Valuing Architecture

First off: I’ve re-jigged this site a little so you might need to update your RSS feeds and such. Sorry about that, but now everything should work much more smoothly.

Lately I’ve been thinking a lot about the practice of architecture and trying to make sense of it in relation to the other professions which together might be called the “built environment practices” including the usual engineers, contractors and consultants of various kinds as well as developers, bankers, politicians, and others who have a more distant—but no less important—impact on the built environment.

Inspired by my previous experience steeping in the startup culture of Silicon valley, I’m trying to dig into the difficulties of running an office, especially small offices, and how these difficulties might be thought of as symptoms of a misformulated profession. Or more simply: how can we hack architectural practice to make it more effective?

This is part of the puzzle:

The difference between these graphs can be read either of two ways. On the one hand it’s depressing. The size of the design fee for a significant project, relative to the income of a small office, is often substantial. This puts the office at risk should the project be stalled or canceled, and therefore increases the likelihood said office over-extends itself to satisfy their big client.

When an office’s portfolio is dominated by one client the dynamics of satisfaction begin to change. Because of the importance of the dominant client, their needs begin to eclipse the needs of others, including the development of new clients. Losing the client can mean losing the office, so what else can be done?

The diversity of an office’s portfolio is useful as a hedge against the risk of losing any particular client, but it’s also a useful way to maintain a healthy understanding of the minimum viable product (MVP) which then, in a self-reinforcing feedback loop flowing the opposite direction, increases the office’s availability for self-initiated research and business development.

MVP is a kind of strategic laziness: it’s a reminder to be focused and only develop those threads or ideas that are relevant at the moment. If laziness is choosing not to work, MVP is about choosing when and where to work.

On the other hand, the size of the design fee relative to the overall project makes half of an excellent argument about the leverage of design and its role as a multiplier that can, in the best cases, deliver value beyond its cost. This would be a reformulation from design as spending to design as an investment. Unfortunately the missing half is hard to come by: evidence of the returns. The shining example of Bilbao is often trotted out, and someone somewhere has done real calculations on how much income has been generated by the rebirth of the town (€168 million euros in 2001 alone, according to Forbes).

But this argument is not very useful when made on a case by case basis. It’s especially useless for young offices that have none of the reputation or cache that Gehry does. The more perceived value accumulates on behalf of starchitects, the more it is drained from the profession at large.

My question is how the practice might begin to develop and keep track of small indicators. How much does a renovation increase the resale value of a home, for instance? And by what percentage does a good renovation increase it over a less good renovation? How do we define “good” in a way that non-architects can understand?

How do we measure value in financial and social terms? There’s triple bottom line accounting, which works within the confines of a firm’s balance sheet, but how do we think about the perception of value from the outside? How do we find better ways to see and understand the value of architecture and spending in the built environment in general?

If I had interns they would be reading about contingent valuation and searching for ways to instrumentalize this branch of economics within the context of the built environment. But since I don’t have any interns, I will leave you with this excerpt from a paper subtitled “How to stop worrying and learn to love economics” (PDF link) which makes mention of the difficult task of valuing the Exxon Valdez oil spill. Can the impact ever be valued in an exact way? No, but it can be rigorous. And what’s instructive about this small vignette is the use of contingent valuation to assess the indirect perceptions of value which compliments more familiar ways to value the catastrophe directly.

The method has also been subjected to rigorous scrutiny, one of its biggest tests being its use to estimate the environmental damage caused by the supertanker Exxon Valdez, which ran aground in March 1989 off Alaska. This led to careful scrutiny in the profession, given the enormous interests and large sums of money involved. The United States National Oceanic and Atmospheric Administration (NOAA) hired two Nobel prize-winning economic theorists – Kenneth Arrow and Robert Solow – to chair a panel to assess the methods. The report (Arrow et al 1993) concludes “that contingent valuation (CV) studies can produce estimates reliable enough to be the starting point of a judicial process of damage assessment, including lost passive-use values”. This last term refers precisely to the non- use values of the environment consisting of existence, option, and bequest benefits – the very same benefits which we have just been discussing in connection with the valuation of art.

This post is an expanded excerpt from a lecture presented at Aalto University Department of Architecture on February 24th, 2011.

8 Comments so far

  1. Rory on February 28th, 2011

    There’s some good questions here, and I’m not going to pretend to know about economics, but it got me thinking about one possible example of how some of these issues might pan out in action.

    So I did a house extension for some friends. Because they’re friends, and they didn’t have much money to spend, I did it for mates rates – I didn’t lose money on it, but I probably didn’t make any either. I thought that’s ok, I want my friends to have a nice place to live, and they’re talking about living there for at least 10 years. BUT, instead their scenario changes, and they spin around and sell the place, coming out a cool 100k ahead.

    Now I can’t take credit for adding that kind of value to their property, as there are plenty of other factors – such as larger trends in real estate values for the area, or the luck in the bidders they got at the auction – but it’s probably safe to say that my design played a role.

