Thursday, June 8, 2017

Will Modular Housing Ever Hit 10% of Housing Starts?

Yesterday I had an interesting question posed to me if I thought modular housing’s future will reach 10% market share with all the positive media coverage touting its benefits.

He also asked why he couldn’t find any numbers for modular housing starts in the Southwest or the West Coast.

Second question first. Neither the West Coast or the Southwest have much of modular presence, minuscule actually, as both of these areas are Manufactured Housing strongholds, especially the Southwest. Standard modular is priced too high in comparison. Tract builders and Manufactured Housing dominates the West. It will be years before any major inroads will be made in either area. Fact of life folks.

As for his question about the future of modular housing’s reaching 10% of the total, that elicited a response from me that he wasn’t expecting.

Assuming there will be 800,000 new single family home starts in the US this year and modular’s share is 2%, as he stated to me, that means that only 16,000 will be modular. Since no one actually knows the true number of modular factories in the US, I told him my best guess was 50 true modular plants. Each factory would have to produce 320 homes or approximately 1,000 modules. WOW!, that’s really not a realistic number for most factories.

Based on my calculations, In order to raise modular’s share to 10% would require an additional 200 factories to be built. If the cost of building a factory, acquiring the equipment, trailers and beginning materials as well as hiring the initial staff and paying them for the 3 months after the factory is completed until the first house rolls off the assembly line is about $5,000,000, that would require an initial investment of $1.0 Billion Dollars!


IMHO, that is an unsurmountable amount.

A small regional site tract builder for example could start up with no building investment, no equipment investment and a small staff. The only real investment would be cost of land and development and the 3 or 4 seed spec houses, all of which could cost less than $1,000,000 that would be eliminated as houses in the development are sold, hopefully leaving a nice profit and the initial investment paid off.

All it will take to reach a 10% market share is an enormous amount of money and a lot of new factory and sales people. Both of which are currently in short supply. Plus new builders; something else in short supply.

To prove my point, here is a recent article about FullStack Modular’s startup, a new multifamily and commercial factory opening in Brooklyn, NY with aspirations of going not only national but global:

FullStack Modular, LLC, the turnkey modular prefabricated solution for developers of multifamily buildings, hotels, and dormitories, announces the closing of a $6 million Series A round of funding. The investment is led by McCourt Global and includes real estate industry leaders Lawrence Benenson, Lloyd Goldman, Jonathan Grunzweig, Jonathan Langer, and Daniel Levene. 

The funds will be used to scale production of FullStack Modular's 100,000 square foot design and construction facility in the Brooklyn Navy Yard, as well as facilitate company growth with an eye towards expanding to the west coast and abroad

"We are excited to have this powerful group of investors involved in our business," said FullStack Modular CEO and Founder, Roger Krulak. "Our company is transforming the real estate construction business and the way mid and high-rise buildings are created. Our fully integrated design-build process incorporates innovative technologies such as Building Information Modeling [BIM], design for manufacturing, and lean construction management. The result is a process which is faster and more cost effective than conventional building, generates far less waste, enables safer site conditions, and is less disruptive to the surrounding neighborhoods."

"Roger and his team at FullStack Modular are bringing innovative technologies and processes to an industry long in need of greater efficiency," said Drew McCourt, President of McCourt Global. "We're pleased to support FullStack Modular as it scales its business and leverages growth opportunities both here in the United States and abroad."

CLICK HERE to read their story.

Watch for the upcoming article about modular’s future in Professional Builder.


Carl Nolan said...

There is a lot of "between the lines" in what you wrote and a lot to think about. Your'e right Coach, it really just comes down to the money.

Anonymous said...

It is a good question, but I think your analysis is looking at the wrong side of the equation. The problem to achieve 10% is not a supply problem, it is a demand problem. With increased and stable demand, the money would flow for increased production capacity. It also would not be required overnight. It would take many years to go from 2% to 10%.

I would also like to see the market share that excludes tract building. What is modular housing share then?

Carl Nolan said...

Yes Anonymous it is a good question. Just read where Musk told his board that Tesla will need 10 more factories to keep up with demand expected by 2019. And again you are correct in saying that demand comes before investment in new modular factories. But asking what % of the market modular would have without site built tract homes is not relevant. You might as well eliminate right handed site builders who drive Ford trucks also. There are 16,000 modular homes produced and changing the way the % is calculated won't change that number.
I do want to point out that Modcoach is the only one giving this side of modular any attention. Everybody in the media and all the economists think that modular homes will magically appear from the existing factories to fill an unrealized void until new factories are built.
As he pointed out in an earlier article about Mariott wanting to build 300 modular hotels, there won't be enough capacity to build those for years.

Bill Hart said...

Arnt we talking about the old Forest City Ratner closed down operation..simply getting new life in the existing Brooklyn Navy Yard location?

Unknown said...

This is an interesting thought, if the goal of 10% is even something the industry wants to do on its own sooner or wait for it happen naturally some time into the distant future, which more than likely would be a foreign company by that time. I think most of the recent general public's fascination with pre-fab building and architecture, outside of commercial/hospitality, is really more of a function of thought experiments on what happens to society on a long enough timeline while what we know to be true of our current world and our limitations. The future in many people's mind's is one of high automation and technological driven evolution of most services and products and in most people's eye, the building of homes lays in one or both of these categories.

Without dropping out "tract Builders", as was mentioned earlier in the comments, the modular industry needs to focus on that price point if there is any hope of the growth needed to attract the funding needed to get to even half of the delta from current market share to the stated 10% goal. There is plenty of money out there on the sidelines looking for the "Next Big Thing", but no one from this industry has shown that this is a good place to park that money and expect any return (we can all name multiple high profile failures in this regard). There are no shortages of stories about Architects talking about modular and the benefits thereof but rarely are their designs more than fodder for the glossy pages and screens of Dwell and the like. They are great and in certain parts of the country there is a sub market for such high priced homes, but there really hasn't been much in the way of meat and potatoes housing for the masses that are affordable and livable. Folks want to live in the suburbs of cities, that's a fact of life and convenience, but there is no modular housing in these areas, and that is a culmination of a lot of forces outside of industry control, but if domestic modular wants to gain that much market share, it needs to focus on breaking the seal in the suburbs. It's not easy, but whomever figures that out, I would think would be beating the banks and VC back with sticks trying to throw money at you.

Quick, efficient, well designed, and affordable homes for the average Joe and Jane along with stylish and moderately affordable housing for Millennial's leaving the apartments and starting a family are the next big things in housing, that's what the "Tract" guys are focusing on right now and there is opportunity for the right modular situation, but it doesn't look much like what the industry is today.

Anonymous said...

Maybe Clayton with its acquisition of lots in two metro areas may solve the riddle by producing modular or hybrid sub-divisions ala Levittown with stylish energy efficient homes since their production numbers seem to match site $$ costs and they have production plants close enough so transport added to all the other local fees and costs push the buying threshold too high.