Tuesday, October 13, 2020

Is Modular Construction Really the Answer for Subsidized Affordable Housing?

We hear a lot about “modular construction being the answer to building affordable housing” in cities across the US but there is a problem with that statement that needs addressed before modular can actually be that answer.

In the United States, the term affordable housing is used to describe housing for which the total costs of rent – or a mortgage – plus utilities is at or below, 30% of the household's gross income. To make housing available to people who don’t meet this criteria, and there millions of them across the US, solutions have to be found to build a lot of housing that meets their needs that can be built AND subsidized and operated by state and local housing authorities as well as developers which are authorized and funded by the United States Department of Housing and Urban Development (HUD).

So why is Affordable Housing so expensive and why isn’t modular being used more often?

The key entity of affordable housing is the “developer”—the business person who puts the deals together, securing funds from a bank or investors (or government or charitable agencies, for subsidized housing), and hiring professionals to design and construct the building. 

Typically, the developer selects a general contractor and that contractor, in turn, hires subcontractors. There is always a general contractor!

Now the developer, many of whom have been building affordable housing for years, hears that modular construction is faster, cheaper and all the other malarky that is spread by so-called experts and prognosticators in modular housing.

Finding a modular factory

So the developer approaches a couple commercial modular factories for a price.But a rough quote is all they get….at first. By now the developer has spent way too much time bringing the modular factory up to speed on what they want waiting for the price. Funding has a lifespan and taking too much time just to get a price can put a hurt on the funding.

Finally the developer gets a price from the factory and now learns that is just the FOB price. Delivery and setting the modules are additional expenses. 

By the time the developer adds up all the costs of building the project using a modular factory, the cost could be 10-15% higher than they have been doing it with their General Contractor building it on site.

So why is the so-called cheaper and faster modular route coming in more expensive? It is usually a faster way to have the project ready for occupancy which is a good thing but that higher cost may eat up much of the money that time saved.

The Secret

Here’s the big reason modular may not be the best way to build subsidized affordable housing. The factory that builds the modules has a little something extra built into the price, Profit! There is not a modular factory out there that can afford to build a single module and not make any profit on it, let alone 150 of them for no profit.

Normally, a developer who builds subsidized affordable housing figures the cost of having the building erected as the biggest part of the project meaning it is a COST, not a profit center like the modular factory considers it.

That 10-15% extra cost of having a subsidized housing project built using modular construction is the factory’s profit. Take a minute and think about it. 

To use modular construction as the real advantage it should be in constructing subsidized housing, the developer needs to have enough projects in the pipeline to build their own modular factory turning out only products for their own projects. Then it becomes a cost of building the project, not a profit center for a modular factory that builds projects for all types of developers.

Related Article: Skender Closes New Modular Factory in Chicago

Today the landscape is beginning to see developer-owned modular factories being built to produce modules at cost for their own projects.

Modular construction is a great way to build many projects including some really big hotels, dormitories, conventional multifamily, multi-story housing projects and medical facilities. All of these are projects the developer realizes will have a factory profit included.

The only segment that can’t use modular effectively is the subsidized housing market unless the developer owns the factory.

One way that may help is for a government agency, like HUD, and begin funding the building of modular factories strictly for subsidized housing for developers. Will that happen? No. Could it happen? Sure.

Gary Fleisher, the Original Modcoach, owns the Modcoach Network consisting of Modcoach News, Modular Home Coach and Modcoach Connects.


Robert Olander said...

At Linked Equipment we figured this out a while back so offer one throat to choke for homeowners. We do the initial consult, we draw the plans, build the homes, deliver them, and drop them on the pad. We even use a national inspection service so it arrives pre-inspected with a badge to show the local inspector it has been inspected thoroughly by a national agency. That helps to permit and approvals go faster locally.

We have our own builders, electrician, plumbers, and what we agreed to build with the owner is what they get. No 3rd party markup if they contact us, to begin with. We deliver a turnkey home to their pad and install it.

Anonymous said...

Greater upfront design costs specific to modular commits you early on

Limited modular manufacturers so swapping is very difficult - much less of a commodity like a traditional GC - pigeon holes you

Modular specific permitting requirements much greater than traditional construction and generally a separate, not necessarily concurrent timeline...results in greater design costs and longer permitting timeline...big hurdle 

Factory inspection regiment is much more stringent than onsite e.g. every box is inspected

Constrained rectangular geometry leaves value on the table in terms of maxing out rentable SF, particularly on a tight urban infill sites

Also a tradeoff between limiting manufacturing variation and varying module unit layouts

Layouts are generally shotgun style if self contained...may not be most conducive to certain sites..also, limited light...if not, face increased stitching between modules onsite...fire rating challenges

Shipping requires max widths and lengths 

Wood is not a great material to work with in manufacturing/transportation - weathers and warps

Increased material costs due to duplicate walls and floors/ceilings and added structure for lifting...also, doubled up walls results in reduced wall to wall SF

Harder to finance offsite product

Scope clarification with GCs and subs; not motivated in current market climate, dont offer full savings to owner, view as risky/uncertain and price as such

Contract mitigation risk...essentially have two GCs in project IF owner is contracting separately creating a massive scope intersection/risk point

Unaware of any project that has been cheaper or faster (many claims to be prior to completion!)

Bankruptcies and recapitalizations rampant in industry