Saturday, September 1, 2018

Modular Manufacturing Capacity at Critical Levels

What happens when an industry does something right and the world takes notice? The answer is the rule of “Supply and Demand.”

Just a few years ago most of the commercial modular manufacturing was done by a group of factories that specialized in big projects like dormitories, apartment buildings and man camps.

Then without much fanfare Marriott Corporation began studying modular construction as a way to bring hotels online quicker, easier and with less hassle. They decided to order a hotel and everything they had hoped for was met. Then they announced their accomplishment at one of their annual hotel owners conferences and as we all know the floodgates opened and today 13% of all new hotels by the big hotels chains are now built using modular construction.

This is when it became apparent that two forces were working to make going modular a good thing. The first was, at the time, a factory capacity that could meet the demand for modular hotels and an extremely tight construction labor market not only in framing but also the electrical, plumbing, HVAC and other on-site trades.

Modular began to look like a great alternative to site-built hotels.

About this time the media, everyone from the NAHB, blogs, economists to local newspapers began to write about the advantages of ‘prefabricated’ construction. The modular housing industry had fallen to less than 3% of all new housing starts and capacity was plentiful.

But a strange thing began to happen. The big commercial modular factories started to see their lead times from contract to production increase and the hotel chains wanted more production. Then that awful “Supply and Demand” thing reared its head and the hotel people began looking for other sources for their modular hotels.

They found it in the residential modular factories that had unused capacity. The hotel orders began to flow into these factories and once more profitable capacity was being met by these orders.

Then we had a Presidential election and everything started going great again for single family modular home building. Small builders were signing contracts at a fast pace and the bigger modular home builders were having people waiting in line to buy a house. Business was great.

Only problem was that ugly thing called capacity. Now that the media was singing the praises of modular more people than ever wanted to learn about our industry. With that added interest came more business along with a rapidly growing capacity problem.

The residential modular factories that once had almost no problem building houses as soon as they got a contract found themselves with lead times of up to 20 weeks to supply their builders because they had one or more 100+ module orders scheduled for their what was once a production line exclusively building single family houses.

To try to alleviate this bottleneck old methods of building large projects, panelized and SIP, became the poster children for both the critical modular capacity and the framing labor shortage at the job sites. New companies like Katerra and Entekra opened factories and immediately began filling orders for affordable housing complexes, homes for tract builders and even hotels.

These new factories incorporated a lot of automation into their production. These new “prefab” factories garnered a lot of new attention.

But just like the modular housing industry there were already more than 200 factories building wall panels, trusses and floors in the US without much fanfare. Most of those established panel factories were already using automation.

All those new factories did was shine a new light on an old established industry. That new light brought investors out of the woodwork looking for the “Next Big Thing in Construction” who found the new guys and not the old guard who were almost back to capacity already.

Panelization is a great building method and having walls, trusses and floor systems delivered to the job site has reduced the pressure on the onsite labor market. What it hasn’t done is solve the labor shortage in the trades like electrical and plumbing where the advantage of panelization hasn’t helped at all. Panelized construction simply moved the framing labor shortage to the factory where it’s easier to attract good workers and also where those automated processes replaced many jobs that would occur in the field.

Innovative? Yes! Disruptive? No!

That brings us back to the capacity crisis found in modular construction.

When the hotel chains first approached the modular industry to build their new hotels they put strict timetables and penalty clauses in their contracts with the factories. Because the factories needed to fill capacity they agreed to them which in some if not many cases found the factories filling their production but not making much profit.

Tomorrow is the big worry for modular.

It can take up to a year to bring a new modular factory online at costs starting at $4-5 million. There are a couple being planned and one or two ready to break ground but overall the residential modular industry isn’t anxious to build new factories and then have another housing industry recession hit like it did 10 years ago when dozens of factories closed their doors.

The Arcon modular factory (the former Penn Lyon plant) in Selinsgrove, PA filed bankruptcy and the court is selling the property and all the equipment needed to restart it in mid-September. I’ve learned that at least 4 established modular factories are looking at it for added capacity as well as 2 big investors that want to get into modular to reap the reward of all that new business. The sale should be finalized this month. Then we’ll see if an established modular company will be expanding or a new competitor will emerge. On a side note, I recently learned that one of the investors represents a European modular company.

