Planning systems and property cycles : transitioning to demand-driven spatial investment strategies in Burnaby-Vancouver and Amsterdam

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University of Amsterdam Graduate School of Social Sciences

Planning systems and property cycles:

Transitioning to demand-driven spatial investment strategies in

Burnaby-Vancouver and Amsterdam

August 15th_{, 2014}

Master thesis

Research Master Urban Studies B. van Rossum

Student number: 5624630 Bas.v.rossum1988@gmail.com

Supervisor: Prof. Dr. W.G.M. Salet Second Supervisor: Prof. Dr. T. Hutton (University of British Columbia) Second reader: Dr. F. Savini

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Abstract

Property and economic cycles dominate spatial development trajectories of cities around the world. Periods of rapid, supply-led property development during economic peaks are followed by years of stagnation and oversupply, necessitating actors involved in urban development processes to take a more demand-driven perspective into account. Therefore, the latest financial crisis has had a profound impact on property markets, urban development processes and planning paradigms in many cities around the world. This research sets out to analyze the possibly changing actor constellations driving urban development processes in suburban office locations, under the influence of property cycles and the latest financial crisis. The underlying hypothesis is that public and private actors involved in property development are managing a transition from supply- to demand-driven spatial investment strategies. Specifically, I investigate the roles, responsibilities and coalitions of different types of actors in terms of the organization of the initiative for (re)development and the provision of public services and infrastructure. As such, the study revolves around the interplay between public agencies and private actors and their collective influence on urban form and development in times of economic peaks and troughs. Empirical research concentrates on Burnaby, the municipality adjacent to Vancouver and part of the Vancouver Metropolitan Region and Amsterdam, more specifically the Southeast district.

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1. Introduction

In many cities around the world, the established planning paradigms seem to be in a state of transition, provoked by the financial crisis of 2008 which has severely hit property markets and urban development processes (Feindt, 2010). The crisis has „challenged fundamental assumptions about the role of markets, public policy and planning in the provision of wealth and public goods‟ (Feindt, 2010, pp. 169). This is mainly because of the issues in property markets following from the crisis such as high vacancy rates, oversupply and a (qualitative) mismatch between supply and demand, especially evident on office locations. Cities in the Netherlands are therefore currently experiencing a planning paradigm change from large-scale and supply-driven urban planning practice to a more bottom-up, organic, and demand-led planning approach to urban development and transformation in order to cope with the surrounding uncertainty about city‟s future because of the recession, amongst possible other reasons (Buitelaar et al., 2012; Heurkens, 2009; Janssen-Jansen et al., 2013).

Property cycles dominate the spatiotemporal of cities. During periods of economic growth, a shortage of supply and rising rents will result in rampant property development. When economic downturn sets in, demand for space declines, vacancy spikes, rents fall and property development will be minimal, until recovery starts a new cycle. This predictable pattern of boom-slump-recovery accompanied by the transition from a suppliers market (during booms) to a renters (or buyers) market is evident in cities throughout the world and follows the same time wise path as economic boom periods and recessions (Barras, 1994). Because of the internationalized economy, the global financial crisis unfolding in 2008 has affected the property development trajectory of cities around the world, commencing a period of slump.

Institutional planning frameworks shape the roles and responsibilities of public and private actors in urban development processes. As such, it governs the way neighborhoods and office districts in urban areas take form and what kinds of actor constellations are used to develop real estate and public infrastructure. The impact of the crisis on local property markets is therefore „glocalized‟ through the planning institutional framework. In periods of economic growth, planning strategies and actor constellations are geared towards rapid and often supply-led property development because of high growth expectations, while during recessions future projections are uncertain often resulting in more organic planning strategies to match market

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demand. Public and private actors, their embedded power relations and coalitions between them, can exacerbate the overbuilding of real estate during economic boom periods through overoptimistic growth expectations and speculative development or they can mitigate the impact through more conservative strategies (Janssen-Jansen et al., 2013). In periods of recession local governments, when developers and investors often already have to cope with financial losses, they often have to find new and innovative business models for property development as demand is weak and regularly incentivized. In this research, it is therefore hypothesized that peaks and troughs in property cycles lead to shifts in actor constellations driving urban development processes. I focus herein on the development of suburban office locations which are at the heart of economic growth trajectories of metropolitan regions around the world. The main question guiding the research reads:

How do actor constellations driving area development processes in suburban office locations change in times economic peaks and troughs?

Specifically, I look at roles public and private actors take in regarding the organization of the initiative to (re)development and the provision of public services in urban development processes of suburban office locations, as will be further detailed out in the two subsequent sections. The research encompasses a comparative case-study between suburban office districts in Burnaby, a municipality adjacent to Vancouver that is part of the metropolitan region and an office district in Southeast, one of the largest employment centers in the region.

The relevance and goals of the research stem from gaining a better knowledge of the past and learning lessons for the future in terms of mitigating the impacts of downturns. The impact of the global financial crisis varies across local contexts and a significant cause can lie in the planning institutional framework. It is often perceived that the issues of high vacancy rates and oversupply on office locations are a result of property cycles. This viewpoint however neglects that the institutional planning framework and spatial investment strategies of public and private actors can also be a driving force exacerbating property cycles. A comparative case-study between Vancouver and Amsterdam – two cities with admired planning traditions – might produce valuable lessons for future strategies to urban development and the roles of public and private actors in such processes. Secondly, the research aims to learn innovative

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strategies in responding to declines in property markets. The relevance of the research also stems from the fact that it is timely, as many urban governments are now reinventing themselves and planning paradigms to office development. There are thus two major questions to be asked that underpin the societal relevance: what (possibly) went wrong in the past in terms of the actions of public and private actors that fuelled property cycles. Secondly; what valuable lessons can we learn in both cities in responding to issues brought forward by the crisis?

