The Blitz, agglomeration economies, and a giant supply-side real estate experiment

The tragedy and destruction caused by the Blitz created an unintended natural experiment in urban redevelopment. Chris Urwin reflects on what this can teach us anything about agglomeration economies and the resilience of cities.

The Blitz, agglomeration economies, and a giant supply-side real estate experiment

Chris Urwin, director of real assets research at Aviva Investors, heard about the Blitz for the first time through his grandparents on his father’s side, who were both in London at the beginning of World War Two.

At the time, his grandfather (also called Chris) lived in Fulham and used to go on fire watch; during night raids he sat on top of the buildings looking out for fires so he could raise the alarm while everyone was sleeping. Seeing the city being bombed motivated him to later volunteer to join the Royal Air Force.

His grandmother Grace was a young teenager living in social housing in Chelsea, where Chris’s dad was brought up and his grandad lived until he passed away a few years ago. Urwin still recollects them showing him where the bomb shelter was and reflecting on the time they spent there. The first time he saw maps showing the locations where the bombs fell, his eyes were drawn to his grandmothers’ place, to see how close it was to the main bombarded spots.

In this interview, Chris reflects on how the Blitz affected post-war real estate development in London and whether lessons carry over to today.

How did the Blitz shape London’s urban environment and the overall supply and demand dynamics for real estate in the post-war era?

The Blitz created two tiers across the city, with certain rules for some areas and different ones for others. Obviously, the bombing was significant and widespread. One thing I hadn't realised before I read and familiarised myself with the subject is how all parts of London got hit by the Blitz.

I had imagined the bombing would have been more concentrated in industrial areas in the East End and around Docklands. But almost everywhere, people lived with bomb damage; it would have been a very visual part of the daily life in the 1940s and, indeed, well into the post-war period.

Many buildings and real estate that survived the Blitz are heavily protected

If you fast forward a few decades, development opportunities were concentrated in areas that had been hit hardest. It also led us to value what had been lost and seek to preserve the buildings and the urban fabric that characterises London. In this context, it makes sense why we have such strict planning regulations and conservation orders; because so much was lost, now we want to maintain and preserve what is still there. This leaves us with two different tiers, and many buildings and real estate that survived the Blitz are heavily protected.

The general story is that it’s not easy to do construction in London as supply restrictions are significant. But this story doesn’t hold in areas that were heavily bombed, where there isn't anything left to protect. Indeed, there you can see significant and intensive development, with multiple buildings pulled down and put up again as the decades have passed.

My own neighbourhood, Elephant and Castle, was bombed extensively and there is little to remind you of what it was like before the war. In the 1960s, they initially built social housing that lasted through the last decade. Those were pulled down and now the area has been (largely) redeveloped for residential purposes and looks nothing like it did even seven or eight years ago.

Figure 1: Bomb damage in Waterloo and Elephant and Castle

Bomb damage in Waterloo and Elephant and Castle
Source: London Metropolitan Archives/City of London Police

What are the so-called "agglomeration economies"?

In terms of developing an understanding of how cities operate, agglomeration economies are crucial and collaboration becomes one of the most important concepts in urban economics. However, this can be quite hard to personally conceptualise and communicate.

Agglomeration economies address the benefits of having many people (with particular specialisms) in the same place at the same time

When we talk about agglomeration economies, we address the benefits of having many people (with particular specialisms) in the same place and at the same time. If you have numerous people in the same industry in the same city or even the same neighbourhood, it's much easier to find the talent pool to tap into for your company.

When everybody is in the same place, it’s easier for them to share information and inputs – you get economies of scale, and the largest value comes from “knowledge spillovers”. The fact that we have, for example, a tech cluster in Shoreditch or an insurance cluster where our offices are located right in the heart of The City, allows people to exchange ideas and information freely. The productivity gains that accrue are larger than if those companies were spread across the whole country.

Agglomeration economies are invisible; how do we measure them?

Yes, they are hard to see. However, they define our urban environment, and this explains why we get clusters of specialisms in different cities (or in different parts of larger cities, like London). Measuring the effects has been a real challenge for urban economists, as there are many reasons why people choose to locate in a particular place.

The Blitz caused a sort of natural experiment with employment density severely affected in badly hit locations

An academic paper called The billion pound drop1 highlighted how the Blitz caused a sort of natural experiment with - for obvious reasons - employment density severely affected in badly hit locations. Their findings suggest the role of agglomeration economies is probably greater than the academic consensus previously assumed. 

A significant portion of academic literature also supports the view agglomeration economies have been stronger in larger cities – London being the obvious example. It is a global centre and has a long history of different districts specialising in particular areas. But the key point is that there is really strong evidence pointing to more people being densely located leading to stronger productivity growth.

Where are we heading next in terms of how cities will evolve after the pandemic?

We cannot tell for sure. However, several urban economists argue it is hard to replicate the benefits of agglomeration economies remotely, and economic geography does not bend easily to radical change. I tend to agree.

The invisibility of agglomeration effects means we probably underappreciate them

Others are more pessimistic about large cities, like London and Paris, and point to higher rents and longer commutes than second-tier cities being significant downsides. However, this logic can be flipped on its head.

Higher rents are evidence of a willingness of companies to pay, reflecting the fact firms are more productive if they are in particular locations. In turn, people are willing to commute there and incur the costs of doing so because they can earn a higher wage. The invisibility of agglomeration effects means we probably underappreciate them. 

Could COVID-19 spark a new wave of redevelopment and agglomeration economies?

It is complicated. One takeaway from the Blitz was that it was very difficult to foresee the long-term consequences at the time, and certainly any upside. Once a few decades passed, you could see some underlying resilience, which gives us comfort as we move out of this crisis.

The vibrancy that comes from the diversity of London helps protect its resilience

London has suffered many crises, but continued to bounce back. This is aided by the fact it is not just a place for people to work, but also a place for people to live, visit and spend their free time. The vibrancy that comes from the diversity of the city helps protect its resilience.

Agglomeration economies are a real positive; they confirm there is a benefit to being in a particular location. But the pandemic has created a Catch-22: the benefit of being in a certain place is that other people are there. We therefore need everyone to come back to the office to start to enjoy the spillover benefits again. I have a positive medium- to long-term view, but there is a chicken and egg situation that will last for some time. We are going to have to re-learn how to use offices again.

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