Bid Rent Theory

Imagine a moment in the near future: with a little help from StudySmarter, you passed your AP Human Geography exam with flying colours, then got accepted to a great university. Your new school does not require first-years to stay in a campus dorm, so you've been shopping around for an apartment: somewhere cool, somewhere fun, with lots of little shops and restaurants. But, taken aback by the prices, you start looking for something a little more affordable, even if means you will have less access to the interesting retail experiences your university's city has to offer. 

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    Why were those apartments so expensive? It may have been part of a pattern known as bid rent theory. Using Seattle as a case study, we will explore the bid rent theory definition, some bid rent theory assumptions, and major bid rent theory strengths and weaknesses – and try and figure out if it stands up to scrutiny.

    Bid Rent Theory Definition

    Bid rent theory is one way to explain the internal structure of cities.

    Bid rent theory: Land/property/rental unit costs increase the closer one gets to a city's central business district.

    Bid rent theory (which you may alternatively see written out as "bid-rent theory") builds upon very general urban patterns identified by urban geographers:

    • A city will include a central business district (CBD), where most commerce takes place

    • A city will include an industrial district, where most manufacturing takes place

    • A city will include one or more outlying residential districts

    The CBD is the "heart" of the city; in everyday language, we might call the CBD "downtown" or "the city centre," though some cities may classify their CBD as a part of downtown, as we will see later. CBDs are often built upon an original, historic "town centre."

    Most cities' CBDs have a positive feedback loop in place: most commerce, retail activity, social opportunities, and urban conveniences are located in the CBD because that's where the population density is higher—and most people want to live in the CBD because that's where most commerce, retail activity, social opportunities, and urban conveniences are located or are taking place. Population density and commerce continue to increase in proportion to each other.

    The "rent" in bid rent refers to revenue after production and transportation costs have been subtracted. If production costs are fixed, the goal then becomes to reduce transportation costs as much as possible, which is why the densely populated CBD is the most desirable area for commerce.

    "Rent" in "bid rent" does not refer to how much you're paying per month to live in an apartment—though the two concepts are inextricably linked, as higher apartment rental costs can be an indicator of an area's desirability and density.

    People who live in the CBD may have more readily available social and economic opportunities than those living outside of it. Businesses located in the CBD can generate greater profits thanks to the dense population. The high desirability of both residential apartments and retail spaces in the CBD drives prices up; this is the crux of the bid rent theory.

    Bid Rent Theory Bid Rent Theory curve graph StudySmarterFig. 1 - Rent costs decrease the further you move from the CBD

    The farther you get from the CBD, the less competition you face for land use. This is because:

    • commerce will not be as common because businesses will want to maximize profits by being located in as dense an area as possible

    • social opportunities decrease in less densely populated areas, making them less attractive to residents.

    Additionally, the cost of transportation (both in terms of time and money) outweighs the benefit of cheaper rent outside the CBD. These factors drive bid rent down relative to bid rent in the CBD.

    The bid rent theory implies that cities will organically create zones based on building function, that is to say, industry and commerce will not naturally be in the same areas of the city.

    William Alonso Bid Rent Theory

    William Alonso (1933-1999) was an urban planner and economist. He is credited with creating the bid rent theory.

    Alonso was born in Argentina but moved with his family to the US in 1946 when he was around 14. After several positions in academia, Alonso wrote Location and Land Use: Toward a General Theory of Land Rent, which was first published in 1964.2 This book was significant in that it was one of the first modern attempts to explain rent costs in cities.

    Alonso's ideas about land use and bid rent theory were later adapted for use in agricultural geography to explain the spatial distribution of intensive farming and extensive farming.

    Bid Rent Theory Assumptions

    Alonso made several assumptions about the internal structure of cities in formulating the bid rent theory:

    • Cities will generally have distinct and recognizable districts, notably a centralized business district.

    • The CBD will inherently be the most desirable area for a majority of people.

    • Transportation costs will be constant throughout the city; i.e., transportation costs are lower when travelling within the CBD than when travelling from the residential district to the CBD because the geographic distance is shorter.

    • Profit/affordability proportional to population density is the single greatest determining factor for the desirability of a location for commerce.

    Bid rent theory presents an urban layout that is in many ways very similar to the Concentric Zone Model or the Hoyt Sector Model. Many of these assumptions do hold true in many cases, but we will discuss the strengths and weaknesses of the bid rent theory a bit later.

    Bid-Rent Theory Example

    Let's take a look at a few general patterns in Seattle, Washington, to determine the applicability of the bid rent theory. All prices shown are in US dollars.

    First, take a look at the map produced by the Office of the Seattle City Clerk, defining the general downtown area and the CBD within it:

    Bid Rent Theory map of Seattle CBD StudySmarterFig. 2 - Seattle's downtown area, including the CBD

    Using the parameters as defined in this map as of November 2022:

    • Single-bedroom apartments in the heart of the CBD ranged from $3200 to $3700 per month

    • Retail space in and around the CBD (including the Pike Market retail area) ranged from around $32 to $70 per square foot per year

    • Office space in and around the CBD ranged from $25 to $55 per square foot per year

    Let's go a little further south to Seattle's formal industrial district. This area serves as the headquarters for several corporations (like Starbucks and Uwajimaya) as well as a major location for industrial buildings. For the purpose of this exercise, we will also include Southern Downtown ("SODO") as part of the industrial district.

