Theories of rent and urban economics - Essay Example

?INTRODUCTION This paper presents an essay drawn on the theories of rent and urban economies. The theories explain in detail the patterns in office rent shown in the Colliers UK Office Rent Map. The first section covers the theory of neighborhood. The second one is the natural evolution theory followed by the bid rent theory. The essay further outlines Smith’s rent gap theory and the agricultural land theory. The analysis is followed by an outline of the agent based land market model, and the microeconomic theory. The paper winds up with the central place theory and a conclusive remark on the varied rental patterns in an urban setting. The Collier Map show that there are different rent patterns for urban areas in UK and London in particular. The Western part of London records a mixture of rent patterns with a lower level of 10 pounds, and a higher level of 34pounds. The South East London has a rental pattern that way near similar with the difference between the highest and the lowest; levels being minimal (16-24 pounds). The same scenario applies to the North West and Yorkshire which has one of the lowest/cheapest rental rates. The outskirts of London and the hinterland towns have a low level of rent rates compared with the metropolitan. However, there are some urban areas outside the London Metropolitan which have higher rental patterns. A good example is Dublin with a high of 35 pounds. Urban economics is the study of economies that are organized as urban areas (Harvey and Jowsey, 2003). It also studies the cities which are the modern centre of culture, innovation and education. It is in the urban centers where major commercial activities takes place hence the aspect of many offices being located in the urban areas (MacDonald & McMillen, 2007). Urban economics is closely related to the field of real estate and rental properties. Rent is the amount paid by a tenant to a landlord on a rented or leased space. Many theories exist in the field of urban economics and real estate. They are outlined below; The Neighborhood Theory The first theory is based on the housing prices, neighborhood characteristics, and racial segregation. This theory stipulates that the price of an office premise is determined by the characteristics of the neighborhood as well as the characteristics of the house. These neighborhood factors directly influences the patterns of office rent in given urban areas. Neighborhood variable affect the pattern of office rent either positively or in a negative way. These two factors combine to determine the pattern of rent in a given section of an urban area. They include; crime rate in an area, property tax rate, economic strength of the neighborhood, air pollution, accessibility from nearest train/ bus stations, extent of traffic on the street as well as quality of education/ number of institutions of learning (McDonald & McMillen, 2007). This explains the different office rent patterns in an area like Cambridge which is an educational centre and Nottingham. There has been an increase in the quality of office buildings in some sections of urban areas. This results in changes in office rent patterns. Areas with good quality buildings have different office rent patterns with areas with low quality office buildings. The same case applies to areas with different races. There is a tendency for rental patterns to be high in areas populated by the whites, as opposed to areas with a mixture of races (King and Mieszkoski, 1973). This theory explains the difference rental patterns in the London Metropolitan. Areas such as Wimbledon (?30) and Heathrow (?28) with good quality houses have higher rental patterns as compared with those with low quality such as Norwich (?15). Natural Evolution Theory Natural evolution theory is a model which was advanced by Mieszkowski and Mills (1993). They argue that the filtering model provides a primary reason for the movement and relocation of offices in the suburbs. The result is the emergence of suburbs which acts as commercial centers, characterize by high and different office rent patterns, as compared with those located in the inner city. Population increase has created a demand for more buildings to house the many commercial interests in the urban areas. The number of social and other amenities available in urban settings determines the pattern of office rent in a given area. For instance, in an area where there are adequate amenities; there is a likelihood of the office rent being higher. This might be the direct opposite of an urban area with fewer urban amenities, where the rent rates might be lower (McDonald & McMillen, 2007). This connection provides some interesting insights into the quality of life vis a vi the quality of the business environment in various urban areas. The theory explains the disparity in rental patterns between Newcastle (?21)and Sunderland(?13.60). The former has got more and better social amenities as opposed to the latter hence the higher rental rates. The Bid Rent Theory The bird rent theory was formulated in the context of urban land uses and urban land values. It is based on the microeconomic theory where companies make a trade off between the rent of the office, transportation costs and the location of the premises (Fujita, 1989). This results in a convex office rent patterns where there are higher office rents within the central business district. This theory employs the use of the land use scanner to provide a simulation of office rent patterns in urban areas. For instance, based on an analysis of Collier’s UK Office Rent Map, there are high value rates in the urban fringes and low values in small urban areas and outskirts of big cities like London. Small urban areas like Glasgow(17?), Warwick(?17) have low value office rent