One Secret to Growing the Modular Market

A productized approach to multifamily design and construction will expand the market for modular construction and enhance developers’ profits.

If modular is to gain more market share, developers need to change how they approach building design. It’s a change that will benefit everyone.

Every builder and developer I know claims to want lower costs and faster builds. They seek to build more projects for less money. Rather than making that happen, however, most just moan about how labor and material shortages are working against them.

As expensive as it is to build now, it’s not going to get better anytime soon. And while there are many groups working to improve labor challenges, the industry as a whole needs to focus on creating a cultural shift in how we attract young people to the construction industry.

Reducing costs and timetables will take real innovation, but most developers just look for improvements at the margins by investing in sophisticated software or better management systems. While those are good things, they don’t address the fundamental problem: the fact that how we build hasn’t changed.

As Co-founder and Executive Director of the Modular Mobilization Coalition, I obviously think modular can help. But you may be surprised at where I believe it will make a difference. Modular can serve as a marginal improvement or an innovation.

In the 2019 McKinsey report: “Modular Construction – From Projects to Product,” the authors found that the construction productivity gap hasn’t improved in decades, in stark contrast to other industries. To improve that, they advocate an approach where roughly 50% of a project is built in a factory but note that modular hasn’t been able to grow beyond a 4% market share.

Focus On High-Density

That percentage represents the industry as a whole and includes single and multifamily housing as well as commercial buildings (retail stores and hotels), and institutions (schools). Those segments represent very different businesses with different players who have different needs.

I believe that the key to modular growth is focusing on building typologies that are the most suitable for modular construction. 

The real opportunity is in high-density projects that leverage manufacturability and repeatability: multifamily (apartment) buildings, student dorms and hotels. Although the single-family segment is gigantic, and while some builders have made modular work for them, it’s not where the real traction and growth opportunity is for modular right now. To grow beyond that 4%, the modular industry must better service these modular-friendly segments.

The problem is that most developers see every project as different, and look at modular the same way they look at trusses or wall panels – as components, they can plug into their site-built designs. Most find that this doesn’t work very well, then resume their bitching about labor and materials.

That kind of thinking won’t help the industry. Although I’m convinced that we can grow modular’s market share while also improving construction productivity challenges, making that happen will require a new mindset. That mindset starts with developers.

Land First Raises Costs

Most multifamily developers take a land-first approach. They opportunistically purchase a piece of land, then design a building or a group of buildings to fit it. Although this sounds reasonable, the fact is that it is ultimately holding back the modular industry. 

In fact, land-first is to the modular industry what sugar is to many people—an unhealthy addiction that offers immediate satisfaction but guarantees negative long-term consequences. Closing a land deal and designing a unique project for that piece of land feels good, but  it requires expensive designers, engineers. It also requires lots of on-site skilled labor, as well as lots of time and money to build. 

The modular factory is happy to build this project but they are unable to deliver any measurable economies of scale.

Why Product-First is Better

A better approach for this market is what I call “product-first.” Instead of making each project unique, plans are drawn for a basic structure that can be duplicated over and over in different locations. This lets you amortize design and engineering costs over any number of buildings.

The base design can be aimed at a target buyer group of people—55+ buyers, young people on the first step of the career ladder, or whatever. It can also be regional, as with a series of condos designed for Florida’s high-wind coastal areas.

Apartment units will be standardized, making them a perfect fit for modular construction. The exterior and common areas can be custom designed and site-built in order to give the project a local flavor and some individuality.

Product-first represents a potentially huge cost savings. Design and engineering for a one-off project can be 10-20% of total project cost, but if you build the same building several times you can lower that to maybe 1 or 2% per property.

What I’m advocating for is essentially the same thing that developers of low-rise motels and hotels do. Regardless of location, rooms within a given brand (Marriott, Wyndham, etc.) will be much the same. The bathroom is just inside the door, then the space opens up to a room with 1 or 2 beds and includes the standard accouterments. The lobbies and facades will have local design influence and some customization.

Using this approach for multifamily construction will allow builders and developers to complete projects in less time, for lower cost and with more consistent quality. The cost savings can ultimately be passed on to tenants or buyers. Everyone wins.

This way of building also lessens the need for site labor. In fact, I believe the labor problem is less about shortages than it is about allocation. Driving around to different job sites is way less effective than driving to a factory every day. Factories have consistent hours, build a repeatable product (if they’re doing it right), and don’t require as many workers. A pair of hands in a factory is more productive than a pair of hands in the field.

It’s Already Happening

Product-first is not just theory; it’s starting to happen. One developer who has embraced it is Juno. Juno was started by a group of former Apple and Tesla employees, including former Apple design director BJ Siegel, who created the look for the original Apple Stores.

Company CEO Johnathan Scheer says that Juno thinks about apartment projects like Apple does its stores: not as buildings to be crafted, but as products to be manufactured, which they refer to as “productization.” They’re reportedly designing a set of standard modules made from mass timber that can be assembled into apartment buildings anywhere in the country. They believe this will shorten design times by 60 percent, while also reducing construction costs. 

The company recently raised $20 million in funding and is working on a 400-unit complex in Austin. They’re also planning additional projects in Seattle and Denver.

Yes, Juno is the brainchild of a group of Silicon Valley people. And yes, Silicon Valley was behind Katerra, an infamous and spectacular failure. Some industry observers believe that Katerra failed because construction is different, and they see it as proof that outsiders will never succeed in making a disruptive change in the construction industry.

Don’t believe it.

Outsiders are usually the ones who disrupt industries because their perspective allows them to see things insiders can’t see. And the culture of Silicon Valley is iterative: they’re used to trying big things, watching them fail, then applying the lessons learned to new ventures.

Signs are that Juno has learned from the Katerra debacle and is determined not to repeat the same mistakes. For instance they have outsourced manufacturing rather than investing in factories. Their focus is on what they do best: product design and project management. And while they’re not using traditional modules, the commitment to mass timber shows that they take productization seriously.

The bottom line is that product-first has been very successful for the hotel business and is beginning to show up in residential multi-family. Any developer who wants to stay competitive needs to take it seriously.

This article was originally published in Offsite Builder.