Summary: The concept of economies of agglomeration, a brief history of the structure of the central business districts and cities adaption to modern-day requirements.
For a business, locating in the CBD has always been essential. Economies of agglomeration are where firms benefit from being clustered together. Two forms of agglomeration are economies of urbanisation and economies of localisation. From localisation, firms benefit from being in close proximity to their competitors, which enables them to access a common workforce and being able to interact more efficiently with their clients. With urbanisation, firms benefit from complementary businesses in their surroundings allowing for a diverse and scale of business operations. Both these economies inevitably lead to a sharing of information, increased sale of comparative goods, and lead to broader access of skilled professionals. And with competition, firms are required to be more creative & innovative whilst needing to increase their productivity.
Below is a clear representation of economies of agglomeration in London. As the graph suggests, the further away from the CBD (Westminster as CBD), the lower the rateable value. This demonstrating the premium tenants are willing to pay to be closer to the centre of the city.
In the 21st century, urbanisation is only increasing and a result businesses are expanding, whilst metropolitan cities and their structures are adapting to these changes. In a simple scenario, there is one CBD where all the main commerce takes place. Such a model is called a monocentric city, a concept established in the 60s. As mentioned, cities are expanding and so are their business districts and with that additional districts are found. In this case, we talk of a polycentric city. A perfect description of a polycentric city is described by the urbanist Alain Bertraud: “As they grow in size, the original monocentric structure of large metropolises tends with time to dissolve progressively into a polycentric structure, The CBD loses its primacy, and clusters of activities generating trips and spreading within the built-up area. Large cities are not born polycentric; they may evolve in that direction”. Take the example of London. Whilst the City has always been the main hub for businesses, the city has seen an increased influence from several other districts such as Canary Wharf, Mayfair, Camden, and most recently Kings Cross. This does not necessarily mean that firms are experiencing fewer benefits of economies of agglomeration, they are merely expanding. This as a result of an increase in urbanisation, better transport facilities and a growing workforce. A more recent influence is digitalisation. Firstly, it allows firms and their employees to be able to work from any location, meaning they would not necessarily need to work from the CBD. This does raise questions such as longer commutes to meet clients and potentially a less attractive proposition to the workforce. To make up for this, firms are required to be innovative and provide a creative workspace if they intend to attract a talented work pool. Flexibility at work is another factor dispersing cities. This again as a result of digitalisation but also as we are experiencing an increase in the co-working environment start-ups. Employees working from home, firms having subsidiaries across the globe, and entrepreneurs being able to work from any coffee shop are only increasing this dispersion.
This dispersion does raise the question of the significance of economies of agglomeration in the future? Whilst they still have major importance in today’s cities, it remains to be seen what role they will play in the cities of the future and how this will affect how urban planners opt to build the cities of the future.
Tags: Real Estate Economics, Real Estate, Cities, Theories, Digitalisation