Flexible Design Offers Cost-Saving Options
Systems Engineering Applications for Real Estate
October 12, 2007
Developers and builders could save significant money, time, and resources by designing buildings for flexibility using strategic engineering techniques that have proven successful in other applications. That's the message MIT engineering professors Olivier de Weck and Richard de Neufville brought to real estate professionals who attended the Maastricht-Cambridge-MIT Real Estate Finance & Investment Symposium on October 12-14.
"Traditionally," said de Neufville, "There's a statement from the owner. 'Here's what I want.' So architects and engineers go ahead and design for that."
But, said de Weck, while building components and materials have evolved dramatically, making it possible to create much more energy-efficient and economical buildings, the process of designing commercial buildings has not. All too often, it still follows a linear model that will almost certainly result in a building with significant limitations. In that traditional approach, a definition of the building's requirements is based on the findings of a market survey. That definition, in turn, drives the concept and design. Developers "know that uncertainties exist," said de Weck, "but they (address) them by making a 'best guess' during the requirements definition."
Designing for flexibility, on the other hand, means incorporating component systems that can be easily changed throughout their life cycle to adapt to changed circumstances, de Neufville noted. This approach is especially useful for projects requiring large investments (in the $10 - $100 million range); projects where investments are partially irreversible; projects where there are significant uncertainties; and projects with long life cycles.
The typical engineering mindset, said de Weck, is, "Give me a set of requirements today, a timeline and a budget and I will design and deliver the best possible system or product for you by tomorrow." Ninety percent of planning and design are spent on that traditional process, he noted. But, he was quick to add, "We are always forecasting. What will customers require in 18 months? What capacity will our facility need in three years? What variants will we produce in eight years?"
Most important, what if the forecast – a best guess at best – is wrong? It's very likely to be so, said de Weck, because traditional systems engineering (TSE) relies upon a set of notoriously unreliable assumptions. Those assumptions include customers who know, with a high degree of precision, what their needs are and what their needs are going to be; buildings designed as one coherent whole, built and deployed in a single step; and the fantasy that the building will operate in a fairytale environment where regulations, technologies, demographics, usage patterns and other factors that impact building costs remain stable for years to come.
"Perhaps the system (created using TSE) will function technically," he said, "but it will not deliver optimal value." Worse, it could fail financially if it cannot be easily changed to adapt to changes which simply cannot be anticipated, but are almost certain to occur. How different, he asked participants, might their perspective on potential large projects have been on the day before September 11, 2001 and on the day after.
As an alternative to TSE, de Weck recommends strategic engineering, which he defines as "the process of designing systems and products in a way that deliberately accounts for customization and future uncertainties such that their life cycle value is maximized."
That sort of engineering can result in "just in time" building, said de Neufville. To illustrate his point, he presented an example using a spreadsheet analysis to evaluate various scenarios for the design and construction of a multi-story parking garage.
Suppose it's impossible to anticipate, precisely, how many floors will be needed, he said. Relying on a traditional design approach, the builder might create a garage with only four floors, soon antiquated if unexpected demand called for five or six; or, conversely, a building with five floors that failed to generate sufficient income.
By constructing the building so that a fifth floor could easily be added if, and when it, it is needed, the builder would save the cost of building the fifth floor immediately, said de Neufville, but would also avoid a lot of expensive retrofitting costs if the fifth floor needed to be added at a later date.
"The traditional approach for designing a system considers configurations to be fixed over time," said de Weck. But they seldom are. Designing for flexibility allows builders to create buildings that can much more conveniently and less expensively be modified down the road.
The presentations by de Weck and de Neufville were part of an effort by the MIT Center for Real Estate (MIT/CRE) to "build bridges between academia and industry, between countries, and between economics and engineering," said David Geltner, director of the Center. "Real estate development is an inherently interdisciplinary process," he said, adding that one of the enduring strengths of the Center is its affiliation with MIT, where its students, faculty and partners can conveniently interact with leaders from a range of academic disciplines. At its annual meeting last year, for instance, the Center explored the implications of increasingly expensive energy consumption for the real estate of the future. Participants had an opportunity to see presentations by experts on clean energy alternatives from all over the world, including Prof. Henry Jacoby, co-director of MIT's Joint Program on the Science and Policy of Global Change, who showcased MIT's novel Integrated Global System Model, a complex computer representation of Earth's natural systems for cycling carbons.
* * *
The Maastricht-Cambridge-MIT Real Estate Finance & Investment Symposium is sponsored by the Journal of Real Estate Finance & Economics. The annual international conference has been hosted alternately by Cambridge University and Maastrict University since 2000. This is the first year that the MIT/CRE has hosted the conference, a reflection of the Center's collaboration with both European institutions and its increasing eminence in international real estate education.