The structure of the thesis is as follows. In the next theoretical section, I elaborate on the nature of property cycles and explain the causes behind them through the Fischer, diPasquale and Wheaton model, which also explains the relationships between different property markets. I further elaborate the planning institutional framework and relate this to property cycle. In the last two paragraphs of the theoretical section, I introduce two concepts of supply- and demand-driven strategies through which urban development processes can be assessed. In the following methodological section, I introduce the reader to the research design and justify the choices made during the research process, highlighting case-selection and data used. The next two chapters focus on the two case studies of Vancouver and Amsterdam subsequently. In these chapters I first introduce the reader to the economic growth trajectory by assessing property cycles after which I further elaborate on the institutional planning framework in both cities. Then, I focus on the development trajectory of two office districts in both regions, to assess possible transitions in actor constellations in times of boom and slump. An intervening section compares the case-studies. In the conclusion I evaluate the case studies in terms of the concepts introduced in the theoretical section. Also, there is room for discussion and I present some lessons for the future.

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2. Theoretical Framework

The combination of easily accessible capital and a growth mentality of the main actors in urban development during a boom periods in the property cycle led to large-scale urban transformation projects for the past decades in increase the supply of real estate for an emerging demand (Burkhalter & Castells, 2009; Savini, forthcoming). During economic peaks, development is often termed as supply-led as large volume is added to the total stock to absorb the rising demand for office space. The financial crisis has proved to be a turning point switching to new planning strategies, as demand for space has dropped and vacancy rates have spiked. The new planning approach to urban development seems to incorporate small-scale interventions and more end-user involvement, overall relying hands-on end-user demand to guide spatial investment strategies (Buitelaar et al. 2012). This has shifted the actor constellations driving urban development and shaken the traditional roles and responsibilities of public, private and civic actors in planning processes as well as their strategies to spatial investment. The changing interplay between public, private and civic actors in peaks and troughs of real estate cycles will be of primary concern in this comparative case-study between Vancouver and Amsterdam. It is hypothesized that the main driver for possible changes in actor constellations has been the economic downturn, but other structural reasons might also be at play such as the changing demand for office space and the rising challenge of redevelopment projects instead of greenfield development (Buitelaar et al., 2013).

In this theoretical framework of the thesis, I first outline the concept of property cycles and explain the relationships with macroeconomics and financial markets. After that, I put forward a renowned model by DiPasquale, Fischer & Wheaton (1996) which explains property cycles and helps analyzing urban development processes property submarkets, as the property market is not one single market. Then, I introduce what types of actors are generally involved within those property submarkets. Lastly, I put forward a definition of demand- and supply-driven strategies to reflect on the main research theme, to what extent economic crises lead to a transition to more demand-oriented spatial investment strategies in both Canada and the Netherlands.

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9 2.1. Property cycles and financial markets

Economic crises nearly always go hand in hand with collapses of land, real estate and capital markets, as these form the most valuable commodities in today‟s economy. Although real estate cycles may occur without banking crises and banking crises may occur without real estate cycles, the two are correlated in a remarkable number of occasions over a wide variety of national institutional arrangements and markets (Leitner, 1994). Real estate booms often lead to banking busts, because real estate is a fixed supply and cannot be sold shorthand and for the development of real estate, large amounts money are generally required from capital providers. When demand for space is dropping, development projects are put on hold or aborted and owners of commercial real estate do not receive expected rent incomes, they might default on their loans (DiPasquale & Wheaton, 1996). Banks also invest in real estate themselves. That is exactly what happened during the Asian crisis, after which for several years projects did not come off ground due to a lack of demand, oversupply and a lack available finance (Boonchuen & Douglass, 2006). More recently, the global credit crunch of 2008 has been set in motion by a housing bubble in the United States, affecting financial and real estate markets all over the world, through the packaging of high-risk mortgages into residential-mortgage-backed securities (Aalbers, 2009). These relationships between the economy and property markets have been documented by Barras (1994) amongst others and are schematized in figure 1.

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It is widely acknowledged that property cycles dominate the spatiotemporal development of cities from the early 20th

century onwards (See for example: Barras & Ferguson, 1987; Barras, 1994; Harvey, 1978; Kuznets, 1958; Barras, 1994; DiPasquale & Wheaton, 1996; figure 1). Wheaton defines the property cycle as: „a more restrictive definition of a real estate cycle which involves repeated oscillations of a market,

as it continually overshoots and then undershoots its own steady state … real estate cycles are defined as some degree of instability in the market whereby a single economic shock leads the market to oscillate around its steady state for some number of iterations‟ (Wheaton, 1999, pp. 217‐8). This process is further explained in figure 2. The lengths of building cycles tend to differ from peak to peak and authors disagree on explanations for this. The explanations behind property cycles are also debated. Barras & Ferguson (1987) propose that the main reason for swings in development can be found in the demand for commercial real estate space, which are again related to economic cycles. They further argue that periods of over- and undersupply are explained by the lengthy development process of real estate. Others, such as Harvey (1978) and Leitner (1994), moreover seek for explanations in the supply side of real estate: the development industry and capital markets. In Harvey‟s (1978) view, „building cycles are dictated by rhythms of capital accumulation‟ (in: Leitner, 1994; pp. 783). He argues that in times of crises in the primary circuit of industrial production, over accumulation of capital will be redirected to the secondary circuit of capital which is the built environment, including commercial real estate (Harvey, 1978). This process is called capital switching (ibid.). However, others disagree and argue that other factor drive financial capital into real estate (Beitel, 2000). Barras and Ferguson (1987) do account for supply-side variables such as investor finance determining construction activity. However, they argue that these are merely secondary

Fig 2: Property cycles

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exogenous factors reinforcing or dampening market instability. Many authors have argued that excessive overbuilding is also driven by the behavior of banks and the speculative creation of money (Beitel, 2000; Leitner, 1994; Renaud, 2000).

