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Agglomeration benefits are not just about scale

Elsbeth Quispel • 19/10/2020
Every month a column by Elsbeth Quispel is published on a topic related to the value of the city. In it she gives her vision on the social relevance of cities, urban development and therefore also real estate.

The news that we will not be able to go to the office for the next few weeks is difficult for me. For me, the office is the place to work together on projects, to have meetings and to be able to work quietly, but also the place to catch up with colleagues and my team; something that gives me energy.

In a time like this, it becomes even more visible that an office area is made attractive by the diversity of facilities in the area itself. Without the daily commotion at the start and end of the day as well as around lunch time, you will experience an office area without amenities as a lonely and cold place where you do not like to come and certainly do not want to stay. This makes it clear that the presence of other offices is only one of the agglomeration advantages. It is the whole city and especially the soul of the city: the inclusive city that contributes to productivity and employment.

Economist Alfred Marshall was one of the first scientists to introduce the term agglomeration in 1890. An agglomeration arises when companies concentrate in an area because of (sector-specific) location or urbanization advantages such as a specialized labor market, the possibility of sharing facilities or the possibility of creating knowledge and information. These benefits are often measured in productivity and growth.

Agglomeration force seems like a simple concept, bigger is better. The size of cities is quickly seen as the most important characteristic of agglomeration power. But bigger is not necessarily better. Larger cities have more connections and are more likely to benefit from agglomeration. But relatively smaller cities can also perform well when it comes to productivity and employment. It is precisely the substantive connection in a city at different scales that is relevant, its quality: the soul of the city.

In addition to the traditional agglomeration advantages, user facilities attract (office) activity and have a direct positive effect on the rent. In other words, companies are willing to pay more for an office if these facilities are (to a large extent) present in a city less than 3 km from the office. Inclusive space pays off in this way: high quality of public space, many restaurants, museums and theaters, attracts office employment and this in turn creates more demand for the same facilities in the city; an effect that reinforces each other and is called urbanization for short. This not only applies to the large office cities in the Randstad, but is also demonstrated in the rental price level of Enschede and Eindhoven, for example. Scale does of course have an impact here: the more facilities, the more impact on the willingness to pay a higher rent, also in absolute terms. In addition, it remains important to look at the region outside your own city and to create balance at that scale level instead of competing.

Office areas such as Papendorp and Riekerpolder are examples of areas that were developed in the late 1990s in Utrecht and Amsterdam respectively with the idea of landing several fairly large companies looking for an office location in a 'new' office location to be developed. However, both locations are too far from the city center and have been developed (initially) with a lack of facilities of their own, so that traditional agglomeration advantages could be utilized (labor market, infrastructure), but the benefits of the user facilities were not provided. The lack of an inclusive public space with many facilities is also reflected in the rent level here and makes it clear how difficult it is to connect 'separated' areas afterwards and make an area attractive.

An office area needs the inclusive city for its viability and vice versa. It takes over part of the meeting function within offices themselves, facilitates knowledge and information transfer and makes people feel at home and enjoy staying there. Multipurpose areas prevent lost and possibly long-term empty spaces, certainly in the period in which we are now.

I look forward to going back to the pub with colleagues after a day at the office, going out for dinner and / or to the theater with friends and getting energy from all the possibilities the city has to offer.

What's Next: Value Of A City

This was the second part of the series.

Read part 1 here: Soul of a City

This vision is based on internal research and dialogue with internal and external stakeholders, in close collaboration with consultants and analysts from our Real Estate Strategy & Innovation team. More background can be found in the similarly named Insight: Agglomeration benefits are not just about scale (Dutch research paper).

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