Are more productive companies higher up?

Tall commercial buildings dominate city skylines. Nevertheless, despite decades of research on commercial real estate and horizontal patterns of urban development, vertical patterns have been largely ignored. We document that high productivity companies locate higher up, with less productive offices lower down and retail at ground level. These patterns reflect tradeoffs between street access and vertical amenities. Vertical rent gradients are non-monotonic, independent of nearby employment, and large. Doubling zipcode employment is associated with a 10.7% increase in rent, consistent with the presence of agglomeration economies. Moving up one floor has the same effect on rent as adding roughly 3,500 workers to a zipcode.

That is by Crocker H. Liu, Stuart S. Rosenthal, and William C. Strange, via the excellent Kevin Lewis.  I do get why the ground floor companies would have lower productivity, because they may be walk-in service sector outlets.  But otherwise, why might this relationship hold?  Is it that everyone wants to better view and the power office?  Is being “high up” high status per se?

Comments

Corporate law firms have very high revenue per employee and they traditionally lease floors in prestigious skyscrapers.

Companies who need more floorspace per dollar, such as warehouse firms tend to like cheaper land. For example, many of the warehouses serving the Port of Los Angeles are located about 60 miles inland in Moreno Valley.

Respond

Add Comment

The causation goes the other way. The more productive and wealthy can afford to be on the top floor.

My first thought, too.

Respond

Add Comment

Respond

Add Comment

An exception is that (last I checked, back in the 1980s) the most famous skyscraper, the Empire State Building, has few prestigious high-billing tenants and many marginal small companies as tenants. Presumably, they use their Empire State Building address as advertising and validation: E.g., You can trust them to deliver their Sea Monkeys as promised for $8.95 because they are on the 92nd floor of the Empire State Building.

Respond

Add Comment

Correlation versus causation. Successful urbanites equate success with being higher in their hideous termite towers, so of course that's where they want to go. It's always and ever about status (Tom Wolfe, RIP!)

Plus the ability to pay the rent.

But that is also endogenous. If it were more prestigious to be on the ground floor of a tall building, the rent would be cheaper higher up.

Prestige is always a fickle thing, but there are a number of reasons why a ground floor is unlikely to be highly valued in such terms. Part of that is even alluded to be Prof. Cowen's 'walk-in service sector outlets.'

Basically, everyone comes in through the ground floor (or the parking garage in the basement, admittedly). Basically, there is no prestige in being just one person in the crowd that comes and goes through the ground floor.

Paying for a view is not an illusion, and not only for high rise office buildings. Only those that can afford it are able to take advantage.

Respond

Add Comment

Respond

Add Comment

Respond

Add Comment

Respond

Add Comment

'and retail at ground level'

Well, that is truly surprising, right? Anybody explored the relationship between the parking spaces and their level in such buildings?

Respond

Add Comment

It's similar to the Protestant penchant for building churches with high-elevation steeples, a physical presence that intimidates the competition and implies a closer relationship with the deity.

Respond

Add Comment

Of course higher-up is higher-status, right?

Was this not the natural thought of everyone here? Or am I badly misled by my instincts?

I think you are right, but one would expect, that rational thinking overcomes instincts when it comes to succesfull bussiness and that the most productive companies are thriving for best-bang-for-the-buck offices or to provide easily accesible spaces to their employees and customers. Turns out, this misconception is proved wrong again, prestige is still the king.

But many successful, productive businesses aren't headquartered in urban cores at all. Which office towers contain the executive suites of Google, Facebook, Apple? Microsoft? Walmart? Ford? Tesla? Are these companies all lacking in prestige due to their low-rise locations?

That's a good point - High Rise HQs are not Tech Office HQs. They are White collar service HQs; Goldman Sachs, etc.

Why is that?

It's harder to examine the quality of the product, so the signalling matters more. Hence the obviously expensive location for the difficult to evaluate consultancy. The outrageous expense is a feature of the location, not a bug.

Respond

Add Comment

Respond

Add Comment

Respond

Add Comment

Ah - but prestige goods and signalling!

"Look at how successful and capable we are if we can afford offices like THESE!"

Respond

Add Comment

Respond

Add Comment

Lakoff and Johnson devote a small chapter to orientation metaphors in their book "Metaphors we live by." Being "up" is associated with all sorts of desirable stuff. Examples they give:
-He has a LOFTY position.
-She'll RISE to the TOP.
-He's CLIMBING the ladder.
-He has little UPWARD mobility.
-She FELL in status.
-I have control OVER her.
-I am ON TOP of the situation.
-He's at the HEIGHT of his power.
-He's in the HIGH command.
-He's in the UPPER echelon.
-His power ROSE.
-He is UNDER my control.
-He FELL from power.
-His power is on the DECLINE.
-Things are looking UP.
-We hit a PEAK last year but its been DOWNHILL ever since.

Would be interesting to know if this is universal across language, and if these examples are cherry-picked (though I struggle to come up with many expressions where being low is a good thing... maybe "he's a DEEP thinker")

Evolutionary Psych: higher geography is strongly favoured through better vantage against prey and attackers, plus defensive strength. Why else do we love imposing views from up high?

