Home Strategy Real Estate Forget Everything You Know, Modular Will Be Worth It

Forget Everything You Know, Modular Will Be Worth It

There is no shortage of developers or builders who have tried prefabrication and now swear against it. I hear more and more, “we tried it and it didn’t work.”

Yet, some are achieving huge success. But how?

By chatting with several experts in the field, I discovered that success comes from forgetting what you know about stick built projects and starting over with a clean slate. Modular projects need different timelines, a different set of stakeholders, and therefore deserve a different process to be successful.

As Daniel Gehman, principal at architecture firm Danielian Associates wrote in a recent blog post:

I offer a fundamental encouragement to anyone considering a modular project: conceive of it as modular or prefabricated from the very word “go.”

Anthony Gude serves as the director of operations at R & S Tavares Associates, a company that provides services that include design, structural engineering, consulting, and project management for prefabricated buildings. He emphasizes the critical need to bring all the key players on a project together from the very beginning.

“If the design team is brought in too late, or if the wrong fabricator is chosen for a project, then you’re setting yourself up for failure,” Gude said.

Leaders at vertically-integrated multifamily housing solutions group VBC, or Volumetric Building Companies, add that design schedules and decision timelines for modular projects can be significantly different from site-constructed projects.

“Approvals, decisions, and details have to be finalized prior to groundbreaking for the best opportunity for success,” says VBC’s president Vaughan Buckley. “This is often reflected in compartmentalized budgets that only consider the ‘trees’ of the phases versus the ‘forest’ of the entire project cost and timeline.”

So, modular construction actually becomes a great opportunity to rework the process for more efficiency, for better teamwork, for more transparency, and ultimately for more effectiveness.

It necessitates a clean slate and an overall different work culture. Culture change may seem like an exaggeration, but it truly isn’t. Modular construction takes everything that a builder knows about building and changes it. The team is different, relationships, accounting, labor, design, process, organization…, and the list goes on.

So, it’s easy to see why it isn’t more broadly adopted—it’s just too radical of a change.

But, here’s the hook. The change is worth it.

Saving More Than A Year Construction Time

In 2019, VBC completed a multifamily project in Philadelphia that took 11 months, when a project of that size typically takes about 24 months. The $15.6 million wood-framed project, called 4125 Chestnut, was made up of 75 modular units for a total of 130 units and completed in 2019.

“Prefab project success can only be quantified by exceeding the schedule of a site-built project, in my opinion,” said Gude. “No other metric is as important. If we’re not delivering speed with all the advantages of modular, we’re not succeeding.”

The time savings are incredibly important for the reduction in carrying costs and the ability to have faster cash flow with access to finished units sooner.

“In addition to reduced timelines, the benefits of modular can be measured in few to no change orders, less contingency financing needed and fewer difficulties in the project due to weather, crew retention and local inspectors demanding last minute changes that cost time and money in on-site construction,” Buckley said.

Saving Six Months In Construction Time

VBC developed another project of 36 units called The Annex. The zoning approvals for the project began in May 2016, and the certificate of occupancy was delivered in April 2017.  

This 37,500-square-foot project was finished six months faster than what a comparable site-built project would have needed. Plus, the management company was able to stage and lease apartments while the exterior was still being completed because the build was water tight and had a safe interior environment.

The manufacturing costs were $2.75 million and the on-site construction costs were $2.5 million, bringing the total project cost to $6.7 million, including the price of the land. The developer was then able to sell the project in just a few months for $9.2 million.

Not All Designs Are Created Equal

These experts in modular construction have seen typical designs being forced into modular to try to cut costs, but it typically ends up not producing the results that they expected.

“Not all designs are created equal when it comes to modular construction,” said Sara Ann Logan, vice president of design at VBC. “Stakeholders who believe that a more traditional design can be modularized can put extreme strain on the speed, consistency, quality, and profitability of a modular project. Design schedules and decision timelines for modular projects can be significantly different from their site-constructed counterparts.”

VBC recommends doing modular feasibility studies to see if modular construction makes sense for the project. Then, the modular builder needs to take the lead to develop the most efficient use of modules to accomplish what the owner wants.

Darren Seary, principal at real estate consulting firm Optimum Modular Solutions, not only recognizes a need for better education on modular design, but also a need to educate contractors and subcontractors so they know how to accurately price the work. 

“Contractors price 10% more even though they are only doing a fraction of the work because they are unfamiliar,” Seary said. “Subcontractors aren’t familiar so they end up pricing a lot of things that are already included in the modules. They pull everything together and then it’s more cost than conventional. Then, the project owners go with conventional because they know it.”

Seary is obviously making the numbers work. He has been able to get a 150-unit permanent supportive housing project to between $200,000 and $225,000 per unit in Los Angeles, where units usually cost more than $475,000 to develop.

