Iceberg Logic
Posted: April 8th, 2010 | Author: Scott Simpson | Filed under: Best Practices, Economy, Strategy | Tags: aesthetics, architecture, building, capital cost, design, value |
Like buildings, icebergs come in all shapes and sizes. They can be beautiful and also a little mysterious. On average, only about 12 percent of an iceberg’s volume sits above the water line. What’s visible is quite small compared to the whole. The part that really matters, the part that provides buoyancy, is hidden from view, though we can sense its presence.
This is not a bad analogy for how design is often perceived. Architects tend to focus most on form and aesthetics — what you see is what you get. But a building is so much more than that. It’s impossible to tell just by looking at a building what it cost to construct or how much it takes to operate or how efficient it might be in terms of space utilization. Unlike cars, buildings don’t come with dashboards that provide real-time feedback about speed, fuel consumption, oil pressure, and so forth. But perhaps they should.
Studies have shown that over a building’s useful life, the original capital cost accounts for only about 12 percent of the total — just like an iceberg. The true cost (and the real value proposition) lies below the waterline — out of sight and out of mind. It’s territory worth exploring.
Capital cost matters a great deal, of course, because it’s most often the gating issue that determines whether or not a project gets built in the first place. But it’s only a small part of the overall picture and, considered by itself, tells us relatively little. Capital expenditure reflects market dynamics at a given point in time. The cost of labor and materials can vary significantly over a relatively short period. To be meaningful, first cost must be measured against something. When considering the location, size, and program of a building, savvy owners understand that it’s not what you spend up front, it’s what you get back that counts. That’s why building lots in prime locations cost more and why zoning regulations matter so much. The largest possible structure built on the best available site will naturally generate the most cash flow and hence create the highest value. It will also consume more energy to operate and cost more in staffing, taxes, and maintenance. All these factors and more go into calculating the underlying value stream of a project. And it’s this underlying value — the part below the waterline — that provides the buoyancy needed to float the project.
Design matters, and of course this includes form, function, and aesthetics. But there’s more to it than that. For too many years, true value creation has not been part of the design dialogue between owners and architects. Remember that design can be both a verb and a noun — a process as well as a thing. The how is often just as powerful as the what. Great designers are always on the lookout for hidden meanings and new ways to inject something extra into the equation. For example:
- For a new office building, an architect managed to design a floor plate that was 90 percent efficient compared to the expected 84 percent, delivering more useful area (and resulting revenue) per square foot.
- For a new dormitory, an architect managed to include one additional floor while still respecting the height limit imposed by zoning. This created space for 50 additional beds, making it possible to finance the project.
- For a new hospital, design for nursing unit that required fewer staff to run efficiently saved $1 million in staffing and operational costs annually while still improving overall outcomes for patients.
- For a new hotel, compelling design helped raise the average occupancy from the normal 75 percent to nearly 85 percent. This increased sales in the restaurant, lobby bar, and shops.
- For a multi-tenant research lab, sophisticated metering systems allowed the tenants to monitor their individual energy use, saving more than 10 percent each year.
You get the idea. These are all real stories from real projects that have won multiple design awards. They were successful in unexpected ways because the design teams took pains to truly understand the owner’s underlying value proposition and roll it into their design approach. By considering all these factors, they were able to create more thoughtful, sophisticated solutions.
The lesson is clear: Focusing only on form, function, and aesthetics is forgetting the 88 percent of the iceberg that sits below the waterline. Ignore it at your peril.
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Scott. I am reminded of our email conversation almost a year ago. Am I presumptuous to think that perhaps I had an influence on your thinking? I am willing to say, you have on mine. I also find Larry Speck’s post interesting in that he supports the “low tech” model over (implied) B.I.M. in order provide work for interns, and create value for the firm and owner. All good ideas in my narrow “value-focused” view point. High tech and aesthetics should never be ingored, but the last two decades have worshipped them and forgotten that buildings are for people who use them, not for those who design them.
Alan Burcope, AIA, MBA, LEED-AP
I think this is exceptional and a very real component of any negotiation, especially post-recession. In the interiors side of the business, designers are faced with the same need to explain their fees in a “values-based” model rather than just saying what they want to charge. the “why” is critical and when a professional can site examples similar to the ones in your article, they can ask for more money, not less!
Some related information from a speech given by Richard Moe, president of the National Trust for Historic Preservation: “Since 70% of the energy consumed over a building’s lifetime is used in the operation of the building, some people argue that all the energy used in demolishing an older building and replacing it is quickly recovered through the increased energy efficiency of the new building, but THAT’S SIMPLY NOT TRUE. Recent research indicates that even if 40% of the materials are recycled, it takes approximately 65 years for a green, energy-efficient new office building to recover the energy lost in demolishing an existing building. And let’s face it: Most new buildings aren’t designed to last anywhere near 65 years.”