Economic globalization and the internationalization of financial markets have tightly knit urban economic systems and produced a global system of financial architecture, through which capital flows can be allocated in the most productive investment opportunities. Some have argued that this leads to increased market efficiency in the long run (Issing, 2000; Obstfeld, 1994), whereas others have argued that it induces volatility and reduces the stability of national economies (Stiglitz, 2002; Renaud, 2000). To be sure, the increasing dominance of global capital and global actors involved in real estate (banks, investors) has had significant impact on the form and content of contemporary cities through the financing of urban development projects in general, megaprojects and the development other forms of real estate through which global financial actors can make profit (Boonchuen, 2002; Sassen, 2001; Majoor, 2008). Office markets are also prone to international investments as global actors are increasingly investing in internationally diversified portfolios. After a couple of decades of financial deregulation urban development projects are increasingly financed through loans or investments from non-domestic actors or through joint developments (Menshikov, 2005). These new and global investment opportunities combined with low interest rates and waves of optimism during economic boom periods fuel the excessive building periods that increase the volatility of property cycles and heighten its peaks and troughs (Renaud, 2000).

Thus, there are major disputes amongst academics in explaining property cycles. There is disagreement on the degree to which building cycles are endogenously determined within the real estate industry through construction lags for example or influenced by exogenous cyclical economic behavior. Most important for this research is the disagreement whether exogenous economic cycles affect mainly the demand for real estate or the supply of capital for property investment. Leitner (1994) concludes that because of the place-specific regularities and irregularities of construction activity „has to be related not only to demand, but also to supply-side factors which some authors treat as exogenous to the office market. Of particular importance are the supply of capital for real estate and the organizational restructuring of financial institutions and the development industry, which in turn are closely linked to economic and political restructuring‟ (Leitner, 1995, pp. 799), such as processes of financial

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deregulation. Lastly, he states that specific historical, planning-institutional and geographic context are also crucial to urban office market dynamics (ibid). Thus, the impact of the global financial crisis is filtered through national and local institutional (planning) systems, and therefore differs locally (Aalbers, 2009; Sim et al., 2003). Institutions and policies on the local and national levels regulate the actions of economic and social agents and therefore also regulate building activity (Sim et al., 2003).

The above has outlined the relationships between the macro-economy and property cycles, and set out to explain why there are periods of over- and undersupply in the first place. This background information is relevant because in the case studies, I will investigate how actor constellations driving urban development change during the troughs of property cycles. First, however, I will further outline how the property market can be subdivided into different sub-markets and explain their interrelationships, which further explain the inner workings of the property cycle. In paragraph 2.3 I further explain how urban development processes navigate through those same markets to deliver space to end-users, from which point onwards I can introduce the actors operating in those different markets.

2.2. Property markets

For the purpose of this research, I use the influential Fischer, DiPasquale & Wheaton model which is a widely recognized model explaining real estate cycles (Toit & Cloete, 2003 – figure 3). Fischer, DiPasquale & Wheaton argue that urban development projects and the property markets can be seen as a „tightly coupled system,‟ consisting of four sub-markets with different interrelationships. The explanatory model also recognizes that the most immediate influence to building cycles is the macroeconomic situation (For the Netherlands the close relationship between economic growth and the total profits from the office market is shown in figure 3). The FDW Model is a „static, quadrant model that traces the relationships between real estate market and asset market variables, as well as the adjustments that take place to establish equilibrium in the supply of and demand for real estate, founded on the principles of demand and supply modeling‟ (Toit & Cloete, 2003; pp. 3). The authors distinguish three sub-markets: the market for space, the investment market (asset valuation market), and the

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construction/development market. The fourth quadrant cannot be seen as a market because it concerns the supply of real estate, which results from adjustments in the construction market. It can be more profoundly related to the supply-side of the market for space (Buitelaar et al., 2013).

Fig 3: The Fischer, Di Pasquale & Wheaton model

Source: Du Toit & Cloete, 2003; pp. 3

Description of the model usually starts with the first quadrant and moves anti-clockwise to the fourth quadrant, while the urban development process starts in the third quadrant and moves the other way around, as will be shown later. In the first quadrant, supply and demand for real estate get together. The quadrant shows that rising rent prices result in a decline in demand. When the economy is in decline, the quadrant shows that declining demand combined with a lower absorption rate of commercial real estate and increased vacancy rates, is followed by a reduction in rent prices. Moving up to the asset valuation market, the second quadrant shows the positive relationship between rent prices and real estate value/price. In times of economic austerity, rent prices are low which in turn affect real estate value as the value of real estate is calculated through yearly rent prices and the capitalization rate (Daniels,

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1975). The third quadrant shows the urban development market and the positive relationship between real estate prices and real estate development. The better the prices, the more development occurs through processes of profit maximizing. In other words, if the price of real estate is high, developers will eagerly built new commercial real estate because they can sell it for a good price to investors. Finally, a portion of stock is always subject to demolition, withdrawal or new production (Quadrant 4). Adjusted stock finally has effect on the supply of real estate and thus on rent prices again, as shown in quadrant 1. Thus, a building boom occurs when rents are high and there is a limited supply of real estate in the first quadrant, the price for real estate will go up (quadrant 2), stimulating investor interest for real estate because of high expected returns. This will be reflected in the construction market (Quadrant 3). The following oversupply again reduces the rent and slump sets in.

There are two main reasons put forward that explain the so-called lag in building cycles. One is the lengthy development process of real estate, through which the demand for and supply of real estate is always skewed (Buitelaar et al, 2013), while Wheaton (1987) explains this by the slow process of rent adjustment in the first quadrant. In periods of oversupply, suppliers of real estate will not immediately drop rent prices because it affects their profits (Leitner, 1994; Wheaton, 1987). As argued above, the easy availability of (global) capital combined with high expected returns can fuel periods of development and influence this process. Amongst other criticisms, one of the main liabilities is that it does not incorporate institutional aspects (Buitelaar et al., 2013; Du Toit & Cloete, 2003). Local conditions and the planning institutional framework still have a considerable impact on these markets as they influence property development through planning (zoning bylaws), tax systems, financial regulatory frameworks, growth policies and through constituting the actor constellations driving urban development processes, which can be growth-driven. All of these reasons can fuel oversupply.

Now that the relevant markets through which urban development processes can be understood have been outlined, I now turn to the main actors active within those property sub-markets. After that, I introduce the concepts of supply- and demand-driven spatial investment strategies and the supposed role of different types of actors within those.

