Monday, February 12, 2018

Offsite Construction’s Appeal Lost on Many Site Builders

Recently there have been reports that offsite construction will grow at least 20% over the next 3 years and that truly is good news for our industry. This increased business will affect both residential and commercial construction.

Offsite construction consists of 6 different segments. Volumetric (modular), Panelized wall components, completed panelized wall systems, component modules, automated housing and “everything else”.

Construction experts, the ones with the crystal balls, have touted offsite as the next big thing for more than a decade but offsite construction has so far failed to truly take off, with only pockets of the industry investing in developing their own offsite products.

Today however, the mainstream site builders are being given no choice but to take up the ‘offsite’ banner and try to make it fit their business models.

The demand and the need for offsite construction is there. But are contractors willing to commit to this offsite revolution – or does it pose too much of a threat to the status quo?

However, over the past 12-18 months, there has been an acceleration in this market largely driven by public sector and commercial hotel demand. The public sector may have a growing appetite for modular, but what about the tract home construction industry?

Getting the tract home industry to embrace offsite is like trying to turn around an old tanker. One reason why the industry is hesitant to develop offsite is the threat it poses to the traditional main subcontractor roles. Tract builders have had their systems in place for decades and getting them to move even a portion of their homes and new communities to offiste is hard.

Clayton Homes, realizing that even regional tract home builders were reluctant to make the change to modular, took another route. They began a program of buying small to medium tract builders, acquiring their undeveloped lots and turning them into work for Clayton’s factories.

Offsite challenges the contractual structures tract builders operate under by reducing work needed on site, which reduces the number of subcontractors needed and calls into question the role of the tract builder in the first place.

Tract builders have been embracing a small part of the offsite agenda, the panelized wall and truss system market but have not really started looking at the more advanced wall systems like Entekra.

And these tract builders would certainly not be willing to look at modular which could effectively cut out as much as 80% of the work done by local subcontractors.

Many big tract builders don’t understand enough about offsite manufacturing to realize the less risk it brings and when they dabble in it instead of taking a serious look at offsite, they usually find that it is expensive and doesn’t work. They have to take the training wheels off the bike and let it fly or they will always look at offsite as a crutch to be used only in times of extreme need.

Builders, both large and small that don’t start thinking about changes their processes will become irrelevant over time.

Site building will shrink as offsite construction develops. The industry will need fewer workers as modular and offsite construction moves all the trades under one roof in a factory and the site builder doesn’t have as many subcontractors to juggle to build their home or commercial project.

Marriott Hotels realized this a couple of years ago and has been building more and more hotels with modules produced by factories cutting costs and lead time to completion.

As mainstream site builders and tract developers hesitate to move to offsite, new innovators have appeared and are chipping away at their once solid businesses. Many of these innovators, such as Kasita, aren’t from the mainstream building industry.

Even the modular housing industry is seeing innovators entering their market that are shaking up their status quo as well. Integrated service companies are beginning to show up that provide better coordination and a quicker product. Express Modular is making giant steps toward becoming the first national modular home builder by integrating dozens of modular factories into their supply chain.

Traditional contractors could one day be replaced with these integrated service companies which would allow non-construction people like financial institutions, suppliers and even small builders to compete with much larger tract builders and bring in projects in a more efficient way.

These integrated service providers could seriously shake up our industry by posing a threat to General Contracting and subcontracting. There are so many subcontractors involved in every building project that having these innovators consolidate everything under one umbrella makes sense for all parties.

One way in which contractors should consider developing offsite is by forming partnerships with these entrepreneurial companies from different industries who spot the opportunities. Joint ventures are a good option.

There are two areas of concern if the 20% increase in offsite building is to become reality; capacity and labor.

These are two sides of the same coin. A quick example is Dunkin Donuts who wants to add 1,000 stores to their successful food chain but is having a hard time finding workers. They are already talking about robotic donut bakers being added to their stores. A benefit that didn’t realize when they started talking robot bakers is that robots can bake or fry donuts on demand when traffic is heavy. They never sleep.

Another example is in the south where immigrant construction workers want a 45% increase in wages or they will quit working. With so many people on public assistance either not wanting to work or living in the wrong areas to do the work needed, these immigrants, both legal and illegal, seem to have a stranglehold on the construction industry.

Building new factories within areas of high unemployment and training those on assistance to work in them and providing higher wages than could be earned before just might be an answer that needs further investigation.

Colby Swanson, Momentum Innovation Group, suggests we could double our capacity overnight is we just added a second shift. At the Modcoach Symposium in Lewisburg, PA last month this was met with negative response from the factory people that attended.

However if we are to meet the demand coming down the pipeline for modular and other types of offsite product, our industry may not have any choice but to look at adding more shifts to meet demand.

If modular in particular can’t keep up with demand, rest assured another industry, maybe a foreign company like Toyota or Polcom, may enter the picture to fill that need.


Anonymous said...

There are two significant hurdles to modular tract building that currently exist (modular defined as pre-built sections arriving on a truck).

1) Design - modular can not effectively build the types of floor plans most of suburban America wants to buy

2) Cost - to build the type of floor plans the market demands, modular and site built techniques would need to be combined. There are some interesting ideas being explored about how to do this differently, but usually, mixing these two techniques causes costs to skyrocket beyond using just one of the techniques exclusively.

Tract builders get critiqued by modular people for not being willing to explore modular. The fact is, it usually takes them about 10 minutes to do the above calculations and rule out modular. The reality is that the current stick built business model is the most effective given the market demands. Labor shortage may change things, but only on the periphery.

Josh Margulies said...

On site trac home building will almost always beat the butt off comparable modular homes built on any production scale. Once labor and vendors are secured a production simply sees his lowest cost curves in production when he build more on site.

The modular home, great as it is, will go only as far as the economics will let it.

There is still a lot of rural building out there and trade shortages abound in the developed part of the country.