Developers are taking on residential building challenges by extending the concept of prefabricated housing to manufacture entire apartment buildings.
California is in the middle of an affordable-housing crisis that cities across the state are struggling to solve. Rick Holliday, a longtime Bay Area real estate developer, thinks one answer lies in an old shipyard in Vallejo, about 40 minutes northeast of San Francisco.
“If we don’t build housing differently, then no one can have any housing,” Mr. Holliday said during a recent tour, as he passed assembly-line workstations and stacks of raw materials like windows, pipes and rolls of pink insulation.
Later this year, California residents will vote on a proposed $4 billion bond to build more subsidized affordable housing. In San Francisco, where developers say the per-unit construction cost is edging toward $800,000, that would buy about 5,000 units, a relative blip. “Costs have risen so much that it is not possible to build homes where people want to live at the prices and rents they can afford,” said John Burns, founder of John Burns Real Estate Consulting.
Almost a decade after the recession flattened the housing industry, causing waves of contractors to go bankrupt and laid-off construction workers to leave the business for other jobs, builders have yet to regain their previous form. Today the pace of new apartment and housing construction sits at a little over half the 2006 peak.
The United States needs new housing, but its building industry isn’t big enough to provide it. The number of residential construction workers is 23 percent lower than in 2006, while higher-skill trades like plumbers, carpenters and electricians are down close to 17 percent. With demand for housing high and the supply of workers short, builders are bidding up prices for the limited number of contractors.
Construction prices nationwide have risen about 5 percent a year for the past three years, according to the Turner Building Cost Index. Costs have gone up even faster in big cities and across California, according to RSMeans, a unit of Gordian, which compiles construction data. In the Bay Area, builders say construction prices are up 30 percent over the past three years — so much that even luxury projects are being stalled by rising costs.
“It’s reached the point where you cannot get enough rent or you cannot sell enough units to make it a viable deal,” said Lou Vasquez, a founding partner and managing director of Build, a real estate developer in San Francisco.
All this has prompted developers to go scrambling for cheaper and less labor-intensive construction methods — and investors to pour money into start-ups that promise to do just that.
“The current system can’t meet demand and that’s resulting in a lack of opportunity for some folks and a major hit to the economy,” said Stonly Baptiste, a co-founder of Urban Us, a Brooklyn-based venture capital firm that invested in Blokable. “These aren’t small problems and they aren’t small markets.”
The technologies vary but generally involve simplifying construction through prefabricated panels that can be assembled like Ikea furniture and modular apartments that can be stacked together like Lego bricks. A recent survey by FMI, a management-consulting and investment banking company focused on the engineering and construction industry, found a third of respondents said they were looking at some form of off-site construction, a steep rise from 2010. The interest extends from housing to hotels to medical facilities, industrial companies and even fast-food restaurants.
“It’s one of those things that looks like an overnight success but it’s taken 10 years and hundreds of people toiling,” said Chris Giattina, chief executive of BLOX, a Birmingham, Ala., company that builds hospitals with modular components.
Brokers of Risk
The global construction industry is a $10 trillion behemoth whose structures determine where people live, how they get to work and what cities look like. It is also one of the world’s least efficient businesses. The construction productivity rate — how much building workers do for each hour of labor they put in — has been flat since 1945, according to the McKinsey Global Institute. Over that period, sectors like agriculture, manufacturing and retail saw their productivity rates surge by as much as 1,500 percent. In other words, while the rest of the economy has been supercharged by machines, computers and robots, construction companies are about as efficient as they were in World War II.
To understand this, consider how buildings are actually built. It all starts with the developer, who doesn’t actually build anything but instead secures a piece of land and a loan, and gets the project approved by the government. At that point the money is passed to the general contractor that made a successful bid to build the project, who passes it to subcontractors that won the bidding for things like plumbing and sheet metal work, which often pass it to even more subcontractors.
Contractors describe this handoff as “brokering risk.” What they mean is that while everyone in the chain has agreed to build a certain piece of the project for a set amount of money and in a given amount of time, none of them are sure they can do so as cheaply or quickly as they’ve promised. They broker that risk by paying someone else to do it for them, minus a small fee.
“Say you’re a general contractor and your subcontractor agrees to do a job. Once we have a contract I don’t care how many man hours you put into it because that’s your problem now,” said Randy Miller, chief executive of RAD Urban, describing the thinking behind the process.
The goal of prefabricated building companies is to turn this model on its head. Instead of offloading risk, the contractor assumes all of it. Instead of sending jobs to subcontractors, they hire their own factory workers. “The general contractor says, ‘Oh my God, construction is scary, let me broker all that risk,’” Mr. Miller said. “I’m saying, ‘Oh my God, construction is scary, let me plan and control it.”
The basic concept isn’t new. In 1624, Massachusetts settlers built homes out of prefabricated materials shipped from England. The pattern was repeated in Australia, Africa and India as the British Empire shipped colonists and structures wide across the globe, according to “Prefab Architecture,” by Ryan E. Smith, a professor at the University of Utah.
Over the next few centuries, new versions of the idea seemed to pop up anywhere people needed to build lots of homes in a hurry — during the California Gold Rush, after the Chicago fire, and through America’s westward expansion. In the early part of the 20th century, Sears sold tens of thousands of kits for Sears Modern Homes, which consisted of prefabricated parts and panels that buyers assembled.
Along the way, the construction industry absorbed manufacturing concepts such as the assembly-line techniques that were utilized by Levitt & Sons, the pioneer of mass-built subdivisions. But the idea of factory-built housing was never adopted long or widely enough to make an impact, at least in the United States.
One reason the United States has lagged behind Europe, Australia and Asia — which all have well-established companies doing modular and prefabricated building — is that it is a predominantly suburban nation, and the vast supply of open land has kept the cost of single-family-home building relatively low. Another is that the construction industry has slim profit margins and invests little in research and development. The chances of being burned are high, and each high-profile failure leads to a furlough of the concept.
Now, instead of single-family homes, many companies doing prefab building are focusing on higher-density condominiums and apartments. That’s because, while single-family home construction remains well below its level before the recession, multifamily condominium and apartment buildings have rebounded strongly. The goal is to be able to do a 40-story tower in 12 months, at half the cost of traditional construction.
If builders are able to reduce construction costs using modular construction, this may solve the affordable housing crisis.