Modular Construction – Another Component for Solving the Affordable Housing Crisis

There is an affordable housing crisis in the United States – of that there is no doubt. The reasons for the crisis are well known: a lack of will at the national level to provide necessary funding; a growing labor shortage; and restrictive local zoning and the age-old problem of NIMBYism (“not in my backyard).

Labor shortages in construction are leading to increased costs and extended timelines. While the price of goods has increased due to tariffs on China, Mexico, and Germany (which may be easing due to recent agreements), it is the lack of labor that is the primary driver of the price increases.

Immigrants have traditionally made up a large percentage of the construction workforce, but current immigration policies at the federal level are putting a severe crimp in the number of available workers. Another factor – which is generally unacknowledged – is the opioid crisis, which is depleting the existing construction workforce.

The government, at least in its current configuration, is not going to help with the labor crisis. As an industry, we are going to have to find ways to build with less labor.

Modular construction is one solution – building in factories and assembling onsite.  This can substantially reduce construction time.  With modular construction, whole rooms, including kitchens and bathrooms, are built in offsite factories, loaded onto containers that are trucked to construction sites, and placed onto structures. Benefits to modular construction include:

  1. Reduced cost (15% or more);
  2. Reduced operational costs due to a reduction in defects that are common with “stick-built” housing;
  3. Increased energy efficiency due to a better fit of components;
  4. Easier higher-vertical density; and
  5. Less stress on the environment.

A major reason for the cost effectiveness of modular building is the labor efficiencies that are built into the factory construction.

A significant impediment to this type of construction are the localities. Nearly every major U.S. city has built-in restrictions – or even prohibitions – against manufactured housing.  This is the case even though manufactured housing is now virtually indistinguishable from stick-built housing. No matter how local governments couch their reasons for denying such housing, it is just another example of NIMBYism – just an effort to keep out certain “types” of people.

What Makes Modular Construction so Efficient?

  1. Efficient production; and
  2. Control of an entire process through vertical integration.

In addition to the built-in efficiencies, consumer perception of modular housing is changing, as are the viewpoints of many in the construction industry. One of the most inefficient workplaces in the world is a construction jobsite. In my days as a builder/developer, it was always frustrating to watch people standing around waiting for something to be completed, installed, or delivered. With pre-fab construction, an entire room, or even larger building elements are manufactured offsite, trucked in, and lifted into place by cranes – resulting in a 20-50% reduction in the construction timeline. The change is most dramatic in areas subject to weather delays.

Manufactured Housing & Labor

The construction industry is experiencing a clear shortage in skilled and semi-skilled labor. Fewer younger workers are coming into the construction trades to replace those who are aging out. Estimates of vacant trade positions nationwide range as high as 250,000. Factories are much easier to staff on a regular and predictable basis with full-time and long-term employees. The vagaries of weather and seasons don’t play a role in the production process.

End-users of modular buildings are becoming more comfortable with the product. Decades of experience with computer-aided design have made modular construction much more attractive and inviting, with bright colors, large windows and interesting shapes.

This method works best for projects that are both repeatable and scalable, such as affordable housing, schools and hotels.

Differences in materials used – lighter, stronger and often easier to produce – will also have an increasingly positive effect on costs and perception. It is becoming common for cement and concrete to be replaced by cross-laminated timber and modules with light steel frames that can simply be bolted into place on site. While this will lead to an increase in factory jobs, onsite positions will decrease.

The traditional method of onsite construction will still be required for small, specialized and one-off projects, but offsite prefabrication will become a growing force in the construction industry.

A recent example of how modular construction works well with affordable housing is Hope on Alvarado, a LIHTC project in Los Angeles. This is an 84-unit tax credit deal with tax-exempt bonds and is targeting the chronically homeless. It is a five-story building with a concrete podium and four stories of modular steel units on top. The modular units were manufactured in China, shipped to Long Beach, CA, trucked ½ hour to the site and put in place by cranes. Components installed at the factory in China included electrical and plumbing, kitchen cabinets, energy star appliances, floor-to-ceiling windows, wall, ceiling, and floor finishes.

On-site contractors hooked up electrical fixtures and plumbing and bolted the modular units to the existing platform. While pouring of the base was delayed due to weather, once it was in place, one floor per week was finished. The modules meet or exceed every applicable CA and U.S. code, are earthquake and hurricane safe, termites and mold proof, and have a GOLD green rating.

A recent report by McKinsey & Company states that modular construction is poised for a great leap forward – with a 50% decrease in construction time and a 20% cost reduction.

Origins of Modular Construction

After World War II, in order to rebuild Europe, Britain, the Netherlands, and Germany began developing modular models. With the catastrophic loss of buildings and decimation of the male population of Europe, there was no choice but to push for efficiency over labor. Using only 10% of the labor force present before the war, they were able to build safe, affordable, and weather-proof shelter. That lesson should not be lost on the United States.

Labor shortages and the opioid crisis have made traditional construction methods more expensive and less reliable. After years of hard physical labor many older workers have become addicted to opioids to the point that they are unable to work at all.

One early effort in this area has been the use of shipping containers as housing. While these containers are fine for pop-up retail or emergency housing, once they are reinforced and the doors and windows are cut, they are as costly as traditional construction.

Lack of Labor & the Aging of the Industry

During the 2009-2010 recession, millions of people who worked in construction left the country and are now unable to return. This – along with an average construction worker age of 48 – is creating an existential threat to the construction industry’s business model.

Factory Proximity to Construction Sites is Critical

For the modular housing model to work at maximum efficiency, factories should be no more than a day’s drive (350 to 400 miles) from the site. Transportation costs are high and can quickly eat into potential cost savings. The process must be scalable in order to have a meaningful impact.

Multifamily modular is also a more complex undertaking than single-family. Utility connections must be run through multiple floors and multiple units, which means more offsite work. Plumbing and electricity can be added at the factory but connections in the building and from the building to the street must be done onsite.

Ultimately, developers of affordable housing need to give serious attention to modular housing. This type of development is not theoretical – it is here and will revolutionize how we develop affordable housing. Forward looking developers need to begin adapting to this new business model.