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15 2.3. Types of actors in property markets

Recently, a comprehensive framework that schematizes the general transactions in urban development projects has been presented, following from the FDW-model (Figure 5). At the end of the day, urban development processes are all about financial transactions: Who invests in what and based on what preliminary assumptions? These preliminary assumptions are supposed to relate to the demand side of the space market. The description in this case starts at the third quadrant where land development takes place, while further moving up to the second and first quadrant. It sketches the processes in the property development of retail and offices in its most general terms, which are also largely applicable to housing development.

Fig 4: Planning processes related to FDW-model

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Figure 4 shows that the first step is often the acquiring of agricultural or urban land by public authorities or private actors, who then service the land in order to sell it to project developers or housing associations for development. Here the municipal government is only involved if she pursues an active public land development strategy by acquiring and servicing land, which in most countries is done by developers. The building contractor develops the property, which will most often be sold to an investor, who will then lease the property out to private individuals. The asset market also shows that investors tend to buy building from each other as investments. Furthermore, the framework highlights the importance of the financial market in all three quadrants through the arrows directed from the „financial market box‟ to the „buyer‟ boxes. These explain the tremendous influence that investment cycles have on property development as they are directed to the main actors involved in urban development, as well as to businesses that form the demand for office space. As has already been argued above, banks and other wealthy institutional players have been the main financiers of real estate development in waves of optimism about economic growth figures, as well as form a major financial obstacle as lender in times of economic decline (Herring & Wachter, 2008). Often, even wealthy institutional investors still opt to attract loan capital if the rent is lower than the annual profit on investment object. This has furthered demand for offices by institutional investors, while real demand of office tenants was not necessarily there (Buitelaar et al., 2013).

Following from this, the main types of actor guiding urban development are outlined below, followed by a short description of their general interest and actions guiding spatial investment strategies. These comprise the main actors in the planning institutional framework. The planning institutional frameworks governs their actions, embeds their power relations and shapes their roles and responsibilities in urban development processes. They are place-specific and therefore will be further detailed out in both case studies.

Public actors

Governments are in most instances subdivided on a three-point scale:

- Local/urban governments. This actor will be of our main interest as local governments are often heavily involved in urban transformation projects.

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- Provincial governments. Provincial governments can also have a stake in area development.

- National government. For the thesis project, provincial and national public governments will not be of prime interest as the focus will be on urban projects that tend to fall under the realm of local authorities. These governments however can be important for setting in motion financial deregulation processes, decentralization and privatization.

The local government in most instances is the actor that is most directly involved in urban development processes, but in some larger projects, higher government layers can also be involved. Downtown and suburban office development have important ramifications for the development of metropolitan regions. They form the building blocks of economic development and help positioning metropolitan regions in the global economy and are therefore important policy components for local and higher level authorities (Leitner, 1994).

In some countries, public authorities are actively involved in land development processes through active public land development strategies (Van der Krabben et al., 2013). Van der Krabben & Jacobs (2013) typify the public land development model as „public comprehensive top-down model.‟ In general, this involves strategic public purchase of land where future urban developments are to be realized, followed by land servicing before being sold or rented out to private sector companies again, who can start developing. In most countries however, local authorities passive in land development processes and leave the acquiring of land for the development of offices and other forms of real estate for the developer or investor. Also, governments can steer development in terms of functions and building heights through the legal system, giving out building permits. Besides this, all layers of the government do have significant influence on urban development processes through urban policies, tax systems and other forms of government involvement. All in all, institutional the planning framework shapes the roles and responsibilities of different types of actors in area development processes and it also regulates the development of real estate. Therefore, it is one of the two independent variables, next to real estate cycles. Through the planning institutional framework, the impact of the crisis on property markets in Vancouver and Amsterdam can be (partially) mitigated (Sim et al., 2003; Janssen-Jansen et al., 2012).

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In recent years, the institutional approach, which recognizes the influence of political, legal and social institutions in determining a city‟s competitive position, has gained importance (Sim et al., 2003). Neo-liberalization, privatization and deregulation, widely spread processes throughout the world, have led to an era that is „increasingly framed in a common language of competitiveness, flexibility, efficiency, state entrepreneurship, partnership and collaborative advantage‟ (Swyngedouw, 2003, p. 29). In their seminal article, Swyngedouw, Moulaert & Rodriquez (2003) argue that neo-liberalization has led to what they term new economic policy and new urban policy can lead to increasing state intervention to position their cities in the global economy (figure 5). Although this is in the context of large-scale development projects (or flagship projects) in Europe, state intervention in the development of suburban office clusters, which are also crucial to the development of metropolitan regions, is applicable to the central research topic, as these processes have led to two important ramifications according to Majoor (2008; pp. 33-34):

“The greater role of local politics and institutions in staging pro-active development strategies: a shift to a business friendly „entrepreneurial city‟, (2) the cutting of traditional channels of democratic accountability and the rise of flexible (and often opaque) modes of governance, often by public/private governing „bodies‟ which, in the case of large-scale development projects, means the primacy of experts, technical, social and economic elites in a highly exclusionary form of governance far away from public scrutiny.”

Aside the business-led logic in assessing complex social, economic and environmental problems, the neoliberal turn impacts land-use planning as it „views intervention in the form of land use planning regulations as intervention that inhibits investment and development, crowds out the private sector and creates uncertain costs and delays for the real estate process‟ (Janssen-Jansen et al., 2013, pp. 19). It is even argued that neoliberalism leads the planning system to be a service to property owners and developers (Feindt, 2010; Lovering, 2010).

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19 Fig 5: Relationships New economic- and urban policy and urban development projects

Source: Swyngedouw et al., 2003, pp. 553

Private actors

The private actor category consists of, amongst others, two core actors in urban development: private developers and investors/owners. Developers are, as the name implies, in most instances responsible for the development of new property or the redevelopment of existing property. Often, they also acquire land. Investors typically invest in real estate to ensure long-term cash flows through rent deposits of tenants. In most cases, unless when developers want to keep their property or real estate is owned by public authorities, investors are the owners of real estate.

