Taking the Long View with the ‘Minimum’: Designing for Change in New Buildings
Featuring commentary by Alex Barrett
Jasper Campshure, M.Arch ‘15
In both finance and design, a building’s lifespan is central to its value. However, the practices and mechanisms in both architecture and real estate can work against producing timelessness in buildings. How then can we produce buildings capable of long, economically productive lives?
There is an important discrepancy in the treatment of time in building professions between those that design buildings and those who initiate, develop, manage, or operate them. Whereas the goal of architecture is generally ‘timelessness,’ real estate tends toward short-term outcomes. In truth, the first of these rarely occurs in any good measure; despite the perceived permanence of architecture in the collective psyche, the fact is that many relatively new buildings are prematurely demolished. This trend will only continue as much poor quality post-war building stock reaches the end of its useful life. At the same time, the second of these characterizations about time is not self-evident. On the contrary, most real estate professionals also tend to think of real estate, the physical asset, as being very long-term. In reality, however, many of the most fundamental mechanisms and practices of much the real estate industry, especially those parts involved in the production of new building, bias a short-term outlook. The result of this incongruence is that even given the cultural value of long-lasting buildings, the real estate industry and designers of buildings work against them actually occurring. What would it take to see a paradigm shift that enhances the long-term productivity of the built environment; wherein buildings perform better and for longer, from both an economic and environmental standpoint? This essay will investigate the possibility of such a new paradigm from both its real estate and design aspects, proposing a framework for conceptualizing the design and construction of buildings capable of long, economically productive lives.
Real Estate’s Short-Term Bias
As it is counterintuitive to contend that the real estate industry has a short-term bias with respect to the physical asset, this essay will discuss some of the subtle and not-so-subtle ways that the industry’s norms and practices privilege short building life.
The notion of planned obsolescence is formalized in the treatment of real estate under federal tax law. This legal framework allows for the straight-line depreciation of residential rental real estate over 27.5 years, and other income-producing real estate over 39 years. The general logic behind depreciation is that it allows real estate to be treated as capital equipment investment used in the operation of producing income, whether through making widgets or charging rent for housing. Non-residential assets depreciate over a longer period because, according to the Congressional logic, non-residential buildings lose their economic value more slowly than residential buildings. Should an owner hold an asset longer than its respective period — regardless of the building’s fitness — they will be losing a 3.6% or 2.5% write-off annually from their original cost basis. Other policies, such as New York City’s 421a program, offer full or partial tax abatement for a set number of years, typically 10 to 25, after which the standing building becomes more expensive to own. These policies — for whatever good purposes they serve — economically disincentivize long-term holding and higher quality building construction. Though 39 years seems far from timelessness, these types of policies are in fact among the longest formalized in real estate.
A more typical time horizon for real estate is much shorter still — five to ten years. Private equity funds, which constitute a predominant vehicle for new building production, particularly in the United States, are typically structured to fundraise, invest, and then dispose of their assets within such a period. In the common format of fee-based real estate development, the developer collects fees, often including acquisition, development, and asset management. For some developers, these fees are the only revenue they see; when the project is complete they are no longer linked to the project. For others, base fees serve as liquidity to carry out a project, with a greater portion of their revenue coming from carried interest earned after an asset is stabilized and sold, refinanced, or otherwise generating income. This is meant to align the financial interests of the developer with those of their investors and does so quite well. However, in neither of these cases will either the developer or investor parties likely have any stake in the building for much more than a handful of years after stabilization. When we look at the aspect of commercial real estate debt, it too follows a similar timeframe, with term lengths rarely exceeding ten years and frequently less than five. There are logical reasons for each of the mechanisms to work the way they do. For the investor, it is just as difficult to know where the economy will be many years down the road as it is to forecast demand for the asset type and location. Short fund terms also allow — perhaps more so in theory than in practice — the managing member to “buy low and sell high” within the real estate cycle. For the lender, shorter terms reset an asset’s debt in the current interest climate, while also providing them with more frequent revenue vis-à-vis origination fees. There are still more reasons, of course.