Ms. McDonald has hit on the central conundrum of the “Green” movement. My favorite statement regarding “green,” is; “the greenest square foot is the one you don’t build.” No one will give you an award nor a LEED point for not building. (Salvaging existing building components not withstanding.)
Cash for Clunkers is a perfect example of backward green ideology, or as I like to call it “green stained” thinking. Manufacturing automobiles consumes massive amounts of energy and raw materials, yet we destroyed hundreds of thousands of functioning automobiles in the name of “green,” only to replace them with new models that got marginally better gas mileage. It makes economic sense, which is fine, and perhaps good, but why does it have to be sold to the public as “green.” The only thing green about it is the color of the money that it generates.
Why can’t we call it what it is? A way to make money. What is wrong with making money? We all have to do it. Let’s get over this idea that profit is bad, and move on to a debate over which ways to make money are better than others.
Design Curicullum especially in Architecture and Interior Design should incorporate awareness towards this ‘iceberg effect’ other than the usual matters concerning aesthetic and other values.
Sustainability, GREEN, recycle, lifecycle of materials should be part of the design vocabulary that will ensure our future Designers contribute more in preserving the good values these practices profess.
There are so many valid and important points in this article that I was hesitant to be critical. However, the basic premise is wrong for most architects. We have been doing life-cycle cost analysis of buildings for a couple decades and even the primitive state of Arizona requires energy modeling. For most architects, the long-term cost of a facility is already a major issue. Our latest library features a real-time energy monitoring system with an interactive screen in the lobby that any visitor can use to see how effective the Photovoltaics are in reducing energy consumption and energy costs. Its a small “dash board”, but its there. The larger challenge is designing energy and cost effcient buildings that excel esthetically as well.
Most developers use a lowest first cost evaluation to a project, and tend to pass the long-term costs on to the tenant or buyer. This article gets right to the point and illustrates where that has gotten us. The issue of energy is particularly important right now, for both the carbon and peak oil. Current models assume energy cost growth on par with inflation. While I agree with Jeremy that architects are interested, most developers are not, and there is no stick or carrot that will induce them. Institutional and public sector clients tend to see farther ahead. I also agree that our buildings need to excel aesthetically, though I believe that a building that excels in passive strategies and healthy indoor environment will usually meet that goal.
So many blog posts passively and actively lambaste developers. Once again, there is an underlying “victimology” in this thinking for architects. Developers are business people who produce a product. They mold their product to meet the needs, expectations and costs that their market will bear. They are not interested in giving the public what they need, they give the public what they want and are willing to pay for. We wouldn’t want them to do anything else. How would you like it if you went to the grocery store for a snack, and the grocer secretly swapped all your unhealthy choices with rice cakes and whey chips, and charged you premium for them? It is not his business to make healthy choices for you. How presumptuous that would be! If you wanted healthy snacks, you would have chosen healthy snacks, right?
We architects need to understand how a free market economy works! If we fail to understand this simple idea, we will become extinct.
Institutional and public sector client aren’t spending their own money, they are spending yours! That is the difference.
As both an architect and a developer, I concur with Mr. Burcope’s comments and offer these as well.
The author was overly simplistic when he wrote, “The largest possible structure built on the best available site will naturally generate the most cash flow and hence create the highest value.” In most markets this is simply not true.
The author’s statement presumes that demand for new space is both limitless and insensitive to price. The later is never the case, and in most markets, weak demand often leads to development decisions to build less than the site envelop will allow and/or to hedge bets by building a mixture of product on the site.
Ever since my first interaction with developers as an architecture co-op student in the early ’80s it has been quite clear to me that developers’ project economics and analyses and architects’ rarely match. This string of comments is just another example of that.
If architects strive to convince developers that their project economics models are superior, they should first gain a basic understanding of the way developers currently approach development finance and decision making. This means architects must learn the basics of market analysis, development finance, asset management and standard pro-forma modeling.
In general, developers have a much better handle on architects’ goals and business objectives than architects have on developers.’ As a result, many developers both exploit architects by taking advantage of their non-business objectives (social conscience, aesthetic goals, legacy, etc.) and they underutilize architect’s expertise (because those architect’s can’t translate their life-cycle analyses into project finance formats that a developer can plug into standard project pro forma models).
Even if architects and developers could agree on a common language, external costs (borne by third parties, such as tenants) would still be a big issue in these life-cycle analyses.
But agreement on mutually acceptable financial model formats would at least be a start toward finding an architect-developer consensus on how to model total ROI (returns on investment).
Stated very eloquently by Mr. Campbell. I personally don’t believe that there will ever be parity between developers and architects until architects begin to take a vested interest in the financial performance of their work. By doing so, they in essence become developers. Architects promote ideas which most often cannot be proven in advance, therefore there is great risk in implementing these ideas. Developers are understandably less eager to take them on. The Architects are gambling with someone else’s money, so they understandably take a hard position of support for their ideas. There really is, and can be no middle ground. Either you put your money where your mouth is, or you submit to the decisions of those who do.