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There are different types of investors. They include banks, institutional investors such as insurance companies and pension funds who manage large sums of investment capital, private investment companies and other organizations that invest in real estate. There are also the Real Estate Investment Trusts: investment companies that invest in real estate using the shares of other investors. Insurance companies can buy shares into those companies. Banks tend to lend money for the development of real estate, and investors can also lend money from banks to acquire real estate. Typically, pension funds and other investors have deep pockets divided up into a diversified portfolio. They largely build their decision on acquiring property or developing property on already acquired land based on their type and amount of funding available (equity vs. debt), their position (investor, property manager or others), macroeconomic conditions, the other investments (stock etc.) they have and the performance of other investment markets as well as long term outlooks (Aderneck & Garnett, 2013; Leitner, 1994; interviewee A, 2014). The final decision to invest in real estate is based on the net rents to be expected each year and the total value of real estate, minus the costs of property (Leitner, 1994). Owners of buildings, such as big pension funds, tend to have a large and diversified portfolio of real estate assets and high vacancy rates in a few of their buildings might not hit them as hard. Investment properties are often managed by property managers and real estate brokerage companies, who take care of tenants and good exploitation of the property for owners.

Developers are in most cases the initiator of office development, having a close relationship with investors and lenders. The general characteristics of the developer are that he invests in urban projects, calculating these through risk and income measurements, and uses his knowledge of the demand for space and creativity to build real estate projects, guiding the project management process himself. As such, the developer operates mainly in the construction market, to sell his property in the asset market in most cases, unless he wants to keep his development as an income-producing asset. The decision to acquire land for (commercial) real estate development is largely based on the office market and tenancy interests, proximity to regional and business centers, land availability, surrounding uses and amenities and accessibility by car and public transport (Aderneck & Garnett, 2013). Developers generally acquire land and go through zoning and permitting processes, backed by the financial security of investors. Pre-leasing commitments are often done before development is initiated. Speculative development occurs when pre-leasing commitments are not arranged, often fuelling oversupply when the economy stagnates. After realization, office buildings are generally sold to

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institutional and private investors as an income-producing asset. Therefore, developers have to bear in mind to types of demand: most notably office space market demand, but also the demand for income-producing assets from investors on the asset market, which has already been put forward in figure 4. Some developers wish to keep property as an income-producing asset.

Other private actors that can be involved in urban development processes include constructing companies, real estate consultancy companies, (semi-public) housing associations, architects and other market actors involved in urban development processes. Except for housing associations, these actors often take no initiating role in urban development, but are rather consulted by either developers or investors: architects cooperate with developers for the design of buildings, whereas real estate consultancy companies often deal with tenancy of buildings owned by investors or advise investors where to acquire property.

Civic / end-users

Under the last category end-users of urban districts are bundled. This category thus concerns the demand-side of the space market in the Fischer, DiPasquale & Wheaton model as well as end-users that are not office tenants. End-users can be companies renting space, hotels, non-governmental organizations, housing tenants etc. Demand for space generally derives from local economic conditions including housing and office markets, is culturally dependent and includes non-material components related to specific demands, such as valued public spaces (Savini et al., 2014). In the case of office markets, trends such as working at home and collaborative office spaces should be increasingly considered (Aderneck & Garnett, 2013). Above all, this category values quality of the environment they live in, work in, or visit.

In this category, owner-occupiers are also included as these are end-users of any given district. Thus, an investor can fall under this category if it occupies and owns the same building. For this category and the purpose of this research, it will be particularly important to investigate the interest of office tenants specifically, among the other end-users of areas.

In the analysis of both cases, I will take a closer examination of the nature, roles and responsibilities of the four main types of actors in urban development processes in both cities,

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as these are context-depended through institutional arrangements in the planning set-up. The remainder of this theoretical chapter will further explain the concepts of supply- and demand-driven spatial investment strategies. The goal of the above section has been to outline the context in which the main types of actors act when it comes to area development, the financial interrelationships between them and to show the important relationships between economy and real estate development, which is crucial in understanding the two main concepts guiding the thesis.

2.4 Supply-driven spatial investment strategies

For a large part over the course of the past decades and in a wide variety of cities, large-scale development projects and office clusters have been built through a supply-oriented attitude towards urban development, which has come to an abrupt end since the global downturn of 2008 (Savini et al., 2014; Vulpenhorst, 2009; Feindt, 2010). Spatial investment strategies can be considered supply-driven when investments from both public and private actors are mobilized to increase the supply of a particular form of real estate or urban space for an expected demand. Often these investments are primarily legitimated to fulfill the interests and desires of the supplier(s). For developers of real estate (developers and investors), these interests are often to keep developments costs low while maximizing its value in order to sell. For investors, this is to maximize its use as an income-producing asset and look at the marketability. Decisions to invest in space are based on risk-and-income calculations, maximizing the yields of investments. Supply-led development is often large-scale and focused around increasing land values, often looking at urban development as an investment (Savini et al., 2014; Vulpenhorst, 2009).

Supply-driven development generally concerns large-scale interventions in space that often involves standardization in terms of programming and aesthetics, to reduce the costs for suppliers (Savini et al., 2014). The focus herein lies more in quantity than in providing quality to end-users (Feindt, 2010). Investments are moreover quantified in terms of financial gains to its initiators and less attention is paid to providing more social goals such as providing a quality public environment and including end-users interior and exterior design wishes (Savini et al., 2014; Raco & Street, 2012).

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23 In times of rapid economic development investors, developers and other financiers want to invest in as much income-producing assets and loans as possible to gain more income (Buitelaar et al., 2012; Vulpenhorst, 2009. Investment decisions are driven by demographic, economic and other macro growth expectations, sometimes fuelled by local governments through optimistic growth scenarios and policies and a neoliberal agenda (Aalbers, 2013; Swyngedouw et al., 2002). Lovering (2010) argues that the neoliberal turn and the resulting institutional structure of planning and systems of governance in many cities around the world has increasingly geared to what he terms „developer-oriented opportunity-driven strategies,‟ benefiting the developers and property owners mainly in the field of urban development (2010, pp. 240-241). Through active land development strategies (see paragraph 2.3) real estate development can be further fuelled. “Along this logic, both land-use planning and strategic planning are instrumental in managing the prices of land, manipulating earnings, and strategically governing the urban land market to control both public and private investment returns” (Savini et al., 2014, p. 12). Planning processes for large-scale development are an extensive collaboration process between investors (banks, pension funds and other lenders), developers, construction companies, representatives of public authorities and other experts in the field (architects, real estate consultants, and other knowledgeable experts). End-users, the demand side of the space market, are not so involved in decision-making processes, relying on the public and private development expertise to meet their interests. This is more often the case in times of rapid economic development, when these kinds of actors recognize the market opportunity to make profits out of a pretended continuous increase in demand for space (Beitel, 2000).

