The Dutch Office Space Tragedy: Unlocking the Lock-in
Planners’ aims to develop sustainable cities often conflict with the priorities of land developers and consumers in the local government’s decision-making arena. In balancing these demands, municipalities often fail to resist development interests, and they change the regulations, in particularly because they themselves compete with their neighbouring authorities for jobs and inhabitants. Although this is explicable from local government’s individual rationality, it often results in suboptimal situations at the regional level. An example is the over-abundance of office space and planned new office capacity in the Amsterdam Metropolitan Area. This can be characterized as a lock-in situation in planning.
The objective of this chapter is to investigate to what extent innovative ways of using law and property rights could contribute to finding solutions for these collective shortcomings, with the Amsterdam Office Space Tragedy as an example. After elaborating on the way the Amsterdam local governments have failed to control land use, I will analyse the set of regulatory decisions that have been proposed to address the problem, for example through the use of transferable development rights. Although this is a variant on planning by property rights, is also has aspects of a more collaborative approach.
Attention will be paid to the regulatory roles of the different levels of Dutch governments in this respect. Further, the challenges which these proposals will pose for the property owners and for the local governments will be discussed. Finally, I will reflect on the question whether law and property rights are the best way to deal with these challenges, or whether other approaches might result in more effective solutions.
Office Development Bubble
During the economic boom in the 1990s and 2000s, an abundance of finance speeded up investments in Dutch urban development. Public and private initiatives in a strong economy pushed for large-scale and high-end office and housing developments. Particularly on the office real estate markets, ‘develop as much as possible’ seemed to be the credo for a long time. Interest rates were low, finance conditions were increasingly relaxed, demand was booming due to high economic growth, investors liked the safe investments in real estate much more than investing in the unstable stock market. As a result, the stock of offices was continuously being enlarged, often stimulated by the governmental bodies involved in development.
In the urban political arena, local governments have always balanced their formal regulatory tasks against their interests in the field of land development and employment growth (cf. Swyngedouw 2005; Downs 2005). Research has shown that, even in good economic times with high growth rates, city governments have not been able to effectively resist developers’ interests, even when they are at odds with the wider public interest of sustainable communities (Peiser 1990; Leo 1997). In more difficult times, when competition for tax-paying households and businesses is increasing, city governments are pushed even further to make urban development decisions which are based on considerations which are political, competitive and financial rather than spatially responsible (see also Peterson 1981). In their pursuit of economic and job growth, city governments always seem to be market-friendly and to follow the developers, and to grant permits for new developments, often relegating statutory norms and procedures to a secondary and subordinated place. In addition, most Dutch local governments also have a financial stake in developing new offices, due to their direct-development strategies.
These direct-development strategies, called active land policies by the Dutch, have been used by many local authorities and they have had a major influence on the process of land development. The municipalities bought and sold land themselves as a means to achieve planning goals, in addition to making plans as the zoning authority. Through this system, Dutch planning could supply affordable land for public goods like social housing for a long time. As municipalities owned almost all land for development, any value increment remained in public hands and was reinvested in the overall quality of urban and regional areas. These development increments, together with the pursuit of job and population growth, have stimulated municipalities to keep using an active development strategy, instead of a more regulatory approach, even after the land market became more market-oriented in the early nineties, when market players also started to buy land for development and speculation. Many municipalities still own vast amounts of land, which they hope to sell to the market for development. Office development generates the highest return on investment in land. This has encouraged the growth of commercial real estate. The risk of active land policy is borne by the public bodies.
Recently, conditions underpinning urban and real estate development have changed. Not only has demand declined due to the economic crisis and changing demographics, and the financial resources have evaporated, but also the focus of the office users has recently shifted towards more sustainable and small-scale developments. As existing vacant office buildings can hardly accommodate these wishes, the tenants often decide to abandon these buildings after their existing rent period has expired, leaving them vacant. There is hardly any demand for reuse, and this increases the vacancy rate in a region. The tenants rent another office, often newly constructed because developers and investors are still eager to develop new commercial real estate, as this still is profitable for them; investors also still see the development of new, sustainable offices with a guaranteed client as an interesting investment object. Therefore, new office development continues, making older offices out-of-date even faster. By now, over 50 per cent of the vacant office stock in the Amsterdam region suffers from structural vacancy. Some locations, for example Diemen-Zuid, face vacancy rates up to 70 per cent by the end of 2011.