patterns, as opposed to Edinburgh which has a high pattern of ?27.50. Smith’s Rent Gap Theory Another theory which is used to analyze the difference in office rent pattern is the Smith’s rent gap theory and local real estate dynamics. It applies an urban spatial model of gentrification (Bolchi and Diappi, 2006). It explains the emergence of gentrifying neighborhoods on the basis of the investment spent in renewing large scale projects. These are projects where developers invest in areas with low quality houses on the base of the gap between the actual rent, and the potential rent. This is based on the gap between the rent prior to and after the rehabilitation. The process is sustained though cooperation from other property owners in the neighborhood. They invest in their properties since the rent in the area rises as a result of the improved quality of housing in an area. Major cities and urban areas in Europe and United Kingdom have experienced the gentrification phenomenon with other being left behind. The process involves the redevelopment and revitalization of a central neighborhood. This results in a rise in office rent in the gentrified areas. The process of gentrification affects whole business district and not a single building. Smith’s rent gap theory of 1979 draws a lot from Von Thunen and Alonso’s theories of urban economics. The city has a central business district and a residential ring. The high demand for accessibility to the CBD makes the rent patterns differ from those in areas outside the CBD. For instance, the London rent assumes the form of a cone, with a climax at the core and a moribund gradient on all sides towards the edge (Bolchi and Diappi, 2008). However, according to Smiths’ rental gap theory, this trend is changed by gentrification. The revitalization and redevelopment of neighborhoods presents rent peaks outside the city center. This explains the high rental patterns in area like Crawley with ?23. Theory of Agricultural Land A scholar in the field of urban economics can not complete an analysis without having a look into the mother theory of urban economics. This was a theory forwarded by Von Thuner in 1826. In His theory of agricultural land use, Thuner presents a bid rent function approach which was later extended into an urban context by Alonso (1964). Land is the main focus of urban economic theory. Economically, land is a complex object full of dual characteristics. First, land is a commodity in the usual economic sense. However, it is immobile. Therefore, each piece of land is unique in terms of its geographical location. Business premises are constructed on land, and the factors that influence the price of land affects the patterns of rents in a given urban setting. One of the main factors which affect the office rent pattern is the location of the ground on which the building is located. If a premise is located in a high prime geographical area (such as a central business district like London, a high class suburb like Edinburgh), then the office rent pattern is likely to be on the higher side. On the other hand, if an office premise is situated in a low prime area such as Horrow and Bromkey with as little as 10 pounds, then chances are that the office rent pattern will be on the lower side. Bid rent function as a concept describes a tenant’s ability to pay for rent under a fixed utility level. This is determined by a combination of factors such as accessibility, financial position of the business, the business environment of the neighborhood, and the need for security. AN- Agent Based Land Market theory This is an analysis of the interactions between buyers and seller in the commercial sector of land and office premises. The main good/ commodity which the buyer and the seller deal with are the premise/house. This model is based on Alonso theory of 1964 with relation to office rent and proximity to the Central Business Distract. Each spatial good is characterized by the distance to the CBD. It is also characterized by evenly distributed environmental amenities. People wishing to rent an office premise place their bids depending on the distance to the CBD. The same case applies even to the proprietors as they set the rent for their premises. Preference for commuting constrains brought about by the budgetary estimates and potential market/commercial conditions all play a role in determining the rent pattern within and without a given urban setting. This model embodies the aspect of space. Most CBD offices might not be as spacious as those in the suburbs. However, a spacious office in a CBD is bound to cost more as compared to a similar property in a suburb area. On the same note, the office rent pattern is determined by the utility given under budgetary constraints. The model stipulates that the agents maximize the utility of a house by choosing the optimal location despite the budget constraints. The presence of agents in a certain section of an urban area helps to enhance the flow of information on the presence of real estates for rent. They act as economic agents who in order to be fully informed, there is a need for a thorough market research. This involves search for information which together with time and monetary costs makes transactions involving the agents more costly. The agent aspect in a way contributes to the different office rent patterns inn various urban centers in the UK. For instance, in large and developed urban areas such as London and Edinburgh, there is a heavy presence of house agents. This arguably makes the houses for rent to be more expensive in comparison with areas with little presence of agents. In the same model, demand and supply plays an integral role in determining the office rent pattern. In urban settings where the demand for the office premises is high, there is a high likelihood