Published under the title “Is it Worth It?” in Clog: Guggenheim
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Figures 1-3
By now we can do away with the idea that aesthetic considerations in contemporary architecture are something sacred; the building’s appearance is fundamentally economic. It is now common to hire design architects to “skin” a building while consulting another firm to determine the placement of its guts. Such practice demonstrates the perceived limitations of the architect’s ability to add value to interior spaces. Money is spent on the envelope, because that is where value is created. This tendency toward the envelope is nowhere more apparent in recent years than at the Guggenheim Bilbao, a museum whose global renown is largely based on the images disseminated of its exterior. Countless mass media articles—and some scholarly researchers1—have commented on and investigated the so-called Bilbao Effect: a phenomenon in which a singular architectural project produces great interest and economic activity in a (typically) financially struggling city. But what exactly is the added economic value of the architecture that produced the effect? What are the economics of the architectural aesthetics?
The answer can be determined through financial analysis, ascertaining the surplus value created by the architectural design as seen by the owner;2 in order to isolate the design value of the built museum, one must estimate the economics of a “non-designed” Guggenheim Bilbao in addition to those of the museum as built according to Frank Gehry’s design.
First, costs and revenues need to be determined: budgets3 done in step 1. Initial cost is calculated by multiplying the cost per square foot by the size of the building. While ticket sales and other revenue don’t cover the museum’s operating budget to produce gross income, but because the government owns the museum, it sees revenue as tax collected from non-local museum visitors. After subtracting the government’s portion of the museum’s annual operating budget from the annual tax revenue created by the average number of non-local visitors, we arrive at an estimate of the museum’s annual gross income. With costs (outflows) and income (inflows) calculated, the museum’s value can be determined through a discounted cash flow (DCF) analysis that calculates the net present value (NPV) of the museum’s cash flows over a period of 50 years.
The DCF analysis illustrated in step 2 is a two-part process that first puts all outflows and inflows at their respective points in time. These values are represented by the undiscounted graphs (1a-1d as initial figures yielded from step 1) for both the Gehry and non-designed museums. Next, each cash flow is discounted over time at a given rate4 back to the start of the project (time zero). For our purposes, because construction began in 1993, we consider it the present. The discounted cash flow amounts are represented by the graphs that, despite slowly growing over time in real dollar amounts as illustrated by the undiscounted graphs, decrease over time in their economic value due to being discounted back to the present.
Finally, in step 3 we add the difference of net present values5 of the respective museums during the operational period (outflows) and construction period (inflows) - represented in the graphic by the hatch overlaid on the discounted cash flow graphs - to arrive at the value added by the Gehry design as seen by the owner. Whereas the Gehry design has a net present cost that is $74 million greater than the non-designed museum, the net present value of its inflows over the next 45 years is $298.7 million greater. That total difference, or surplus, in 1993, is a staggering $224.7 million, or $864 of added value per square foot.
By the looks of things, it would seem this sort of discussion—in which the words “aesthetic” and “design” are synonymous with “money”—has been commonplace in attempts to produce similar outcomes in future Guggenheim expansions.
For the designer this discussion brings to the forefront an ethical dilemma: do the gains (through greater fees or more work) by the individual architect or firm of designing for appearance outweigh the complicity in the loss of importance given to the building as a whole as experienced by the discipline and users of architecture?
1 Of note, the political economist Gerardo del Cerro Santamaría and economist Beatriz Plaza have written extensively on the subject; the former in relation to broader themes of globalization, the latter mostly with respect to the museum’s impact on tourism.
2 There is, of course, greater value still, as seen by international and local businesses, and firms participating in the construction, including Gehry Partners. However, as would be typical of any building project, this analysis limits itself to the value created for the owner (the Basque Government and the Provincial Council of Biscay own the art, and along with the City of Bilbao, own the building and land).
3 Numbers related to construction costs, annual budget, and tax revenue are extrapolated from publicly available sources (given in 1997 US dollars).
4 A 5.5% annual discount rate is one standard, recommended by the EU for large infrastructure projects in Spain in the mid 1990s.
5 Both of these terms derive from the concept of “time value of money,” essentially the idea that one dollar today is worth more than one dollar tomorrow. Together these concepts lie at the core of financial valuation. For a clear description see William Brueggeman and Jeffrey Fisher, Real Estate Finance and Investments (New York: McGraw-Hill Irwin, 2011).