However, the consequence of this short-term bias means that far from timeless, the real estate industry treats its products as being essentially one transaction removed from disposable. In addition to financial reasons, there are legal and reputational motivations for making buildings that will perform in the short-term, but nothing within the industry promotes a building’s ability to last for many years from the perspective of its construction or adaptability. When, along with the aforementioned norms, 5–8 years is the average asset holding period, construction quality and building maintenance become subcritical, yet both erode the physical asset. Potential for different intensity and type of use are also considered to be less important. Given the industry’s organization, owners have little interest in a building’s value, use, or condition 25 years from the present. In strictly economic terms, anything more than making sure a building is in good saleable condition to the next owner essentially amounts to altruism. If this line of thinking doesn’t immediately seem clear, it can quickly be put it to the test with multi-family housing, where the practice finds its maximum in the difference of quality between the condominium intended for immediate sale, and the rental built for long-term income generation. As consumers of residential real estate are not always known to be the best detectors of quality, it is no secret that if long-term holding by the developer is the goal, the rental property will have ‘better bones’ than those of the condominium (which may, not incidentally, ‘look better’). Not to give anyone else too much credit, when the equation in real estate development is build, lease-up at the highest rates possible, take out construction debt, and then sell to a larger investor — as it often is — neither the tenant, nor the would-be buyer is likely spending too much time on quality of construction as part of their due diligence. Ultimately, the institutional investor’s due diligence likely focuses primarily on one thing: NOI today, and maybe for the next several years, but not likely on the building’s ability to produce income much further down the line.
Culturally, these illustrated practices are thought to be backward and shortsighted: bad for the user and bad for the environment. The real estate investor, however, is simply acting logically when working within the contemporary norms of the industry. But this has less to do with real estate professionals and more to do with the set of logics underlying the industry. Even if it is an unintended outcome of what constitutes normatively sound economic decision-making for most of these practices, in the aggregate, they treat real estate — in its design, development, construction, financing, and often holding/trading — as a short-term asset. We arrive at the crux of the problem of the real estate industry’s current treatment of time: its models and mechanisms have no real way of capturing any value beyond the holding period. When we begin to understand the ways in which its practices work on the production of building product, we see a picture of a real estate industry working against timelessness.
Designing for Longevity Through Adaptability
In the end, buildings are torn down and replaced for two reasons, either due to poor physical condition or because of their inability to economically adapt to a new use (or both). At the same time, because substantial renovation or adaptive reuse construction can be one-third the cost (or less) of new construction, it is typically more economical than new construction, even that of the highest LEED rating due to the embedded energy of the new building material. This is echoed in the oft-repeated adage that “the most sustainable building is the one that is already built.” How, then, do we go about designing and constructing buildings that will last a long time due to their construction and “adaptability”?
The ideal of timelessness is not new to architecture. Until the end of the 19th century, architectural design aligned with simple, solid buildings whose use rarely changed. The quest for timelessness in architectural modernism manifests instead through the idea of flexibility. Initially, in the works and writings of architects such as Le Corbusier and Mies van der Rohe, this came through the spatial flexibility offered by open floor plans. As the idea of flexibility (often tied in with attempts at prefabrication and mass production) evolved, architects important to “Modernism” such as Buckminster Fuller, Fritz Haller, John Habraken, and Walter Gropius developed proprietary designs (Figs. 1–4) proposed as innovations with the intent to change building construction by making it cheaper, faster, and more flexible. Instead, none of them were adopted in any meaningful way, making change far from simple and exceedingly difficult when components were highly specific or unavailable. The problem with each of these proposals — and generally the persistent attitude of architectural circles promising revolutionary change — is the reliance on technology, proprietary building products, and paradoxically rigid systems meant to produce flexibility.
