Economics of iconic architecture

This paper discusses the impact of iconic architecture on real estate prices in urban areas from the perspective of welfare economics. First, the definition of iconic architecture will be discussed. Where researches on iconic architecture often use an arbitrary binary classification (a building is either iconic or not), this will be discussed and a possible solution (continuum approach) will be presented. Successively, the phenomenon of spillover effects is discussed. Where classic welfare economists defend a certain level of interventionism of governments in order to reach the optimal situation for the public, increasingly more criticism has emerged. Research shows that government interventionism does not necessarily lead to Pareto improvements and should always be debated. However, in some areas governments do not only have a possible function of interventionists. For example, urban development is one of the responsibilities and aims of municipalities and therefor municipalities play a double role (not only the ‘intervening’ role (Pigou’s argument), but also an internal negotiating role (critics’ argument). After that, the welfare economical view on spillover effects will be applied to iconic architecture. It finds that real estate investors typically strive to reach a private optimum and do not take the external effects of the building design quality on the neighbourhood into account. Therefore, a risk of underinvestment into the external appearance of buildings is present, in market equilibrium. Whether public interventions are justified essentially depends on whether the externalities are significantly present. This paper summarizes researches on the spillover effects of architecture on real estate prices, distinguishing between residential and office areas by using four factors and three spillover ranges: immediate neighbourhoods (with views on the architecture), districts and cities. The four factors determining user utility (hence rents) are ease of face-to-face activities (related to proximity), quality of buildings (objective properties), quality of address (aesthetics and prestige) and metropolitan access (accessability). Finally, this paper uses the amenity theory to explain how the presence of iconic architecture results in urban development and how cities and project developers benefit from creating such architecture. The process of gentrification, which is the revival of districts through the presence of the creative class, and the role of human capital in urban development are explained. The paper concludes with suggestions for further (empirical) research.