The office bubble is often accompanied by a retail bubble, industrial parks bubble and a housing bubble, as a result of past planning decisions based on growth-oriented perspectives. Facing a period of non-growth will challenge urban development enormously. As of now, the cities have hardly responded to this and just continue their existing policies (Janssen-Jansen 2010a; 2010b).
From that perspective, market initiatives for the construction of new offices are often still welcomed by cities, also because the latter increasingly welcome development that is more sustainable than the existing stock. From a more economic perspective, a company’s decision to move to, or stay in, a region is also welcomed and stimulated, as it secures jobs within the municipal boundaries. In this sense, Dutch planning is quite market-oriented. Yet, in most areas it is only possible to develop new office space if this fits the zoning conditions: the area has to be zoned for office development. In Amsterdam and many other cities, an additional regulation exists: the land regulations require that new developments are only possible if the end user (for the first five years) is known. Without an end user, no building permit will be granted. This ‘pre-rent’ regulation applies to all new office development, independently of which actor is the land owner. The zoning plan often has to be adapted before a building permit can be granted. Changing the zoning plan is the responsibility of the municipality. If the zoning plan allows office development, municipalities can still require a known end user before granting a building permit. Since October 2010 an All-in-one Permit for Physical Aspects (omgevingsvergunning) is needed. The permit is covered by the Environmental General Provision Bill (Wet algemene bepalingen omgevingsrecht, Wabo).
With all municipal players in a region focusing on high quality office development in order to increase their local competitiveness and to profit from value increments as a result of their active land strategies, local competition is strong. However, as a result of all these ‘develop as much as possible’ strategies, the competitiveness of the metropolitan region as a whole decreases due to the oversupply of offices. Each actor is motivated to maximize its own ‘use’ of the available demand for office spaces, while the costs of over-exploitation are distributed between all those to whom this demand for office space is available. Here, these include not only the municipalities who decide to build additional offices, but also those who decide against that and also existing office owners (who face devaluation of their properties) and the inhabitants of the region who miss out on other potential land-use amenities and in the case of vacant offices, have to face the site problems.
Currently, about 14 per cent of all Dutch office buildings are vacant: over 7 million square meters (DTZ 2010). The overall office vacancy rate in Amsterdam hit 20 per cent long before the economic crisis (Janssen-Jansen 2010a, 2010b). This vacancy rate is among the highest in Europe (see Figure 10.1). Where 4–8 per cent can still be seen as frictional vacancy, a vacancy rate of 20 per cent indicates a structural problem. As mentioned above, over 50 per cent of the vacant stock suffers from structural vacancy.
Since 2002, the overall vacancy rate has not been below 9 per cent. Many office buildings often outdated and at relatively unattractive locations, are likely to become and remain obsolete. For the international competitiveness of cities, a structural oversupply is harmful (TNO 2009). It worsens the look and image of a city, which directly and indirectly affects the demand for new office space (Van Gool et al. 2007).
Figure 10.1 Office vacancy rates in European cities, Q2-2010
Because the municipal land development strategies mean that the municipalities carry the financial risks of the land development, some municipalities will face severe financial problems in the near future, and even more if they have been overoptimistic in planning and developing industrial parks, retail and housing too. As a consequence, they have an important reason for continuing their ‘develop as much as possible’ strategies because then they will sell their land stocks and thus bring in revenues. Most of the municipalities in the Amsterdam region, but also in other parts of the Netherlands, therefore have included new office capacity in their current plans, despite the high vacancy rates in their areas, thus prolonging the office bubble (Janssen-Jansen, 2010b). They hope to be able to sell land to developers, lessening the burden of interest rates, and they hope that it might stimulate economic development and attract new companies. A classic collective action problem emerges (Ostrom 1990) and a clear lock-in situation. Such a collective action problem is about rational actors who, acting independently and instrumentally, cannot be counted on to commit resources to a common cause (Gordon 2006: 140).