Figures 1-3By now we can do away with the idea that aesthetic considerations in contemporary architecture are something sacred; the building’s appearance is fundamentally economic. It is now common to hire design architects to “skin” a building while consulting another firm to determine the placement of its guts. Such practice demonstrates the perceived limitations of the architect’s ability to add value to interior spaces. Money is spent on the envelope, because that is where value is created. This tendency toward the envelope is nowhere more apparent in recent years than at the Guggenheim Bilbao, a museum whose global renown is largely based on the images disseminated of its exterior. Countless mass media articles—and some scholarly researchers1—have commented on and investigated the so-called Bilbao Effect: a phenomenon in which a singular architectural project produces great interest and economic activity in a (typically) financially struggling city. But what exactly is the added economic value of the architecture that produced the effect? What are the economics of the architectural aesthetics?
The answer can be determined through financial analysis, ascertaining the surplus value created by the architectural design as seen by the owner;2 in order to isolate the design value of the built museum, one must estimate the economics of a “non-designed” Guggenheim Bilbao in addition to those of the museum as built according to Frank Gehry’s design.
First, costs and revenues need to be determined: budgets3 done in step 1. Initial cost is calculated by multiplying the cost per square foot by the size of the building. While ticket sales and other revenue don’t cover the museum’s operating budget to produce gross income, but because the government owns the museum, it sees revenue as tax collected from non-local museum visitors. After subtracting the government’s portion of the museum’s annual operating budget from the annual tax revenue created by the average number of non-local visitors, we arrive at an estimate of the museum’s annual gross income. With costs (outflows) and income (inflows) calculated, the museum’s value can be determined through a discounted cash flow (DCF) analysis that calculates the net present value (NPV) of the museum’s cash flows over a period of 50 years.
The DCF analysis illustrated in step 2 is a two-part process that first puts all outflows and inflows at their respective points in time. These values are represented by the undiscounted graphs (1a-1d as initial figures yielded from step 1) for both the Gehry and non-designed museums. Next, each cash flow is discounted over time at a given rate4 back to the start of the project (time zero). For our purposes, because construction began in 1993, we consider it the present. The discounted cash flow amounts are represented by the graphs that, despite slowly growing over time in real dollar amounts as illustrated by the undiscounted graphs, decrease over time in their economic value due to being discounted back to the present.
Finally, in step 3 we add the difference of net present values5 of the respective museums during the operational period (outflows) and construction period (inflows) - represented in the graphic by the hatch overlaid on the discounted cash flow graphs - to arrive at the value added by the Gehry design as seen by the owner. Whereas the Gehry design has a net present cost that is $74 million greater than the non-designed museum, the net present value of its inflows over the next 45 years is $298.7 million greater. That total difference, or surplus, in 1993, is a staggering $224.7 million, or $864 of added value per square foot.
By the looks of things, it would seem this sort of discussion—in which the words “aesthetic” and “design” are synonymous with “money”—has been commonplace in attempts to produce similar outcomes in future Guggenheim expansions.
For the designer this discussion brings to the forefront an ethical dilemma: do the gains (through greater fees or more work) by the individual architect or firm of designing for appearance outweigh the complicity in the loss of importance given to the building as a whole as experienced by the discipline and users of architecture?
1 Of note, the political economist Gerardo del Cerro Santamaría and economist Beatriz Plaza have written extensively on the subject; the former in relation to broader themes of globalization, the latter mostly with respect to the museum’s impact on tourism.
2 There is, of course, greater value still, as seen by international and local businesses, and firms participating in the construction, including Gehry Partners. However, as would be typical of any building project, this analysis limits itself to the value created for the owner (the Basque Government and the Provincial Council of Biscay own the art, and along with the City of Bilbao, own the building and land).
3 Numbers related to construction costs, annual budget, and tax revenue are extrapolated from publicly available sources (given in 1997 US dollars).
4 A 5.5% annual discount rate is one standard, recommended by the EU for large infrastructure projects in Spain in the mid 1990s.
5 Both of these terms derive from the concept of “time value of money,” essentially the idea that one dollar today is worth more than one dollar tomorrow. Together these concepts lie at the core of financial valuation. For a clear description see William Brueggeman and Jeffrey Fisher, Real Estate Finance and Investments (New York: McGraw-Hill Irwin, 2011).