In such a „can‟t fail‟ atmosphere, plentiful rapid return projects are developed with high expected returns but investors/developers can be thoroughly disappointed when economic slump sets in and the expected demand for space is not met. Speculative development goes hand in hand here. Financial agencies/lenders are also often very much willing to jump the boat by giving out easy loans easily during these boom times. Projects can be fully financed through lenders (Vulpenhorst, 2009). Characteristically, these speculative developments are built in peripheral locations where tracts of land are still available (Baerwald, 1978; Buitelaar et al., 2013).

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24 There is also a „hidden‟ demand for, often commercial, supply of buildings which is not related to office space demand. It is produced by the asset market. Pension funds, insurance companies and other big investment companies in real estate are often willing to put away money as a long-term investment in income-producing assets, but these do not necessarily have to relate to hands-on demand for (commercial) space (Buitelaar et al., 2013). These companies put away money to ensure a long-term investment capability. As such, investors can also take an active role in the urban development process by pushing on real estate objects for which there is no demand. The initiative then originates in the asset market and oversupply can be fuelled. In a different role, investors can buy up land to be developed upon by developers, financed by the investor (Baerwald, 1978). In any case, speculative and supply-driven development is on the lure when pre-leasing commitments are not arranged and development takes place in times of economic surge, anticipating on emerging demand.

All in all, supply-driven spatial investment strategies tend to originate in the construction and/or the asset market, and are based on the growth of demand for office space in the space market. Supply driven spatial investment strategies are often characterized by some or all of the following characteristics:

- The increase of supply of space for an expected demand (sometimes involving speculative development).

- Rapid development processes in economic boom times, often involving standardization of projects to gain maximum profits. Little care is often put in providing a neat public environment, as demand for space seems warranted. Development that maximizes the value of real estate objects as an income-producing asset while minimizing costs of development.

- Facilitated by an entrepreneurial and pro-active local authority. Attracting business is of crucial importance for the economic well-being of cities and can therefore lead some local governments investing large sums of money in facilitating office development, the supply-side of the market. Municipalities can also be financially involved through active public land development strategies. Also, municipalities tend to overoptimistically frame growth expectations to fuel spatial investments from private actors.

- Little end-user involvement and not directly initiated by end-users (businesses and individuals).

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25 - Investments in urban space are largely financed by easily accessible capital from banks,

investors and other financial institutions.

- The organization of the initiative in supply-driven structures often rests primarily on the developer, who holds relationships with municipality, investor, financiers and tenants separate, thus keeping relationships with actors in the three sub-markets apart. Development is not necessarily initiated from the perspective of the end-user, but from the perspective of developer and sometimes investors and banks, who wish to put away money as a long-term investment. Developers can develop real estate from a more short-term perspective, realizing the property and selling it to an investor, not necessarily having to look at it again. In supply-driven spatial investment strategies, financial arrangements are more often done before demand is assessed, as banks, investors and other financiers are willing to invest in real estate because of the high expected returns. As such, these developments are often largely or fully financed by easily accessible capital from banks or other lenders. The funding for projects is therefore moreover based loan capital. The risks under these conditions are often higher (possibility that expected demand will not be met) but the expected returns are also (because of high rents) high.

- With the focus on increasing the supply of real estate and maximizing the returns on investments in economic boom times, development processes in suburban locations can become hasty and sloppy in terms of providing a quality public urban environment. Over the long-term, this can result in a withering out of office space demand, with tenants opting for locations that do provide better quality pedestrian spaces, greenery and other facilities. Especially when the economic tide is turning and the market is shifting from supply- to demand-driven, vacancy rates can increase in those areas that have paid little attention to end-users interest in the past. Local governments have the challenging responsibility in warranting the public interest through policy plans and collaborations with the private sector. Investors have a considerable interest in valued public facilities and space to ensure long-term incomes, whereas developers have a shorter term perspective when it comes to large investments in public space, as long as they can sell their property to investors. An interesting question here is who finances investments in public space, which is largely dependent on the institutional planning context.

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26 The last two bullet points, which I will term as the organization of the initiative and the provision of public services respectively, will be the primary focus in assessing supply- and demand-driven spatial investment strategies in both Vancouver and Amsterdam. In the methodology section (3.1) I will further elaborate on the organization of the initiative and the provision of public services and introduce two underlying hypothesis. First, I turn to the nature of demand-driven spatial investment strategies.

2.5 Demand-driven spatial investment strategies

In many cities, a planning paradigm change is emerging to more organic, demand-led urban development approaches (Burkhalter & Castells, 2009; Vulpenhorst, 2009; Feindt, 2010), in responding to the decline in property markets and the decreasing long-term growth projections. As a result, decisions to invest in space are moreover based on hands-on demand instead of anonymous end-users and optimistic growth scenarios. Demand-driven development is moreover characterized by spontaneous interventions, temporary activities, grass-roots initiatives and an overall step-by-step approach to urban development, in coping with the surrounding uncertainty about the future. Urban planning processes are more interactive, contextual, organic and consensus based (Savini, 2013). According to Savini, Salet & Majoor (2014, p. 12) „a demand-led logic radically reverses the supply chain of urban production. It proposes solutions that shift attention towards the existent and variegated local demands to incentivize urban transformation rather than perpetuating supply-led strategies to re-boost supply through cost-reduction. It means approaching planning as a practice oriented to grasp and mobilize locally generated demand for development before establishing financial arrangements. It involves a policy of attendance, invitation and mobilization of local questions, and a planning attitude highly differentiated and responsive to individual needs.‟ The financing of spatial investment can also be moreover done by end-users. End-users moreover function as the commissioner of a particular project. Straub (2012) argues that the pivot for demand-driven development is that property development and the designing process is done together with

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27 private individuals instead of for them. Thus, it is more a process of co-creation of the urban environment.

