areas that connive to jump the queue and go straight to the super-tall stage, for some artificial reason, rather than follow land-density economics. The Century City section of Los Angeles is one example, but the real classic example for this sort of instant development is the Las Vegas Strip. Vegas builds high, not because of economic pressure for building density, but for its own sake.

Shanghai has no casinos, but Pudong is the office-tower equivalent of the Strip. Giant skyscrapers erupt from the river bank in myriad forms, one more architecturally extravagant than the next. Like Vegas, they sport outsized gimmicks: the Aurora building transforms into a giant video billboard at night, the Pearl Orient tower is a science-fiction fantasy, and the Shanghai World Financial Center (SWFC) — the second-tallest building in the world — has a 105th-floor observation lounge with a glass floor looking down onto a giant hole in the building. It is spectacular.

I was curious what all of this splendor and view cost, so looked up the rent: the SWFC is charging $76 per square foot per year. By comparison, my company pays $25 for a second- or third-tier building in Bellevue, Wash. The good buildings in Bellevue are $40; downtown Seattle commands $45 to $50 (although I understand there may be some space coming available in the Washington Mutual building rather soon). At the other extreme, the warehouse space we rent in Kent, an outlying industrial suburb of Seattle, is a whopping $3.60, which is fortunate for me because rocket engines and dinosaurs take up space.

Our Singapore office costs us $73: about the same as SWFC, but for a much less impressive building. Our Tokyo office is the worst at $96, and it is definitely second-tier. I don’t have an office in midtown Manhattan, but my broker tells me that those average about $88 per square foot per year. So the coolest, newest office space in Shanghai at the SWFC is about the same price as mid-range Singapore, and a bit cheaper than midtown.

We have no plans to open a office in Shanghai. Plus we’re cheap, so we’d never pick that building (our office in Palo Alto is upstairs from a nail salon). However, I find it interesting that despite our frugal approach, we already pay 26 percent higher than SWFC in at least one place. Of course, all this proves is a rediscovery of the old real estate maxim: location, location, location.

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