When I am on a hillside where I can see a few miles, I enjoy the beauty of so much landscape before me. When I am on a mountain where I can see dozens of miles, I am thrilled at being able to take in so much expanse. "There's the whole city. And the lake beyond the low mountains on the other side of the city." I have never thought about attack or defense in those situations. The joy seems to be more about taking so much sensation in.

"I have never thought about attack or defense in those situations. The joy seems to be more about taking so much sensation in."

Of course. Much easier for your DNA to program into you good feelings about being able to observe a lot of terrain, rather than complicated mental machinery about military strategy.

Respond

Add Comment

"The joy seems to be more about taking so much sensation in."

Obviously "joy" is something that just happens to animals and is in no way an adaptive response? :-)

Oh, and those lovely tree-and-field vistas under clear blue skies? That's your hunter-gatherer brain talking.

Respond

Add Comment

Respond

Add Comment

Respond

Add Comment

Respond

Add Comment

Respond

Add Comment

Working at the 7th floor in a building in Manhattan or (in my case) in Chicago downtown, is depressing, you really feel like Winston in Nineteen-Eightyfour. Moving up to the 80th floor with a fantastic view is much better, and I suspect most share my opinion. The effect on rent is multiplied by the status projection, which is not only vanity, it is an objective marketing tool for many companies, especially professional service firms.
Of course, companies with 500.000$ per year in value added per employee, like white shoes lawyer partnerships or management consulting companies can afford the rent, while less productive (per employee) firms go where the rent is cheaper.
Frankly, it seems pretty obvious to me.

Respond

Add Comment

If the office located on a higher floor doesn't increase productivity or only marginally so, then why would anyone wish to locate on a higher floor, pay all that higher rent, and take home less income. I suppose the answer is that "income" has a broader meaning than what's reflected on the W-2. Status and view matter, as does size. But sometimes never the twain shall meet. The senior, and most productive partner, in a large law firm (bearing his name as the founder) in my sunbelt city left his firm when the rent got too high in the firm's fancy offices on the upper levels in one of the new high rise office buildings. As is often the case, the rent gradually rose over the years, with low (or no) rent early and then rising to what is projected to be the market rate in future years. He wasn't going to suffer lower income just to have a view. Even some lawyers can be rational. Another large firm had a similar experience: as the rent rose, the productivity of the lawyers actually declined, as partners began to fear the inevitable - mass flight - and stopped billing clients (bill them now or bill them later, later the better choice in this case). Soon enough, the firm folded. Even some lawyers can be rational.

Respond

Add Comment

The firm that folded isn't that unusual. It was until near the end a highly profitable law firm, and explains how what was a profitable professional practice suddenly implodes. It reminds me of Hemingway's line in The Sun Also Rises: 'How did you go bankrupt?' Bill asked. 'Two ways,' Mike said. 'Gradually and then suddenly.'

Respond

Add Comment

Nothing to see here. More productive companies can pay the sky high rent.

Respond

Add Comment

There was a short-lived TBS multicam sitcom named "Ground Floor" about the division between offices/employees on different levels of a building. I think that was the first time I'd heard of that generalization, which could indicate how unobservant I am.

Respond

Add Comment

Being higher up definitely involves better views, as well as less traffic noise up to a certain point. Top floor is closer to a helicopter pad in some cases, and possibly rooftop dining.

And reliable suicide altitude for when the SEC is busting down your door to discuss that $2.5B portfolio of NINJA loans you orchestrated!

Those poor saps on the fourth floor....well, they just bounced off a taxi roof and survived...a final humiliation...

Respond

Add Comment

Respond

Add Comment

Within a firm that’s rents multiple floors, do the more senior staff choose the higher or lower of their rented floors?

I would expect the senior guys almost always choose offices on the highest floor in their rented set, and that it primarily reflects status within the firm.

Respond

Add Comment

Just think of the foregone productivity gains when cities such as Shanghai (in certain areas) and DC impose arbitrary height restrictions on buildings!

Respond

Add Comment

Height is desirable. In just about any US city with hills, the high rent neighborhoods are on the top of the hills and the low rent neighborhoods are at the bottom. Same with rents (residential and business) within a high-rise.

If I'm a firm and I want to attract workers, what location will be more attractive: office suites with views of Central Park, or a windowless sweatshop in some basement? Height is a workplace amenity just like the free food at Google or heck having air conditioning in the office.

The struggling money-losing companies can't afford to hire the best employees, nor offer high salaries, nor offer amenities such as height. But the highly productive companies can.

Respond

Add Comment

This rule is broken at large banks.

Post 2001 the senior executives now are on escapable floors (3-5 typically) whereas previously they were near the top.

Additionally the investment banking & trading operations are on lower floors so as to have very large open plans (typically in podiums vs the smaller floor plates of point towers) and to be escapable.

Law, accounting and other do still tend to have a very large height premium

Respond

Add Comment

Respond

Add Comment