This, however, is not fully acknowledged by the author. Especially in terms of in office markets, which is done mostly in the form of a multi-tenant office buildings, office development is inherently to some extent speculative (Daniels, 1975). It cannot always be a full process of co-creation, with end-users functioning as the commissioner. Office tenants are inherently mobile as there worker base can grow or shrink, necessitating them to go for five or ten year tenancy agreements with owners. Commercial real estate markets are inherently renters markets as tenants have to be mobile. Office development therefore always requires somewhat of an entrepreneurial mentality by its initiators, involving complex risk and income calculations. What can be said in terms of commercial markets, is that demand-driven spatial investment strategies do however seem to be better phased out to match market demand. In developing multiple office buildings on a large site, developers or landowners can develop building by building.

Demand-driven development also seems to pays stronger homage to the public environment and social and environmental goals. It is not so much focused on maximizing the financial gains, but on providing spatial quality and social cohesion, both harder to quantify (Savini, et al. 2014). Raco & Street (2012, pp. 1083) acknowledge that: „recession has also brought to the fore greater recognition of the importance of „softer‟ elements in urban development planning, such as the building of new parks, greater environmental protection, heritage planning and the construction of more accessible built environments. During eras of rampant property development, little interest was taken in the quality of the urban environments that were being rolled out.” It was more about providing quality over quantity (Feindt, 2010). A long-term perspective on the use of the area and object buildings is also moreover taken into account by owners (Interviews 4, 5, K, 2014). For office buildings and districts, this can be done through investments in coffee-corners, fitness center, environmental performance and revitalization of the public environment. These demand-driven investments are done from and end-user perspective, namely to enhance the quality of the location to attract new tenancy. It also mitigates the impact of crisis as tenants feel more attached to the area, resulting in lower vacancy rates as they will not leave.

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28 Because of the recession, public and private actors have little leverage to invest in urban space or lend money out to developers. For investors, investment decisions are moreover based on the dynamics of the space market: investors tend to acquire only the office properties that they know there will be long-term demand for, for example on locations close to public transport nodes (Uittenbogaard & Veldman, 2013; Vulpenhorst, 2009; Interview 6, 2014). Investors take in a more risk-averse stance allocating their real estate investments. Investors therefore have a stronger position in the organization of the initiative and development is moreover driven by financiers and investors. Developers have to legitimate demand for their initiative and ensure long-term net incomes. Also, owner of buildings with high vacancy rates tend to take more initiative in either starting a redevelopment process to a different function or investing in public facilities of the building or around it to attract new tenants. Overall, investors and/or landowners have a more prominent and powerful position in area development processes, although they often tend to have little financial leverage.

Although the concept of demand-driven spatial investment strategies is relatively young and still in state, both academically and on the ground, it can be argued that demand-driven spatial investment strategies have at least one or more of the following characteristics (Again, the last two points will be of primary focus in assessing both case-studies):

- Investments are moreover driven by hands-on demand or local office market space demand as the economy is in a recession and there is more uncertainty about the future of districts.

- End-users are involved in planning and designing process through co-creation or bottom-up initiatives or through more extensive collaborations between developer and end-users to better encapsulate end-user interests.

- Small-scale interventions through organic, step-by-step and spontaneous process

- A passive or invitational government waiting for market action and maximizing the yield of small-scale public investments (for example through small-scale investments in public infrastructure to stimulate market activity.

- Investments in urban space are moreover financed from either end-users, landlords or through private equity.

- The organization of the initiative is different from supply-driven spatial investment strategies. Capital is not easily accessible as investors and lenders are recovering from

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29 the crisis and are not willing to invest or lend in risky projects. Spatial investments are moreover financed from private equity capital. Development overall is moreover initiated from the market for space. When this demand has been found, the search for finances is started. The developer still has a leading role, but he moreover has to combine the interests of tenants, lenders and buyers (investor) to realize a solid and sustainable bid that adds to the city and to the buying investor over the longer term. The development of real estate projects is on the one hand moreover steered by hands-on market demand and hands-on the other hand financiers. Developers have to find new and innovative ways to bridge these gaps and are thus looking for new (often public-private) alliances (Nozeman, 2011). In demand-driven structures the thee sub-markets of the property market (asset, space and construction market) are brought closer together by the developer, who needs to find new and innovative ways to bridge the obstacles of a lack of available finance and shrinking demand for space resulting in more choices for the tenants.

- A stronger focus on enhancing the social and environmental use of space and the provision of public services. Spatial investment strategies can be termed more demand-driven if the initiators of development pay more attention to providing a quality public environment and other public services. Inherently, this is collaboration between the conditioning local authority and the development industry, depending largely on the institutional planning context in terms of who pays for what. Owners of existing office buildings can also upgrade public facilities or the surrounding public environment to increase the attractiveness of an area.

Savini, Salet & Majoor (2014) propose to think of demand- and supply driven spatial investment strategies as a dilemma entailing the paradoxical reality in mobilizing finance for urban transformation: “On one hand is the need to mobilize urban production to address emerging demands; on the other is the desire for self-produced space, tailored to contextual demand and development needs” (2014, pp. 14).

In evaluating the new dilemmas actors involved in real estate development are facing, Vulpenhorst (In: Uittenbogaard & Veldman, 2013) proposes that in the context of the Netherlands a new more demand-led business model is emerging. Real estate development processes used to go from link to link, as proposed through the edited FDW-model. Large-scale

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30 development was fuelled by unlimited availability of capital, land and scarcity and end-users were only anonymous buyers in development processes. The global financial crisis has put to this to an end and a new more demand-led business model is emerging, in which end-users are more involved in urban development processes. The characteristics of the old and new business model exemplify some of the dilemmas that stakeholders in urban development are facing here and I present them here as a concluding statement sketching the dilemma between supply- and demand-driven development (table 1), though I do not acknowledge that all of these characteristics fully fit the bill of either supply- or demand-driven spatial investment strategies in any given city. I will focus on the interplay between public, private and end-users in the provision of public services and the organization of the initiative in these two proposed models.

