Investment Analysis

Engineering Value

Fine-tuning building performance can boost asset strength.

By Arkady Siterman |

It seems like only yesterday that real estate investors and developers breezily talked about easy exit strategies and double-digit internal rates of return. When lenders and investors were eager, winning at real estate was more about managing the capital stack than fixing the smokestack.

Times have changed. In this new reality, the development, acquisition, and management of major properties often have extended horizons. This longer-term investment strategy may be the default choice, but right now it’s the only choice.

In this climate, value engineers have much to offer private equity and institutional property investors. With their help, developers, investors, and owners can reduce the cost of constructing and operating properties and eventually achieve higher resale values.

Improving Performance

Value engineering is not reducing the scale or architectural vision of a project. Those business and design decisions remain the prerogative of the developer and architect. Instead, value engineers are concerned with improving a building’s construction and performance — especially its mechanical, electrical, and plumbing systems — while reducing expenditures. Value engineers are retained by the developer to optimize MEP and other building systems.

But why are systems not optimized from the start? The answer lies in the nature of large construction projects built on deadline, often amid changing budgets, goals, or even fluctuating energy and material prices. Design engineering firms, pushing to craft MEP systems on schedule, are not necessarily focused on delivering better MEP systems for less money. Understandably, project completion can take precedence over other concerns, such as optimized capital costs and operating efficiency.

In contrast, value engineers have the singular mission of increasing system efficiency while decreasing system costs. Given that role, expert value engineers stay current on the latest technologies and equipment, changes in codes, and industry operating standards. It’s their job to fine-tune each system for each particular circumstance.

Adding Value

In the current slowdown, developers have the time and inclination to improve buildings since there is no longer a mad rush to finish and lease new properties. Instead developers look for ways to improve value.

In addition, the rising cost of building systems is compelling developers to seek advice. MEP systems can consume as much as one-third of a large project’s construction budget. These higher costs are due to increasing complexity, Leadership in Energy and Environmental Design targets, and more-stringent government building performance codes.

Moreover, because exit strategies remain uncertain, the cost of operating inefficient systems also is under greater scrutiny. Generally speaking, energy costs at a class A office building or luxury hotel will run about $1.50 per square foot annually — in some office markets, that is almost one month’s rental revenue, according to CB Richard Ellis and Florida Power & Light Co.
For example, one popular building form — the glass-sheathed tower — is but one step removed from being a solar oven, particularly in warm climates. Extensive and energy-intensive efforts must be taken to keep such structures habitable, and thus such towers benefit greatly from value engineers’ insights. Value engineers can deliver significant savings in MEP construction costs, often up to 20 percent, and similar reductions in building energy consumption.

In some projects, proper value engineering not only improves building performance but also delivers increased revenues to building owners. The process of streamlining MEP systems can result in smaller ductwork and consolidated placement of heating, ventilating, and air-conditioning equipment.

In the case of the Sanaya Amman, high-rise residential towers in Amman, Jordan, value engineers consolidated MEP equipment onto one floor although the original design placed the equipment on two floors. The change created additional leasable space. In most cases consolidating major equipment and reducing ductwork and vertical piping size boost leasable floor space, while smaller overhead ductwork and piping results in higher ceilings, a sought-after tenant feature.

Value engineers also can advise on obtaining LEED certification at a lower cost. Long before using less energy was a green cause, value engineers looked for ways to minimize energy consumption as a business matter. Therefore, value engineers approach cutting energy use or reaching other LEED targets with an eye on expenses.

It is always the right decision to build an office tower or luxury hotel that operates with maximum efficiency in relation to cost. Even in the most flush of times, to build MEP systems that have not been optimized decreases returns for investors and developers and wastes natural resources and capital.