    Bid Rent Theory map of Seattle Industrial District StudySmarterFig. 3 - Seattle's industrial district

    Again, as of November 2022:

    • Single bedroom/studio apartments in SODO ranged from $1700 to $2200 per month; residences are virtually non-existent closer to the industrial centre

    • Retail space in and around the industrial centre ranged from $20 to $25 per square foot per year, but was very limited relative to the CBD

    • Office/warehouse space in and around the industrial district was around $20 per square foot per year

    So far, so good: the bid rent theory holds up. Next, let's compare prices in one of Seattle's residential areas.

    Bid Rent Theory map of Seattle Residential District StudySmarterFig. 4 - West Seattle, one of Seattle's residential districts

    West Seattle is mostly a mishmash of different residential neighbourhoods with some limited retail/commerce services. As of November 2022:

    • Single-bedroom apartments in West Seattle ranged from $1400 to $3500 per month; many apartments available

    • Retail space in and around West Seattle was around $27 to $31 per square foot per year

    • Office space in and around the industrial district was around $15 to $35 per square foot per year

    What general patterns can we glean from this case study? Well, in Seattle, residential space, office space, and retail space are generally more expensive around the CBD than they are around the industrial district or the West Seattle residential district. This suggests that, in the most general sense, Seattle conforms to the bid rent theory: prices are higher around the CBD, presumably because that area of the city is perceived as more desirable for commerce and residence.

    Bid Rent Strengths and Weaknesses

    The bid rent theory is simple, almost intuitive—as we mentioned in the introduction, you may have even encountered bid rent at play while browsing for apartments or while shopping downtown, perhaps without even fully understanding the patterns you were seeing. Or maybe, you thought to yourself, "Oh, we're in the heart of the city—these prices make sense."

    In either case, the bid rent theory does have a number of weaknesses. For example, in 1964, Alonso could not have possibly predicted the rise of online shopping and its role in retail activity. Online shopping undercuts the relationship between physical location and profit margins; population density is not necessarily a determining factor in a retail business's success. If online commerce continues to increase (which seems likely), it is not entirely impossible that competition for physical retail space within CBDs will decrease. For now, rural-to-urban migration patterns are still generally steady, but what long-term effect the Internet will have on residential population distributions remains to be seen.

    Another weakness of the bid rent theory is its assumption about how any given city will be organized. Unlike Seattle, not every city conforms to the general pattern of "CBD-Industrial District-Residential Districts." For example, Tokyo, Japan, has multiple CBDs (see our explanation on the Multiple Nuclei Model). Meanwhile, Chesapeake, Virginia, has no real discernable CBD—which is not all that unusual for cities and towns that have developed out of suburbs. In those cases, the bid rent theory is not particularly applicable.

    Bid Rent Theory - Key takeaways

    • Bid rent theory states that land/real estate/rental costs are higher in and around a city's central business district due to demand.
    • Bid rent theory was first postulated by William Alonso (1933-1999), an urban planner, academic, and economist, who described bid rent in his 1964 book Location and Land Use: Toward a General Theory of Land Rent.
    • Many cities, like Seattle, generally conform pretty well to the bid rent theory.
    • The bid rent theory does not fit all cities, and it remains to be seen how internet commerce will affect its applicability moving forward.


    References

    1. Fig. 1: Bid rent1 (https://en.wikipedia.org/wiki/File:Bid_rent1.svg), by SyntaxError55 (https://en.wikipedia.org/wiki/User:SyntaxError55), Licensed by CC-BY-SA-3.0 (https://creativecommons.org/licenses/by-sa/3.0/deed.en)
    2. Alonso, W. (1968). Location and land use: Toward a general theory of land rent. Harvard University Press.
    Frequently Asked Questions about Bid Rent Theory

    What is the bid rent theory?  

    Bid rent theory states that land/real estate/rental costs are higher in and around a city's central business district due to demand. 

    Who created bid rent theory? 

    Urban planner William Alonso (1933-1999) is credited with creating bid rent theory. 

    When was the bid rent theory created? 

    Bid rent theory was first described in Alonso's 1964 book Location and Land Use.

    How is the bid rent theory used?  

    Bid rent theory is used to explain patterns in rent prices across an urban environment. 

    What is the purpose of the bid rent theory? 

    The purpose of bid rent theory is to explain how population density and commerce affect rent prices in a city. 

    Test your knowledge with multiple choice flashcards

    Which of the following books is credited with first describing bid rent theory? 

    Bid rent theory assumes a city has a _____, a _____, and a _____. 

    Bid rent theory states that generally, the closer you are to the _____, the _____ rent costs will be. 

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