Business Tips

Will modular construction be on the rise in 2018?

If you could name one big change to the physical process of construction (not the materials or the technology) over the last fifty or a hundred years, what would it be?

Of course, there are motorized cranes, forklifts, pulleys and more, allowing us to build ever-taller buildings. And there are relatively new materials being used, like fiberglass and polymers.

But the drawing up of designs specific to each structure, putting in bids and taking out loans, clearing the work site for materials, workers, and equipment, and forging on at the mercy of weather and the subs’ schedules—none of that has radically changed.

Until recently. Prefabricated construction, also known as modular or off-site construction, is a new model for construction that wouldn’t be possible without some of the technology we’ve developed over the last fifty to a hundred years, but has certainly been doable for the last four or five decades. It just hasn’t caught on big yet—but some say it’s about to.

Why Modular Now

Modular construction utilizes off-site manufacturing facilities where structures or portions of structures are built. The components are then reassembled at the construction site.

“Every other industry in history has evolved in some way. I see modular as the next evolution of the construction industry,” said Modular Building Institute Executive Director Tom Hardiman. “Availability of skilled labor is tight. Housing costs are off the charts. We need more housing units—without labor, how are we going to build them?”

There’s reason to believe Hardiman’s predictions. Prefab construction—at least in case of larger buildings—costs less. It gets done faster with less labor, which is appealing to developers. Marriott has recently announced that it will be using modular construction of guest rooms and bathrooms in more than fifty new North America hotel builds. Other hotel chains, including Hilton and Hyatt, are jumping aboard or have already begun.

The same reasons—cost savings, faster builds for quicker ROI—are attracting developers in the multi-family housing market, a sector where modular construction topped three per cent of the market share in 2016, according to the latest Modular Building Institute report.

A couple of other factors make modular building attractive now: advocates claim that it uses less material, as factory construction is more exact, making it a more sustainable method than stick-building. They also say modular buildings are built on the factory floor to be transport-ready, and can therefore stand up to natural disasters better.

Room on the Supply Side

As CNBC reported last summer, home prices had been outpacing inflation for decades, making homes less and less affordable for middle-class buyers (not to mention those in lower income brackets). Most people blame this discrepancy on income growth and housing costs on a shortage of supply.

The U.S. housing shortage drags on, with 29 straight months of diminishing inventory as of November 2017.

According to researchers at Realtor.com, some relief is coming in the second half of 2018. However, most of the increased inventory and slowing in price growth will occur at the high end of the market. “Entry-level homes will continue to see price gains, [due to both] the larger number of buyers that can afford them and [fewer] homes available for sale in this price range,” the report reads.

On top of this, the country is recovering from the devastation of two major hurricanes. Said Hardiman of the Modular Building Institute: “We’ve been talking to the state agencies about allowing modular companies from outside the state to build for Texas. It’s the best solution after a disaster. We did a lot of work after Katrina. Instead of putting people in RVs and mobile homes we can build more robust structures and do it quickly.”

So What’s Holding Prefab Back?

UC Berkeley’s Terner Center for Innovative Housing published a report last March arguing that prefab could help boost housing supply for lower to middle-income families in the San Francisco area, a locus of the affordable housing crisis.

However, the report notes that since 2013, only five prefab housing structures had been built in the Bay Area, adding up to just 777 units. Just eight more were underway at the time of the report.

Major prefabrication factories in California and New York closed up shop or changed hands in the last two years, and so far modular building isn’t as much of a bargain as its champions have promised.

The Terner Center presented a few possible reasons modular building hadn’t taken hold more, including lack of design flexibility and additional materials needed to protect the structures in transit and at the site. There are also state and local building codes. The report notes that there is as yet no established point in the modular building process for local inspectors, who usually have more stringent standards, to step in and complete their reviews, which ruffles the powers-that-be in some municipalities.

“Right now, state trumps local codes for modular construction in San Francisco,” said Michael Theriault, secretary-treasurer of the San Francisco Building Trades Council. This could present a problem in a city that’s tightly filled with frame buildings that have burned down en masse before. “The council will probably mount a challenge.”

Theriault was quick to note that the city’s trade unions are not against modular building, in theory. “But we would like it to be built in San Francisco, per San Francisco’s codes, and utilizing local workers who are getting a fair deal,” he said.

Still a bigger obstacle to modular’s success, according to the Terner Center, is financing: factories, with their overhead and consistently payrolled employees, need the capital up front to start a project, and can’t rely on a mix of debt and equity like construction contractors often do. They also may not be able to weather the business’s cyclical nature.

Both Thierault and the Terner report maintain that modular’s logistical and technical challenges can be overcome—necessity is the mother of invention, as the adage goes—but only time will tell.

The Terner Center presented a few possible reasons modular building hadn’t taken hold more, including lack of design flexibility and additional materials needed to protect the structures in transit and at the site.

A Builder’s Perspective

George Parmer established Fine Line Homes in 1972 in Harrisburg, Pennsylvania. He builds single and multi-family homes across an area that encompasses his state’s whole northeastern quadrant plus central New York.

Parmer started the company as a modular builder, renting out space at a nearby factory. “They were super-strong houses, because they had to go over roads with potholes and everything else to get to the job site,” he commented.

He said the homes were often wrapped in plywood for extra protection during their travels, and required special equipment to move them from the trailers to the job site and erect them there—adding to the cost of the project.

To reduce costs Parmer tried panelized housing, essentially a hybrid of off-site and on-site building, before moving again to traditional stick building, the method he’s been using for the past three decades.

He pointed out that modular homes aren’t built to fit the actual foundation on the site. “There might be parts of the foundation that has gaps, because it’s not exactly plumb. So you might have to use other materials to fill it in.”

San Francisco’s Theriault expressed similar concerns about not-so-flush foundations—“unless you start working with adjustable steel frames, there are going to be tolerances you’ll have to live with”—as well as gaps between individually-sheathed modules.

“I don’t have anything against modular,” George Parmer of Fine Line Homes concluded. “But the last time I looked a few years ago, I could still construct a stick-built home of the same quality for less money.”