On the other hand, there are many buildings that never promised to be amenable to change or offer long, economically productive lives, but have done just that. One older example is the typical SoHo loft building in New York City (Figs. 5–6). These were built mostly in the second half of the 19th century and often with 25’x100’ or 50’x100’ floor plates. Most began life as factories or storehouses and thus were built with thicker wall sections and floor plates than a typical residential building of the same size. Because of their industrial nature, these buildings have higher ceiling heights. Along with wider window expanses afforded by the cast iron facades that many have, these heights brought a lot of light into deep floor plates — a simple solution for pre-electrical buildings. These features have meant that rather than being torn down as the neighborhood character changed from factories and warehouses to artist studios in the 1960–80’s, and now predominantly retail, offices, and residential apartments, the SoHo loft buildings are now 100–150 years old and seem to have the physical attributes and built-in flexibility to continue to last for long into the future. Indeed, part of the reason for the use changes in SoHo can be attributed precisely to the building type’s ability to adapt to new functions.
A more specific and recent example is the Bois-le-Prêtre (Figs. 7–11), a fifteen-story rental housing tower completed in northern Paris in 1959 that in 2011 underwent a second substantial renovation under the direction of the architecture firm Lacaton & Vassal. Originally slated for demolition, it was decided to instead renovate again after an earlier 1990 renovation left small windows that let little light into the apartments. The decidedly low-tech design called for little more than removing the non-load-bearing parts of the facade and enlarging the building by 10’ in most places, creating much more desirable apartments by way of the new light-filled winter gardens — essentially a double-skin glass facade that is both structurally and thermally independent from the existing building. The result was a building with a new lease on life, fifty-percent reduction in direct energy costs (due to the winter garden’s thermal buffering), all for one-third of the building’s replacement cost. Furthermore, the building remained occupied during the renovation phase. The renovation was possible because, like the SoHo loft building, the original Bois-le-Prêtre was barebones in its finishing and constructional logic, yet with well-located and redundant structural elements and circulation.
The takeaway is that one cannot reliably design for flexibility through technology, anticipating technological changes, or through the use of systems, but only through designing for the ‘minimum.’ When one looks at recent major changes to the way we use buildings, none of the introduction of HVAC systems, fluorescent lighting, telecom systems, or computers could have been anticipated by the architects of buildings immediately preceding any of those innovations. Nor could Griffin Thomas, the architect of the 1873 Gunter Building, have anticipated that the fur warehouse he designed in 1873 would a century later be high-end ground floor retail and residential apartments. Whether a building is flexible and adaptable to change is known only at the time of consideration to do something else with it. To propel itself forward (and compete with newer buildings in the future), the building needs to easily allow for change regardless of new products or technologies. Buildings that have proven to be adaptable tend to have a few things in common.
- Uncomplicated floor plans and regularly spaced and generously sized windows.
- Structural simplicity
- Structurally over-sized and well-constructed from simple, long-lasting materials.
Designing for change means designing buildings that are materially and structurally simple. It means considering as much — or more — what not to put in a building as what to include. It means determining precisely where to put the parts of the building that either won’t likely change (such as vertical circulation and plumbing) or can easily adapt. It means designing for a building’s first use that does not preclude changes in technology or type and intensity of use. It means a range of quality of construction: i.e. good quality construction (able to last a long time with low maintenance) on structure, and allowance for lower quality construction on other things, such as interior wall partitions. This way of building might seem to remove the architect from the equation. The contrary is true. It does, however, require architects to refocus their energies in a type of building designed and constructed with deliberate attention paid to its organization and layout, the location and quality of its structure, the location and integration of its systems (mechanical, electrical, plumbing, and telecom), and its material composition and finishes, each in a manner that is sufficient for the building’s first use, but also one that anticipates its utility in both future times and future uses. This is not currently done as a general matter of architectural design.
