UNDERSTANDING THE DUTCH MARKET FOR INDUSTRIAL AREAS

with System Dynamics Modeling

ERES conference

Eindhoven 2011

Session: Market Research, Analysis and Forecasting

Erik Blokhuis

Eindhoven University of Technology

e.g.j.blokhuis@tue.nl

GENERAL

• Dutch policy on industrial areas is fully aimed at:– attracting companies

– stimulating local economy

– creating employment

• From these perspectives, the Dutch policy is very successful– 32% of total employment

– 35% of added value in NL is created on industrial areas

– annual yield: € 1.7 million / hectare

– distributive effect on employment

GENERAL

• Supply of space for industrial activities is important factor for Dutch economy

• This economic relevance influences the planning and realization of industrial areas– large governmental influence (80% of supply of building land)– availability of large stocks of immediately grantable land– strong connection to wishes and demands of companies

• legal certainty, good accessibility, flexibility, sufficient space, low costs

PLANNING APPROACH1. ESTIMATION OF DEMAND

Estimate level of regional demand (municipality /

province)

Determine future supply in terms of

existing plans (municipality)

Select new locations based on planning task

(municipality)

2. PLAN DEVELOPMENT

Update land-use plans for the selected new

locations (municipality)

Try to buy up all of the necessary land (municipality)

Prepare the land for granting (municipality)

3. CONSTRUCTION

Sell the land plots to individual companies

(municipality)

Build a suitable accommodation on the

site (company)

Arrange servicing: roads, sewer, water,

power (municipality)

Planning task

Completion

Fixed land-use plans

4. MANAGEMENT & MAINTENANCE

Manage/maintain buildings and private spaces (companies)

Manage/maintain public spaces, infrastructure (municipality)

PLANNING APPROACH

• Three main steps in planning process:– estimating the level of regional demand (business location monitor)– determining the future supply of industrial areas (existing plans)– selecting new locations

• Actors’ influence– municipalities have control over supply of industrial land– companies find industrial areas attractive, because of low land

prices, legal certainty, and possibilities to buy more land than necessary

– investors are almost absent, because of low gaining capacity, low rent level, high sale risks

NEGATIVE CONSEQUENCES

• Large supply of new industrial area land plots

• Low land prices

• Low occupancy rates and rapid deterioration of existing areas

• Stagnating redevelopment processes

NEGATIVE CONSEQUENCES

• Large supply of new industrial area land plots– 50% of construction land is reserved for industrial activities, while

industry covers less than 20% of the currently built-up land

• Causes:– lack of realism in demand estimations– municipalities choose development in stead of redevelopment– mutual competition between municipalities in attracting

companies

NEGATIVE CONSEQUENCES

• Low land prices– Land prices for residential areas are 3-4 times higher

Related problems: inefficient land use, low investor involvement, low attention for maintenance, …

NEGATIVE CONSEQUENCES

• Low occupancy rates and rapid deterioration of existing areas– Redevelopment task:

NEGATIVE CONSEQUENCES

• Stagnating redevelopment processes– Lower line represents finished redevelopment projects

INTERVENTIONS

• Government recognized problematic situation, and proposes five interventions:

– employment of the so-called SER tool– introduction of park management– reservation of 400 million Euros to accelerate the redevelopment

of deteriorated areas until 2013, aiming to redevelop 6.500 ha– stimulation of regional cooperation, which should result in a

competitive and sustainably managed stock of industrial areas– increasing involvement of professional real estate parties in the

industrial area market

SYSTEM DYNAMICS MODEL

• Most of these interventions will not have an optimal effect because the Dutch market for industrial areas functions as a complex system

– governing interventions will only be successful when the underlying processes support them

– using System Dynamics (SD) to model the market for industrial areas as a system

– SD deals with internal feedback loops that affect the behavior of the system (more realistic), and can comprise a high number of soft, hard-to-quantify factors besides numerical data

– now: only causal loop diagram. In the future, a stock and flow diagram will be constructed

– eventually, we want to identify leverage points in the system, in order to recommend on most effective intervention measures

Share of New Areas inMeeting Spatial Demand

Utilization onExisting Areas

Occupancy onNew Areas

Spatial Demand forIndustrial Areas

+ -

-+

Quality of ExistingAreas

Inter-MunicipalCompetition

+

Land Prices NewAreas

-

Real Estate CostsNew Areas

+

Potential of Achieving AddedValue through Redevelopment

(when necessary)Complexity of

Redevelopment Task

-

-

+

Attitude: Industrial Areas /Activities Stimulate Local

Economy

Necessity forRedevelopment

+

-

Value of ExistingAreas

+

demandand supply

(+)

RedevelopmentCosts

-

Execution ofRedevelopment Task

-Stocks ofPrepared Sites

+

Yield of extra spacethrough redevelopment

+

Overestimation inDemand Calculations

+

Interest Charges

+

Investments in Quality andMaintenance Existing Areas

(Mun)

Recovery TimeProduction Costs (Mun)-

-

+

++

Added Value for MunicipalLand Company (agriculture ->

industry)

++ profitability for

municipalities(+)

competitionbetween newand existingareas (+)

Growth of thestock

Uniformity ofbuilding stock

Market value of thebuilding stock

Circulation

+

+

+

-+

Profitability ofindustrial area real

estate

+

Role of professionalreal estate companies

++

+

+

area valueand

profitability(+)

External processguidance

+

Attention for realestate maintenance

+

Depreciation ofbuildings

-

-

Economicdevelopment

Employment

+

valuepotential ofredevelopment (+)

+

+

Park management

++

municipalcompetition

(+)land and

RE prices(+)

RESULTS

• Remarkably, this causal loop diagram lacks negative feedback (or viability) loops– These keep systems working everlastingly– Domination of reinforcing loops will result in an unstable system and

oversupply of stocks (the case in the current market for IA)

• Leverage points:– Demand calculation– Share of new areas in meeting demand– Land prices– Value of existing areas– Municipal competition– Role of professional real estate companies

RECOMMENDATIONS

• Short term:– Improving demand calculation method– Obliging municipalities to study possibilities of redevelopment for

meeting spatial demands– Drastically increasing land prices– Establishing a national fund for increasing area value

• Long term:– Positioning planning and development of IA on regional scale– Creating strong preconditions for professionalization of IA

market (increasing role of professional RE parties)

Requires large public investments!

THANKS…

Questions?