Thursday, December 11, 2008

Is Shanghai Turning Pro or Just Building High? A Guest Post

By Nathan Myhrvold, the former chief technology officer of Microsoft, now runs the invention company Intellectual Ventures. He is a polymath’s polymath: a physicist by training who practices many feats of technology as well as dinosaur-hunting, intensive cuisine, photography, and other, more esoteric pursuits. Earlier this year he contributed three guest posts about his visits to Greenland and Iceland. Now he is back from a trip to China. Here is his Shanghai dispatch; it is wonderful. In a few days we will post his Beijing chronicle.

In one of the classic scenes in American cinema, young Benjamin Braddock is attending a cocktail party celebrating his graduation from college and entry into adult life. His internal reverie on his future is interrupted by Mr. McGuire, who says he has one word of advice for him. After a pregnant pause McGuire says, “Plastics!” Then he beams at the self-evident brilliance of this remark. Benjamin does not know what to say in reply.

A few years ago, I found myself at a cocktail party of business leaders when the C.E.O. of a major company came up to me, beside himself with excitement, and said, “I have the seen the future.” After a long and dramatic pause he delivered his answer: “China!” Like Benjamin, I was at a loss for words.

For the last decade, the same sort of scene has played out in many business conversations. The explosive emergence of China is remarkable by any measure. Most folks find it hard to internalize numbers and third-hand reports. So they dutifully make the trip and are shocked to see the reality of it. Once immersed in the reality of it, they are struck with as much awe as Mr. McGuire had for the U.S. plastics industry circa 1967. Indeed, many of the recently converted China fanatics seemed a bit like the folks who report meeting space aliens, or a personal visit with the Virgin Mary.

Numbers are my friends, so the economic figures were something I could internalize. I believed in the Chinese economic miracle, even from afar. In the late 1990’s, I was responsible for putting a major Microsoft research center in Beijing (which has grown to be a smashing success). Yet I did this without ever setting foot in China itself. Several times I had trips planned, but some other urgent priority would come up and I would be vectored off in another direction.

This year, my company opened an office in China, so I finally had an opportunity to visit. I normally leave my camera behind on business trips, but this time I decided to bring it along and document my trip.

My first stop in China was Shanghai, and I arrived directly from New Delhi; the contrast couldn’t have been greater. Both China and India are developing countries. You can’t escape that in New Delhi; a five-minute drive on any road will remind you where you are, for example, when water buffalo walk by. Shanghai, on the other hand, looks like a 1950’s artist’s rendition of the city of the future. There are millions of people living in China on less than $2 a day, but they aren’t much in evidence in greater Shanghai.

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.

The frenetic commercial exuberance of Shanghai is palpable to even a casual observer. In the case of Vegas, it is clear why the architects are driven to excess; they’re playing to the same types of human weaknesses that underlie its main industry. The dubious thrill of gambling with the odds against you is itself an act of irrationality, overcompensating for some deep-felt need or emptiness. The architecture of gambling naturally follows suit, shamelessly pandering to the same instincts: the swagger and bravado of a high roller translated into glass and steel.

It is less clear why Shanghai feels the need to be quite so architecturally assertive. I could spin a theory about the inevitable anxiousness of the nouveau riche, or the unease with the prosaic nature of cheap labor and low-cost manufacturing that is the source of its wealth. It could be the foreign influence or the feeling of modernity to escape the past. Maybe it’s some of all of these, but I am not convinced.

Competition plays a role in accelerating the trend; once one wild building is successful, it puts a premium on the next developer and says “top that!” Ego is another factor — both real estate developers and their tenants are out to stamp their mark on the Shanghai skyline. So maybe it is wrong to look for a cause, but rather it is like the runaway sexual selection that makes a peacock’s tail out of a small chance event that is amplified by competition.

New York City has all of these factors in spades, but its skyscrapers remain relentlessly practical by comparison. There are architectural flourishes here and there, but some profound fiscal gravity seems to pull everything back to earth. There is intense competition and no small amount of ego for its developers; the New York real estate industry produced Donald Trump, after all. Even so, the wildest and showiest parts of NYC are strangely pragmatic compared to Shanghai.

