Monday, January 27, 2020

The Enticement of Commercial Modular Construction

Just 12 short years ago there were hundreds of large and small modular factories turning out both production homes and custom homes with many of them on the East Coast. Today many of the biggest names in residential modular manufacturing are a distant memory and few, if any, new modular factories dedicated to single family housing have come on line since.

2008 was more than a housing crisis, it was the last time modular housing represented more than 5% of all new single family houses in the US.

The factories that weathered the storm of 2008 had to make some tough decisions. Stay the course building single family homes or look for other revenue streams to keep the doors open.

Hurricane Sandy was the deadliest and most destructive, as well as the strongest hurricane of the 2012 Atlantic hurricane season. Inflicting nearly $70 billion in damage, it was the second-costliest hurricane on record in the United States until surpassed by Hurricanes Harvey and Maria in 2017.

Sandy, even though it was horrific to those that lost their homes, was a blessing for the East Coast modular housing industry. Factories were committed to helping rebuild most of shoreline from Delaware through Massachusetts. But even Sandy wasn’t enough to keep a few of those remaining factories open and a few more closed their doors.

After 2008, many modular home builders couldn’t sell houses to people that couldn’t afford them and there was a glut of used homes that needed to be cleared first. Many left the modular business forever.

Around 2015, just as the aftermath of Sandy was winding down and modular housing starts were once again declining, Marriott hotels decided to try using modular construction to build a few of their new hotels.

Needless to say, it was a success and today approximately 40% of all new Marriott hotels are modular. Other hotels chains saw the rapid turnaround time to having a new hotel up and running in less time which for them meant more revenue.

And so it began, residential modular housing, once a powerful and growing part of new home construction started to give way to commercial projects for hospitality, medical, dormitories, apartment buildings and even workforce housing.

It made sense to the modular factories that used to turn down big projects would now start to court them as fewer new homes were being ordered by fewer modular home builders. It was enticing to say the least to go after that low hanging fruit.

Many went after it so hard they decided to cut back on both standard plan book and custom homes.

But that enticing taste of commercial construction comes with some hidden traps and pitfalls.

First, a factory deciding to go after more commercial in lieu of single family housing, even though they still have builders buying SFH, does not want to invest any additional monies into bringing new SFH builders into the factory or begin any type of training program.

In all honesty, commercial developers don’t need all that hand holding “new to modular” single family builders need which is a pitfall for both the builder and the factory. No training for new builders and no active recruitment of site builders to become modular home builders means fewer and fewer single family homes will be ordered and built.

That wonderful feeling of landing 2 or 3 major projects looks great on paper but what happens after signing the contracts can be devastating.

The factory management truly believes that with proper scheduling they can start one major project within a couple days of finishing the last one.

Murphy's law states: "Anything that can go wrong will go wrong"

And it does. For instance, what happens if your next major 100 module project is delayed just 3 weeks. What happens to all the production line people? Do you lay them off or keep them on hoping a single family home or two can be added to the empty space on the line?

And some modular factories in their eagerness to get a signed contract allow a time clause to be added. “Sure, we can have all those modules set by….” But what happens if you get 12” of snow and the roads needed to transport the modules are closed for a week or worse, floods wash away roads?

Do you think the time clause halts while you wait for clear and sunny days? Your developer, even though he wants the project completed on time, has an insurance policy, called the time clause you signed, that will help them with the delays but it means all the profit the factory was looking to make just went out the window.

Many modular factories are moving more and more to commercial and are beginning to understand and have backup plans in those situations but it probably means that those single family home builders will become a less important part of their production.

There are modular factories that have not been as enticed to take on many major commercial projects but instead work them into their slower production months and continue to be the best they can for their current single family builders.

Those factories just might be the foundation for a few more new single family modular home factories to build on, ones that go after standard and custom homes and attract new builders into the modular construction industry.

Becoming a commercial modular factory can be a great way for a former residential modular factory to go but if modular SFH is to survive, we need to take a hard look at how to leverage our skilled labor pool, inherent green and energy efficient building methods and sustainability to attract new site builders to our industry.

It’s OK to be enticed by commercial modular production but make sure you know exactly what you’re getting into first.

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