I’ve had people ask me how much capacity is currently available in modular production. That’s impossible to answer. Capacity could be doubled at any current factory simply be starting a second shift. However finding labor and supervisors for a second shift is tough. The best indicators of capacity is how far out the lead time has grown. The current 20 weeks at some factories indicates there is a problem.

Part two of the capacity crisis.

With all the attention modular is receiving as the best way to build large scale projects many “New to Modular” developers are wanting to use modular construction.

What will happen when the affordable housing developers approach both the commercial and residential modular factories with entire neighborhoods consisting of 5 buildings each with 140 modules? And what if 20 of these neighborhoods came knocking in modular’s door in one year. That alone is 14,000 new modules needed. And there are hundreds of affordable housing projects on the drawing boards.

Who today could even begin to fill this need? Nobody in the US. That brings us to modular manufacturers from Europe and the Pacific Rim. Sweden, Norway, England, Poland and Germany must be salivating thinking of the opportunities. Add Japan, China, Thailand, Philippines and Australia sending modules into the West Coast and an invasion could happen and rather quickly.

Toyota, Sekisui, Sony, England’s Legal and General and Sweden’s Lindback, are just some of the companies that could find building factories in the US a great way to expand.

When, not if, they begin building factories here the number of modular housing projects will sky rocket and our modular housing industry will find itself with more than a capacity problem to worry about. China will bring funding along with its modular presence.

Two opportunities are coming up shortly where this could be discussed. One is the Building Systems Council Summit in Knoxville, TN September 30-October 2 and the other is the MHBA Annual Membership Meeting in Hershey, PA October 9-10.

The commercial and residential modular industries have been waiting for decades for an opportunity like this and it would be terrible if we didn’t step up the plate and hit it out of the park.

You just know those foreign manufactures are eyeing the US as low hanging fruit just about ready to fall to the ground.


An East Coast builder said...

Coach you did it again. The problem is obvious to everyone but nobody is talking about it. You need to do one of your all day meetings where everyone can sit down and come to some decisions about how the factories can help us builders. I for one am seeing my lead times increasing to the point that I might switch back to site building just to keep my customers. Most of those factories that closed over the last 10 years were inefficient and poorly managed. The ones that survived are good solid ones but when are we going to see some new blood. Someone that can supply the builder's needs.

Tom Hardiman said...

Dead on Gary! I wrote a blog called "what if demand isn't the problem?" about a year ago and followed up this year with a definitive answer - demand is NOT the problem. Marriott hasn't even started to use modular to the extent they want to. Now Hilton, Hyatt, Citizen M, Choice Hotels are all going down this path. Multi family developers call our office weekly looking for factories to work with. Problem is, most of the established factories are pretty darn busy now. New factories and modular companies will emerge - because they have to. Traditional GCs will move in this direction too. There is NO WAY to build all the housing, hotels, schools, restaurants, etc that we need without using more modular construction. We'll talk about it at MHBA's annual meeting with the panel you are on.

Anonymous said...

Gary, given that the supply & demand curve is arcing strongly toward DEMAND, and that all signs for sustained demand are present (overseas interest in supply, hotel chains are just getting started, affordable housing is a full blown crisis, FEMA is actively looking at Mod vs manufactured), why would any potential investor fear bankruptcy at any time in the near future? The only thing unforeseeable is possible political power shifts, but the left and the right all agree on the need for housing!

Unknown said...

Maybe builders should combine forces and financials and open their own co-op modular plants?

Unknown said...

The left is touting tax increases especially on the evil 1% who are the ones with the investment strength to build monstrous modular plants. Wanna see this huge bump in need dissolve? Throw in a tax increase to burst the bubble.

Anonymous said...

The problem will always remain with the labor pool - you can build a superplant and if you don't have enough manpower within the correct wage bracket, along with an excellent company culture, you will have severe problems. It's going to take a lot more than simply "building a huge plant"

Mr. East Coast Builder, your lead times will likely not get much better until your prices go up, and manufacturers will be able to compete for labor and still be profitable or at least maintain manufacturing standards and overhead