of the rent value being high. On the other hand, where demand for the office space is relatively low, the office rent tends to be lower as compared to where demand is high. The same case applies to large cities like London. In these large urban areas, the office rent pattern differs to a large extent with smaller urban towns like Glasgow (?17) and Nottingham. Where the urban areas are large, the rent tends to be on the higher side. On the other hand, it tends to be relatively lower in smaller urban areas. Microeconomic theory This theory dwells on the economies of scale which work together to influence the demand and supply of rental offices in a given area (Ball, Lizieri and MacGregor, 1998). For instance, the income level of actual and potential tenants influences their demand for rental spaces. The theory predicts that, an increase in income levels, results in an increase in the willingness to pay the set rent. Therefore, the demand for rental space increases proportionally. The microeconomic theory is intertwined with the microeconomic demand theory which states that an increase in income impacts positively in the buyer’s/tenant’s willingness to pay the set rent (Sloman ,2006). This explains why areas like Edinburg, London, and Cambridge where a majority of the residents are well endowed economically records high rental patterns. An urban area where the residents and investors are economically endowed is most likely to have different rental patterns with its counterpart whose residents have got low income levels. The same theory goes further ands states that the utility derived from a good by the consumer influences the willingness to pay. In theory, it has been established that consumers are willing to pay for a property that confers greater utility. Therefore, a tenant’s willingness to pay higher rent is high in an area with properties that offer higher utility such as the CBD of London. Hence, the area that experiences a higher rental rates like London and Edinburgh have a tendency to avail to the market properties that offer high utility to the tenants. The willingness to pay by the tenant is higher that in urban areas with properties that offer a lower level of utility. Preference for proximity effect is the other factor in microeconomic that influences the office rent pattern in a given urban setting. This aspect resembles utility factor as it is not observable in the real world. Nevertheless, instinct reveals that a higher tenant’s preference for a given property and its attributes results to a higher willingness to pay (Ball, Lizieri and MacGregor, 1998). The high rental price in urban areas provided in a way is influenced by high attributes of the properties which appeal more to the consumers. The willingness of tenants to pay the set rent behaves differently based on the distinctiveness of the properties in the area. For instance, a property which is near a central business district confers high preference to the tenant who needs to be closer to the city centre. The willingness to pay of such a tenant increases as we get closer to the CBD. This means that property owners in area proximate to the CBD can afford to put their rental rates on higher levels as opposed to their counterparts in areas far from the CBD. This best explain the diverse rental office patterns in the London metropolitan. The effect of distance from the London CBD is that rental prices tend to decrease as distance from the CBD increases. This is supported by Alonso in his theory, where he says that both the disutility of commuting and travel expenses increase with distance from the CBD (1964, P 71). Central place theory This is a spatial theory in urban geography which tries to explain the reasons behind the distribution patterns, sizes and number of towns’ ands cities around the world. It provides a good framework in which an urban economist can study the urban scenario in a given country. Its first proponent was a German geographer named Walter Christaller in 1933. The scholar established the economic relationship between cities and their hinterlands. According to the theory, the city is an economic distribution centre. The theory asserts that human beings tend to purchase goods where they are closely and readily available. Therefore, the city offers a closer place for people to buy goods. The result has been an influx of man people into the urban areas. Towns and cities with as high population and economic base tend to exhibit high rental patterns that towns and cities with relatively smaller demographics and economic base (Rosenberg, 2011). The CBD of London has got a well developed economic base as opposed to its suburbs hence the high rental patterns. CONCLUSION There have been many theories advanced in the field of rent and urban economics which tries to explain the different office rent patterns in the urban areas. These theories all point out to the tenants’ willingness to pay a given predetermined rent as the main determinant on the pricing of rental premises. However, though there are other factors, which work side by side with the aspect of a tenants willingness to pay to determine the pricing pattern of a given urban setting. Therefore, it is imperative to analyze these factors together and not in isolation so as to have a comprehensive analysis of the different office rent patterns in the urban setting. REFERENCES Alonso William, 1964. Location and Land Use. Harvard Univ. Press. Anas Alex, 1978. Dynamics of Urban Residential Growth, Journal of Urban Economics. Bolchi, P and Diappi, L 2006, Smith’s Rent Gap Theory and Local Real Estate Dynamics: A Multi-Agent Model. Viewed 6 November 2011, http:www.sciencedirect.com. Briney, A 2011, Central Place Theory: An Overview of Christaller’s Central Place Theory. 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