None of this is rocket science and it has been done before. But it does represent a radical shift from the current norm. When we look at the material aspect of the building equation, we see that post-war, the construction industry has moved continually toward more complicated buildings, shepherded by a building products industry eager to offer specialty products that combine in a complicated fashion to produce today’s buildings. Architecture firms now maintain physical libraries cataloging endless building products and staff people that are experts in single things such as curtain walls. The ostensibly cheap and certainly fast construction offered by this framework play to the short-term bias of the real estate industry. Despite the short-term economic benefit related to cheapness and speed of construction, the truth remains that as buildings have gotten more complicated, so have their problems. Complicated building assemblies are more susceptible to the elements, especially when not executed perfectly, and can be difficult to repair and replace. Furthermore, they have historically proven to contain unknown toxins (lead, asbestos) and have led to unanticipated problems (sick building syndrome). This status quo is not the best way. When we remove unnecessarily complicated building products from buildings, it allows for more flexibility, often with less material waste.
The Economic Argument
An innovative solution cannot come merely from a sustainability argument (which is what is often proposed), but needs to be based in an economic argument that doesn’t initially require an unrealistic restructuring of the financial norms of the real estate industry. The basic contention of such an argument would be that a building that is designed and constructed for a very long time, and therefore necessarily for many different uses, will have a greater net present value than a comparable building built according to current norms when using standard discounted cash flow valuation metrics.
A building designed and constructed according to the ‘minimum’ is not merely saving the substantial replacement cost every 30 to 50 years. Importantly, the building itself undergoes less frequent renovation due to a certain built-in flexibility that more easily allows for a variety of uses, and will have lower renovation costs given its lack of complicated material assemblies. Finally, greater spatial flexibility coupled by simpler and faster renovation will allow this building higher occupancy during periods of redevelopment. Taken together, these characteristics produce a material economic difference. Along what would be considered a very long timeline according current underwriting standards — say 100 years — the difference in lower costs from non-demolition, construction, and occupancy loss — one can project a positive economic value difference against the comparable ‘standard’ building.
Furthermore, this approach to building using tried-and-true materials mitigates the risk of currently unknown toxic or inferior materials that may have to be abated at a high cost in the future. An additional future economic upside could come from policy changes that incentivize adaptive reuse and older building operation and occupancy, something certainly in the realm of possibility if policy changes ever attempt to implement something like a ‘triple bottom line.’
The big leap: All of this assumes future hypothetical value, but to bring the discussion back into the purview of the short-term financial outlook of commercial real estate, which seeks to be paid now rather than later, the economic elephant in the room is that no investor holds real estate for 100 years, nor are they currently able to sell that future economic value. The ideal route to quantify an economic basis of longevity would be in the development and use of a series of metrics of ‘adaptability,’ wherein current owners and developers would be able to recognize those assumed differential future cash flows in the present. The adoption of such valuation metrics would be transformative for new building design, construction, financing, and operational and asset management.
Avenues for Instigating a Move to the Long-Term
In closing, it makes sense to speculate on how a move toward a built environment with physically enduring buildings amenable to changes in type and intensity of use might take place. This would first require a recognition of the various ways in which the professions involved in building design, development, financing, and management presently work against this occurring. The set of problems as to why this doesn’t currently happen are systemic, but change needs to occur from individuals working in these disciplines.
After such recognition by individual professionals and firms, it could then translate into action from both the supply and demand sides of new building production. The architectural discipline has been largely complicit in real estate’s tendency toward short-term view of buildings by focusing on building aspects that play into building construction, namely designing for highly specific building uses, but also by focusing on aesthetic beauty, especially in their formal and envelope aspects, a matter that is subject to constant change of opinion. The result is stylistic changes that do not pay off in the long run. When architects focus on designing buildings that might ostensibly seem simple but are actually quite complex in their consideration of time and multiple use, the economic advantages of such buildings can be part of the value proposition offered in competitions or to clients. Developers, for their part, can begin by building such buildings, and making the advantages known to potential investors, with the aim of causing them to alter their underwriting, and therefore, also the value thereby attributed. Consumer education could be part of this effort to segment the market through product differentiation, aimed as much at tenants in commercial real estate, as at buyers of residential real estate. On the demand side, core institutional investors need to begin demanding buildings capable of producing greater and less volatile returns for a longer period of time. This demand can come directly through new building development for which they will be the eventual long-term owners, and indirectly by making it of central importance to their due diligence, valuing these buildings at a different rate. Lenders can and should make similar demands and changes to their due diligence as a way to lower the risk profile (from future demolition or inability to adapt) of their underlying collateral. Above all, it asks each of the specific disciplines of design, construction, development, or lending and investment, to individually and collectively bridge their respective disciplinary knowledge gaps in construction quality and characteristics of adaptability, bringing each closer to the thing (“architecture,” “building,” “project,” “collateral,” and “asset”) from which their respective disciplines alienate them.