Process Evolution

Technology is evolving quickly, which means that there are more and more tools available for modular construction. First, there is software available, such as Archistar, Hypar, and Kreo, that can look at site feasibility, along with producing parametric design and modeling.

An exciting evolution that Gude foresees is the ownership and distribution of designs as digital products, much like the recent explosion of NFTs, or non-fungible tokens. This development will be incredibly beneficial in a world where illegal use of designs is becoming more frequent, presenting safety and legal issues for the stakeholders involved.

Much like NFTs, the designs would have digital ledgers that would act as a certificate of authenticity, giving the owner a benefit every time the design is used, similar to book or music royalties.  

“All the technology for this already exists,” Gude says. “As it becomes more widely adopted, it will be a game-changer for permitting, design workflows and allow us all to maximize the benefit of modularization and industrial design in construction.”

Gude believes that engineering firms that are fabrication and manufacturing specialists will even learn to own and distribute fabricator specific details, therefore making design more economical and the fabricator’s workflow much smoother.

“This is the real thing holding back economics of low margin work like multifamily housing where the fabricators are the last to adopt the best of technology,” Gude said. “A major advantage of modular construction is being able to re-use design elements on multiple projects, thus reducing costs.”

VBC also sees advantages in leveraging the integration between file storage, project documentation, and intra-software communication in order to reduce or eliminate redundancies and allow design, manufacturing, and construction teams to reduce the amount of time they spend tracking, locating, and managing responses. The evolution of this would mean systems that can collaborate across national and international borders.

Mohamed Al-Hussein, a professor and the NSERC industrial research chair in the Industrialization of Building Construction Department of Civil and Environmental Engineering at the University of Alberta, is very excited about the advances of technology here in North America. He has been researching modular construction for a number of years and after visiting Europe and seeing the traction of the industry there, believes that there is a huge opportunity here.

In Europe, the buildings are made with structures to last a long time. Here, we build with lightweight materials like 2x4s, which means that the machinery can be lighter and work faster. With that in mind, Al-Hussein is commercializing machines this summer that will be a fraction of the cost of what is currently on the market and will fabricate and frame for light weight wood and light gauge steel.

What About The Risk?

There is no avoiding risk—both conventional construction and modular construction have risks.

“The industry has grown accustomed to the risks in conventional construction, and accepts them,” says Seary. “They know they aren’t going to hit time, quality and cost. If you weigh those out and bring conventional risks to the surface, you could argue that modular is less risky if managed correctly.”

In a side-by-side comparison of the risks involved in both processes, Seary shows that modular can be a very attractive, low risk option. One of the higher risks is obtaining financing, but one cause of that is that financiers do not have comps, which will be removed as modular gains more traction.

“There are unique challenges to financing modular projects,” said Elizabeth Selby, housing innovation, senior project manager, Los Angeles’s Office of Mayor Garcetti. “So, we are looking at it as a city so that our developers have a way to finance them.”

Selby is excited about the promises of modular construction and how the city can support it more with better ways to finance and also ways to review the projects more expeditiously.

“Building affordable housing is as costly as building anything else,” Selby said. “You can build with simpler finishes, but it’s not super impactful. Costs are what they are. Affordable also is expensive because finance is a very complex transaction, very time consuming, very competitive and requires a lot of expertise.”

She explains that in conventional builds, the supplies for construction are ordered, such as lumber, and after it shows up on site, an inspector arrives to approve it and then the finance from the city is approved. Typically, the city has to confirm that all the materials are on site, before the project owner is reimbursed for the purchase of the product.

But in a factory-built project, it’s very different. When construction starts, the project owners have to pay a deposit to the factory. So, it is a capital outlay that isn’t an investment in materials. The deposit is only reserving a place in line. Then, there is a large deposit to buy materials for the factory to get started. Then, the prefabricated units get shipped to the job site.

Al-Hussein also recognizes the shortcomings of the financial structure. He points out that 80 to 90% of the construction cost is already spent, and the unit is still sitting in a factory.

“There is a strong learning curve,” admits Selby. “We have to put money out there and we need to be sure we can get it back. We are asking ourselves, how do we underwrite a factory? How do we make a large capital outlay with the confidence that the units will show up on site later? How do we put bonding in place so that the city is protected?”

The Bottom Line: Discipline

Many developers have incredible examples of time and cost savings, in different parts of the country, on different types of projects. The examples are becoming more and more frequent.

As Gehman says, “The main ingredient for success is discipline. The development and design team must be prepared to respond to ideas outside of the scope with firm resolve to the mission because they will almost always lead to bespoke solutions that frustrate the original intention of simplicity. One or two little customizations along the way can usually be incorporated, but by about the time of the third one, I alert the team it’s time to pull the plug. Also, production lines hate changes, so a firm resolve in decision making long before fabrication begins is vitally important; stopping a production line to make a change will squander the entire advantage of the process.”

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