Why Buildings Shouldn’t Last 1000 Years

parth

One of the many criticisms leveled (badum-psh) against modern buildings is that they’re shoddy, lasting only a handful of years before they need to be torn down or replaced. Modern buildings are generally designed to have a 50 year lifespan, and many are torn down before they even reach that. Compare this to ancient buildings, some of which have lasted for hundreds or thousands of years, and continue to impress even today.

But it’s actually a good thing that our buildings don’t last that long. The reason is something called Net Present Value, which is how organizations decide the value of projects they’re considering funding. Net Present value is essentially the current value of all future cash flows, minus the initial cost. The higher the number, the more valuable the project is. The formula is below:

NPV

Where C0 is initial investment, Ct is annual cash-flow, r is the discount rate, and t is the number of years. Let’s plug in some numbers and compare a typical, 50 year life building with a theoretical building designed to last 1000 years.

First, the initial investment. We’ll say our typical building will cost 1,000,000 dollars. This might cover, say, a small (7-8000 square foot) commercial building like a store or a warehouse. It’s hard to say how much a hypothetical thousand year building would cost, but it would be FAR more expensive. NONE of our modern materials – steel, concrete, wood etc, would suffice, as they’re all subject to corrosion and decay. The only buildings that have lasted for a thousand years are ones constructed of stone. But let’s be conservative and say it costs three times as much – 3,000,000 dollars.

Next, the annual cash flow. For our typical building, we’ll assume a gross rent multiplier of 8 (which might make this a fairly lucrative building), which gives an annual rent of 125,000 dollars. We’ll give the same annual rent to the 1000 year building, because nothing about a 1000 year building would make it better for tenants (if anything, it’d be worse, as increasing durability tends to decrease usability).

But, our cashflow won’t be constant. Rents increase over time, even above inflation. This suggest an average increase of around 1.3% a year over inflation. This suggests a commercial rent increase of around 2-3% a year, though that isn’t inflation adjusted. We’ll assume an annual rent increase of 1.5% over inflation (though it’s unclear how realistic this is long-term – towards the end of a thousand years an initial 1000 dollar per month rent would turn into just over a billion, which seems…unlikely).

The discount rate is the theoretical rate of return you could get if you just held on to your money. For our discount rate, well, the 10-year treasury bond rate averages around 2% or so. The corporate bond rate has been steadily marching downward over the years, but is currently at 3.5%. The average return from the S&P 500 since it’s inception is 7% (inflation adjusted). This page suggest that 4-5% is a good number to use for a discount rate. We’ll go with 4%

Plugging these values in to a net present value calculator yields $2,571,612 for the typical building, and $2,075,000 for the 1000 year building.

In other words, the typical building is much more valuable, to the tune of ~25%, than the 1000 year building. And let’s be clear: I HEAVILY stacked the deck in favor of the 1000 year building by only making it 3 times more expensive, and assuming a perpetual rent increase of 1.5%.

It doesn’t matter that our 1000 year building lasts 50 times as long. Building it to last is so much more expensive that the “cheap” building comes out ahead. And keep in mind, assuming a building would actually last 1000 years, even if we designed it to, is a bold prediction. Vanishingly few buildings, even ones designed for longevity, have done so – the majority of them are rubble.

These numbers shouldn’t be that surprising. A building is just not that great of an investment. Buildings are nicer than they were 100 or 200 years ago, but they fulfill the same fundamental purpose they did then. They haven’t fundamentally changed the way we live our lives or the structure of civilization like the car or the computer or the plane or the cell phone have. In a dynamic, growing economy we should expect there to be much better places – more useful places – to put your money than a building. You don’t see the Vatican financing too many massive churches designed to last the ages these days, despite having a few billion dollars to invest. In some ways, ancient people’s predilections for long-lasting buildings reflects the fact that their economies were stagnant, with little innovation or growth.

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