What is offered here is primarily a way of re-conceptualizing the problem of low-quality building design and production fundamentally as a consideration of the treatment of time by various professions that come together to produce buildings. The solution proposed is a pragmatic design and construction methodology with immediate application, whose tools are already located within the conventional knowledge bases of the design, construction and development, and investment disciplines, and which can occur initially within existing financial mechanisms. By asking more (and paradoxically perhaps less), from the design and construction of new buildings with the principal measure of adaptability, this innovative reframing of the field aims to produce buildings capable of long, economically productive lives by realigning the treatment of time on the subject of buildings for both the design and real estate professions in a manner consistent with both their own and broader societal or cultural values.
Commentary by Alex Barrett
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Alex Barrett founded his development company, Barrett Design LLC, in 2005 to combine real estate development and architecture under one roof to form a uniquely capable and versatile company. Today the firm is comprised of six full time staff in addition to Alex, five of whom have architecture degrees. The firm has a strategic partnership with Alex’s wife Lindsay Barrett of Compass, who oversees the sales and marketing of the firm’s completed condominium units. To date, the firm has focused on developing condominium properties, both ground up and rehabilitations, in the “Brownstone” neighborhoods of Brooklyn. The firm adds value to these properties through condominium conversion, expansion and/or rehabilitation, and resells them as individual condominium units. Since 2005, the firm has returned to its investors an average IRR of just over 38%. Prior to founding BDD, Mr. Barrett was Director of Design and Development at a boutique development firm in SoHo. Prior to that, he spent seven years practicing architecture in New York City, most recently at the firm of Beyer Blinder Belle. Mr. Barrett received his Master of Architecture degree from Yale University’s School of Architecture in 1997, received a BA in Psychology-Based Human Relations from Connecticut College, and has studied real estate development and finance at New York University.
The author has chosen a laudable and challenging topic that has perplexed architects for decades — how one can design flexibility and adaptability into buildings — and hypothesizes that part of the problem may stem from the short-term investment horizons that are typical of the real estate industry. While the author does a good job framing the question, I believe his analysis is hampered by some overly broad generalizations and could benefit from deeper analysis and real-world examples.
Real Estate’s Short-Term Bias
In this section the author discusses that various tax benefits — depreciation and abatements — that are applied to income producing real estate. While it is true that these tax benefits dis-incentivize holding a property after the benefits expire, I do not believe it proves that “the notion of planned obsolescence is formalized in the treatment of real estate under federal tax law.” Similarly, the fact that most real estate private equity funds operate on five- to ten-year investment horizons does not mean, as the author states, “nothing within the industry promotes producing a building with the ability to last for years from either a construction or ‘adaptable’ point of view.”
One can look to the commercial real estate market in Manhattan for some counterpoints. Some of the largest and most expensive real estate transactions over the last year have been midtown commercial office buildings built in the 1950’s and 1960’s. Private equity firms or family real estate offices have owned many such buildings for decades, in spite of the tax and financial incentives cited by the author. Furthermore, the fact that the value of these properties has risen steadily and sharply contradicts the author’s contention that “the real estate industry treats its products as being essentially one transaction removed from disposable.”
