Personally I don't like niches. You spend time and money for beautiful tile and then create a focal point of drippy half empty shampoo bottles! Don't do a niche but instead get a beautiful rack that hangs over the shower head. In stead of a niche you can do a rectangular pattern of accent tile where niche would have been.

With dual shower heads not sure if I will have room for a rack but hopefully I will. Just spoke to plumber who also does not like niches and says they often leak.

You could also inquire about corner shelves made of your wall tile.

Corner shelves would be a better option or moving the niche to a wall that is not exterior. Your contractor is right, it will not be insulated and can be a problem. We try to avoid niches on exterior walls if at all possible. If necessary, we would have customer sign off that they understand and want it anyway.

I had only a 2x4 exterior wall and went the hi-tech route instead of building the wall out. I gave up 20 mm (0.79 inches) of shelf space to put in two 10 mm layers of Spaceloft aerogel insulation (R-7.8 at an R value of 9.62/inch). I still had 2.7 inches depth of niche shelf which was sufficient for most shampoo bottles. The outside wall had a half inch of foil-faced polyurethane board under the vinyl siding (R value 6.8/in when new but which drops to 5.5/in with age) and a half inch of Wedi waterproofing panel (R value of 4.2/in) for a total R value of 11.9 behind the niche. Compared to 3.5 inches of fiberglass batting at R-12.6 (R value 3.6/in), it was good enough. If you have a 2x6 wall then you could easily put in three or four layers of 10 mm Spaceloft for a total R value of 11.4-15.1, not counting any other materials present. Spaceloft is a product of Aspen Aerogel and is available for about seven a half bucks a square foot from their distributor, Airtight Distribution.

How has the Spaceloft insulation worked out? Do you live in a cold climate? Thanks!