Table 1: Old and new business models in urban development

Old business model (1945-2010): Blindfolded

New business model 2010-??: Co-producer

Land Knowledge

Creating large volumes Small steps

Anonymous market Known clients

Anonymous buildings Personalized buildings

Immobile building Flexible building structures

Standardization with variations in detail Custom-made from models and standards

Scarcity Freedom of choice (for end-users)

One-time transactions Longstanding client relationships

Large-scale and ambitious Small-scale

Focus on creating large districts Step-by-step

Complex process, tightly coupled system Straightforward process, loosely coupled system

New development Transformation and redevelopment

Indirect financing by banks and investors Direct financing by end-users and tenants Start at 70% pre-leasing commitments Smaller units, series of one-by-one

Government supports supply side Government supports demand side Power and creation for suppliers Co-creation with end-users and tenants. Source: Vulpenhorst in: Uittenbogaard & Veldman, 2013, pp. 153

2.6. Summary and conceptual framework

Property cycles, focusing on the moments of peaks and crises, are taken as a starting point for this thesis. The latest financial crisis has had significant impact on property markets and

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property development, resulting in an oversupply of office space in most developed cities around the world and has left a large footprint on the budgets of actors involved in urban development processes. This overarching problem has required actors involved in the development of real estate to shift to more demand-driven strategies to spatial investment. Supply-driven spatial investment strategies are therefore identified with times of rapid economic development, whereas demand-driven spatial investment strategies are required during the troughs of economic and real estate cycles, when there is no scarcity of buildings and tenants have more freedom of choice. Specifically I focus on the financial crisis of 2008. I will investigate primarily how this transition leads to possibly changing actor constellations. Herein, I focus on the attitudes, coalitions and financing in the organization of the initiative and provision of public services. I analyze from which type of actors they come, what alliances they form, and which types of actors invest in space including public infrastructure. In doing so, two cases have been selected, one in Amsterdam and one in Vancouver. The cases that have been selected concern suburban office locations that have originally been set up as office and business districts in times of economic prosperity.

Table 2: Recap; characteristics supply- and demand-driven strategies

Supply-driven spatial investment strategies Demand-driven spatial investment strategies

The increase of supply of space for an expected demand

Investments are driven by hands-on demand or local office market space demand

Rapid development processes in economic boom periods, often involving the same development formula to maximize the yields for suppliers

Organic, step-by-step and spontaneous urban transformation processes with small-scale interventions and diverse physical structures. Facilitated by an entrepreneurial and

pro-active local authority

„Invitational‟ local government stimulating market or civic initiative

Little end-users involvement in development and decision-making processes

End-users that are more integrated into development and decision-making processes, possibly as a commissioner for development Financed by easily accessible capital from

banks, investors and financial institutions

Financed by end-user or from private or from private equity

Organization of initiative rests primarily on developer

Initiative depends on hands-on demand by end-user and financiers (or financed through private equity)

Provision of public services sloppy Good provision of public services

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32 Resulting from the theoretical overview introduced above, the following conceptual framework best reflects the research setup. The peaks and troughs of property cycles, with a particular focus on the most recent global financial crisis are taken as independent variable. These have an impact on the actors involved in real estate development (most notably financially), office locations (changing demand, absorption and vacancy), and actor constellations, possible changing in times of economic peaks and troughs. The planning institutional framework is taken as the second independent variable as it shapes the general roles and responsibilities of involved actors as well as the conditions under which real estate development can take place. As argued above, these two independent variables also influence each other as the planning institutional framework „glocalizes‟ the impact of property cycles and vice versa. The through-put variable is considered to be the organization of the initiative and the provision of public services in terms of supply- and demand-driven strategies. The dependent variable are the actor constellations in peaks and troughs. Overall, all of these variables physically result in the (re)development of suburban office locations. The main variables however are the institutional planning framework (X1), economic peaks and troughs, considered to be ante and post global financial crisis (X2), and the actor constellations in peak (Y1) and trough (Y2), measured in terms of the attitudes, coalitions and financing of the initiative and public services. As argued above, the planning framework can also have an impact on the height and depth of real estate cycles. The planning framework also has considerable influence on office locations through the processes described above. The role and responsibilities of the government for instance can strongly impact the physical characteristics of office districts through design regulations, zoning and the design of the public environment.

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33 Fig 6: Conceptual framework

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34

3. Methodology

In this methodological section, I will outline the research setup in four paragraphs, explaining the choices made during the research process and giving the thesis a scientific base. In the first section, the main research question is introduced, followed by four sub-questions that structure the investigation of both cases in Amsterdam and Vancouver. The sub-questions built up to answering the main research question. The last two sub-questions about the organization of the initiative and the provision of public services are accompanied by two guiding hypotheses. The next section elaborates on the research design. The research goals are also introduced in this paragraph. The third section outlines on what grounds the cases have been chosen and why these two cases are suitable to compare, referring back to the main research question. In the fourth section, I introduce the data and analyzing methods used. A final note is made to tackle some of the limitations of the research.

3.1. Research questions and hypotheses

The overarching research question reads:

How do actor constellations driving urban development processes in suburban office locations change in times economic peaks and troughs?

A number of terms in the research questions need some clarification. Actor constellations refer to types of actors and the relationships between public (local government), private (developer and investors), and civic (end-users and organizations representing end-users) driving urban development processes. The position and role and responsibilities they take in urban development processes are largely institutionalized through the institutional planning framework and further bounded further bound historically, culturally and legally. Suburban office locations are areas outside the city center or main business center. With economic peaks and troughs I refer back to the economic and property cycles introduced in the theoretical framework. In terms of changing actor constellations after an economic recession, I will focus on the latest financial crisis of 2008, because it has proven to be easier finding data and

Planning systems and property cycles : transitioning to demand-driven spatial investment strategies in Burnaby-Vancouver and Amsterdam