Construction quality is an important and complex subject. The author rightly points out that speculative development projects can sometimes lack financial incentives for developers to build to a high standard of quality, which is presumably more costly. The author goes on to posit that a developer’s self interest would cause him to construct a higher quality rental building (assuming he intends to hold them), than an otherwise comparable condominium building where he intends to sell the units upon completion. In the New York City market, I would argue that the opposite is true. While there is not a direct correlation between construction cost and quality, it might nonetheless be instructive to compare average construction costs of rental buildings to that of condominium buildings. In my experience as a developer in the New York City market, I have found a consensus view that rental construction costs typically carry about a 10% discount to condominiums. Furthermore, an examination of the Manhattan residential condominium market would likely provide ample evidence that developers are not skimping on quality.
Designing for Longevity through Adaptability
In this section the author discusses the quest for “flexibility” in building design, citing the efforts of designers like Fuller and Gropius to develop building systems — a kit of building parts, really. While the author correctly points out that these efforts often involved proprietary and highly specific design components, I believe the primary goal was to design a universal system of parts that could be applied to a broad set of building sites and programs. I’m not sure that adaptability to future uses and occupancies was necessarily one of their goals. Here I think a deeper dive into one or two examples may be enlightening.
The author goes on to cite SoHo loft buildings as an example of a building type that has adapted well to changing uses: from manufacturing, to art studios, and finally residential use. It is true that the typical loft building in SoHo possess many features that make it suitable (even desirable) for multiple uses — high ceilings, open plans, and large windows. However, it is worth noting that the depth of these buildings — typically around 100’ with almost all of the light and air provided at the street facade — produces very deep and dark floor plates, which is undesirable for residential use, and contrary to current building code requirements. The author includes a plan of a corner loft building with two exposures, while typical loft buldings in SoHo are attached on two sides. The longevity of these buildings is undoubtedly due to many variables: the architectural beauty of the buildings, neighborhood features such as desirable retail corridors, and proximity to transportation, not to mention the protections afforded by the Landmarks Preservation Commission, which have averted demolitions.
This is the substance of the author’s thesis, and contains some good ideas about what makes a building adaptable to different uses in the future. However, I would take issue with a few point. For example, I would argue that it is very difficult to anticipate future plumbing and vertical circulation needs. To return to the SoHo loft building example, elevators were often located in one of the window bays, and plumbing was minimal if it existed at all. Today, these infrastructure components have largely been relocated as buildings have been converted to residential use or are otherwise rehabilitated, at minimal cost relative to building value. And while it is true that the building materials and assemblies have become increasingly complex, I think it is a broad generalization to conclude that they “leave a lot to go wrong [and] are more susceptible to the elements.” Further analysis or supporting examples would be helpful here as well.
The Economic Argument
It is appealing to imagine the broader real estate industry placing a greater emphasis on building longevity and adaptability in order to reduce building obsolescence and replacement. The author is correct that such a shift in practice would reduce overall construction costs and have many environmental benefits. Groups such as the Urban Land Institute and the U.S. Green Building Council advocate similarly. However, the challenge of quantifying fairly abstract notions like “adaptability,” assigning them a net present value, and then convincing the broader real estate community to adopt such metrics is an enormous task. The author does not present a convincing argument for why the real estate industry, which is typically concerned with property valuation over a five- to ten-year period (as demonstrated by the author), would accept such a change.
Avenues for Instigating a Move to the Long Term
I would agree that some in the architectural profession might be complicit in viewing buildings as short-term assets. However, I don’t believe that “designing for highly specific building uses… [and] focusing on aesthetic beauty, especially in their formal and envelope aspects” are the best examples of this syndrome. First, architects are, at a most basic level, service professionals, with a mandate to design to the programmatic needs of their clients at the present moment. And second, I’m confident that Griffin Thomas, and Lacaton & Vassal were as interested in “aesthetic beauty” and the formal aspects of their building facades as most contemporary architects. Perhaps a discussion of the cultural and stylistic contexts within which architects work would add some depth to this discussion.