    Given their making such a packet out of me, I wanted to turn around and ask for the difference in fees from mates to commercial rates. But that wasn’t the deal. However it would seem to me that with this fancy ‘contingent valuation’ you speak of, I could work out precisely how much value I did add, and work this into my fee agreement, effectively allowing me to work for a proportion of this if the owners decide to sell in the future.

    And presumably this would work both ways, if my crappy design decreased the value of their property, I would have to pay them. That’s the risk I take. This risk might also work as a means to more effectively communicate my own confidence in building value, as I become a stakeholder. And it’s virtuous in terms of design too, because the better the job I do, the more I stand to gain down the track.

  2. bryan on February 28th, 2011

    @RH I remember this story and in fact this was one thing on my mind while I was writing the post. How are the real estate websites in AU? In the US, for instance, there is a wealth of historical data about the market on consumer real estate sites. If the data is available it might be worth trying to puzzle through the value add of your design services by looking at overall price inflation in that neighborhood and comparing it to the 100k difference in sale price that you witnessed. And post the results if you can bearit!

  3. Rory on February 28th, 2011

    Oh sorry Bryan I’d forgotten I’d bored you with that old war story already! It sure would be worth trying to puzzle through it, (and actually, looks like I’ll be doing another job for these same micro-developers, so perhaps that’s a chance to put this accounting into action).

    But I guess the point of yours I was trying to highlight is that communicating value is OUR responsibility as designers. Too often do I hear architects complain about the public’s ignorance of the value of design, and normally the assumed response is better marketing – some kind of PR campaign by the AIA for example. If we could instead (to paraphrase something you wrote on here a while back) ‘treat contracts as a design exercise’ – using the language of the developer – then we surely stand a far better chance of being heard.

  4. bryan on February 28th, 2011

    Wait, the AIA aren’t going to do this for us?

    Yes, it’s our job. And hopefully this means that we can do it as a community of young designers who treat this as a way to rethink the profession in addition to the personal gains it may produce.

  5. Dan on March 1st, 2011

    Just seen this – interesting, and v important.

    One half-formed thought and one note:

    1. Something about hinging value to real estate prices feels too blunt, and possibly dangerous. Too much at the whim of the market, and also not a good proxy for value. Shared value approaches (see Porter and Kramer) may be better model than triple-bottom-line, but it’s early days. Also, from a purely financial capital view, property investment is highly illiquid and only really tracks general economy performance. We might actually want to hinge it to something with more oomph. Perhaps think about a venture capital model instead?

    2. RE Bilbao effect. The museum was only one (smallish) part of major investments by Bilbao at that point, including vast infrastructure developments. So the effect of the museum itself – and specifically Gehry et al’s design – is much harder to track than Forbes (and most others) make out. Lawrence Barth has better info on this than I. There’s also a strategic problem with the Bilbao Effect – in that each subsequent ‘Bilbao effect’ has less and less impact, by definition, and reduces the value of the Effect each time, if you see what I mean. If there is one in every town, it becomes worthless. But the real story there is in the detail of what actually went on in Bilbao at that time (and subsequently, through programming shows etc.) – the icon is the most tangible and obvious part of it, and so written about, but the metro under the ground is also highly impact-ful, alongside other investments by the Basque govt.

    That all needs valuing too.

  6. bryan on March 1st, 2011

    @Dan Agreed that the real estate argument is weak on the verge of dangerous, but it is also extremely tangible and actionable. Seems like a good opportunity for some “sketching in data,” to borrow from Eric Rodenbeck, in parallell with TBL, contingent valuation, shared value, and other approaches that, ultimately, are about culture change and will take, to be Californina about it, forevs’.

    The VC model is a REALLY interesting one for me (for obvious reasons) and I’ve been noodling on this for a while without much progress. It’s hard to pitch to a VC when there is little chance of runaway success in the built env. practices. Even the best firms are small by VC exit standards. According to an estimate from late last year, Foster’s office is worth about 218m USD. While respectable, this is not much in the grand scheme of things and Foster’s is one of the most successful offices in terms of both finance and fame!

    Missing aspect of architectural knowledge: a survey of firm buy outs. OMA, Zaha, Foster, they’ve all taken investments. This is a good story waiting to be written. Intern?!

    Also important to note here the difference between Rory and Norman (no offense, Rory). Rory and I need techniques that we can use to bootstrap a small office. Someone between us and Norman needs a way to finance prudent growth. A long way around, but I’m wondering aloud if the real estate focus might be an expedient rocket booster to relevance that can be jettisoned later when an individual firm is on their feet and/or the BEP (built env. practices) figure out another business model and with that another way to value their work.

    Your point on Bilbao is very well taken. In that way it’s the success story mirror equivalent of Pruitt Igoe. This is a nice pairing that we should explore further.

  7. David on January 24th, 2012

    Thanks for your insight bryan. I kinda get where you are coming from after recently reading Eric Ries book The Lean Startup. Since this I have be racking my brain on how these idea may to how we approach and architectural practice. I have just started my own practice, currently along very traditional lines. Exciting and nerve racking at the same time. My aim is to give good attention to reseach as well as design, but is there a business model at will better support this approach?

    Thanks for the post.

  8. dragonvale hack no survey on January 31st, 2014

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