Times Square is now a riot of enormous video displays, but all toward a practical end. What seems like wretched excess is actually hard at work: those screens are all rented out for advertising. It recalls a Hunter S. Thompson maxim: “When the going gets weird, the weird turn pro.”

Dubai is probably a good point of comparison for Shanghai. I was last in Dubai 25 years ago, which is tantamount to saying I have never been to the current Dubai. In the last couple of years, I have had several Benjamin moments with awestruck people who have just returned. “Oh my God! Dubai!” is a typical cocktail party response. Or, as one friend puts it, Dubai “makes Vegas seem like Paris” in terms of taste and culture, but boy does it get your attention.

O.K., so I haven’t been there, but (perhaps foolishly) I think it is easy to understand from afar. Like Las Vegas, Dubai is in the business of making a spectacle of itself — it has to turn pro. It’s not like there is some other reason to go to that particular patch of desert. So while Dubai may be extravagant, there is a rationale to it. The maxim “if you build it, they will come” surely cannot apply if you are building something humdrum, ordinary, or commonplace; you need to be weird to turn pro.

Yet this cannot be the reason for Shanghai’s architectural indulgence. Unlike Las Vegas or Dubai, it does not rely on tourism to make a living. There is a really nice aquarium with a walk-through shark tank, but that isn’t what powers the local economy. Shanghai would be a center of commerce for much of China no matter what. It doesn’t need to attract gawkers and revelers.

Regardless of the underlying motivation, the fact is that Shanghai is a great place to see futuristic architecture. The upbeat feeling it radiates is impossible to ignore.

Mostly that is good, but the insane scale of the place does make you wonder: how real is this? At night, it is obvious that only a few floors of SWFC are rented, and much the same is true for the other new buildings. During the day I kept asking, “Where are all the people?”

In Manhattan at lunchtime, you find that tall office buildings disgorge their inhabitants and fill the streets with a mass of people. Shanghai looked more like Manhattan on a Sunday. Maybe this means that Shanghai city planners did a better job. Maybe it means that they have built it, but they haven’t managed to come yet. It made me worry.

People have argued for years that Shanghai real estate is a classic speculative bubble, and for years they have been wrong. That is one of the problems with identifying bubbles.

If somebody says “this can’t last!” and predicts that the bubble will burst, they may be wrong for a while before they are right. What if they are wrong every year for nine years, and then it comes true in the tenth? How do you count that? Is that 100 percent success in predicting that it was a bubble or 90 percent failure because they missed it so many years?

It is a difficult question, because both answers have some merit. On one hand, pessimism and cynicism are almost too easy. The prediction “this won’t end well” has very little predictive value without a time scale attached, because eventually there are bound to be both good and bad events. It’s a bit like the line from the Bible that says, “There will be wars, and rumors of wars.” Well O.K., but don’t expect me to be all that impressed when the prediction comes true. It’s just too easy.

On the other hand, it takes great courage to stand up to a groundswell of public opinion and call bullshit on something that the world has fallen in love with. Maybe you should get an extra star for saying “this can’t last” and being wrong every year, since it is so easy to give in.

I have been caught in this trap myself. In the mid 1990’s profiles of me in the press argued that I had “missed” the internet. A principal reason was because my zeal for the internet, while real, was tempered with caution. I wrote a memo at Microsoft in that era with the title “How long can it last?” where I pointed out that many aspects of internet economics were unsustainable in the short-term (long-term I was very bullish). During that time period I was pilloried in other articles for saying, among other things, that the Java programming language was “just another programming language,” not some miracle that would transform programming or replace Microsoft Word with a mere thousand lines of Java code. In the eyes of the press, and many up-and-coming internet folks, I was clearly a has-been old-timer that just didn’t “get” the newest technology. Then the internet bubble burst, and Java retreated to be (surprise!) just another programming language.

I am not informed enough to know whether Shanghai’s frenetic real estate market has the attributes of a bubble or not. So far it has not been, and people who bet that way would have lost their shirts. It may continue that way forever.

It is a complicated issue because even if Shanghai is sound today with respect to local economics, the current world financial crisis may come crashing in as an exogenous factor to screw things up. Should that count or not? Were the dinosaurs to blame for the asteroid that wiped them out? It hardly seems fair to blame them, but absolution won’t make them any less extinct.