Viewing it from a metropolitan perspective, a kind of ‘tragedy of the commons’1 evolves, as a conflict arises between the use of resources for individual interests and for the common good (Hardin 1968). Not only is the demand for office space by market actors often seen as a kind of resource for development by municipalities, but so is the open space that might be used for office zoning in a region also. And although the open space, at least in the Netherlands, is not freely accessible (as it is always one of the municipalities which has to decide whether or not to use the open space for another development), the total needed space for office development in a metropolitan region is finite. The demand for offices can in regional perspective be seen as a shared resource for development opportunities.
New buildings are being added to the supply, older buildings become redundant. To some extent, new uses in those old buildings will be possible, but in areas with high levels of office vacancies, like in the Netherlands, there is hardly any prospect for these older and less environmentally friendly buildings being used for new offices. From a planning perspective with ambitions for a sustainable urban future, a logical step would be to stimulate redevelopment of those sites. However, transformation and restructuring is a complex process involving many diverse stakeholders and high costs of land acquisition, land rehabilitation and construction. Even with high density plans for housing or offices, the units in redevelopment projects are relatively expensive. With an extremely weak demand in this higher end of the housing and business markets, decreased trust in the stable value of real estate, and the changed behaviour of financial institutions towards business investments and household mortgages, the return on investment in restructuring processes is, as a consequence, very uncertain for developers and investors. This discourages them from starting redevelopment at all. Yields on developing new offices are more certain. As said before, local governments, constantly competing for private investment, find it hard to resist new developments. Yet, at a certain moment, one has to acknowledge the problematic situation.
The Amsterdam Metropolitan Area, suffering from high office vacancy rates, has been searching for solutions to the collective shortcoming of office development in its region. At first, in 2005, the municipalities were concerned with the enormous planned capacity (zoning) for new offices, but more recently attention has shifted to the problem of the vacant offices themselves, reinforced by policy attention at the national level and proposed regulatory decisions to address the problem. Due to demographic developments, and the introduction of more flexible forms of work, it is likely that the structural vacancy will grow, re-emphasizing the need for action.
The next section will elaborate on the way the Amsterdam region is dealing with the office overcapacity. Section three will deal with the proposed regulations and ordinances, for the existing vacant buildings, but also for preventing new situations of overdevelopment. The final section reflects on the question whether the use of law and property rights will result in effective solutions.
Regulating Office Capacity in the Amsterdam Metropolitan Area
Because of its societal impact, office supply is subject to urban planning and local spatial regulation. At the regional level, however there is in the Netherlands hardly any regulation, although relations between businesses, labour, banking and finance (major consumers of offices) are rescaling to regional and even international levels. In the Amsterdam region, this lack of regional office regulation has resulted in an oversupply of offices. In 2006, the vacancy was over two million square meters (23 per cent of the stock). The existing plans indicate that up to 2030, over eight million additional square meters are foreseen. According to estimates of supply and demand, by the end of 2005 sufficient regional office space had been planned for the next 83 years (Van der Plas 2006). According to calculations based on economic growth projections, the demand would be about 3.5 million m2 until 2030. Although it is obvious that this total disregard of the user market for office space is undesirable, it took a number of years before the involved players felt obliged to search for a solution. None of the actors, neither market nor government, suffered from the problem. Until recently, most involved actors regarded the oversupply of office space as a market failure. They argued that the oversupply was a stage in the hog cycle2 and they did not categorize it as a public problem. In their opinion, empty offices were a problem only for their owners, the investors and developers who built them ‘at risk’ anticipating high user demand (Ploeger 2004: 140), not a problem for society as a whole.