Richmond, Virginia, USA – December 3rd, 2012: Cancelled Stamp From The United States Featuring The Pioneer Of The Automobile, Henry Ford.
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Last week I attended a “box setting event” in Seattle, the celebration of the assembly of a modular multifamily apartment building called Cubix at Othello. I’ve pointed out before that not only is modular construction nothing new, whether it can “solve” housing price issues is entirely dependent on the same contingency as all other housing: deregulating the housing economy. Whether a house or apartment building is affordable to an individual or family is largely based on its price, and price is a function of supply and demand. If housing supply is constrained by rules, fees, regulation, and taxes then it will cost more to produce and will lag behind supply. That’s why prices for housing, or anything else, “skyrocket.” But the reason that modular is less expensive to produce and thus lower in price is worth looking at as a lesson for people who care about making good housing policy.
We need to take a deeper look at risk in the economy. What developers and builders of housing want most of all when producing hosing is not huge profits, although returns to investors are critical. But fundamental to getting any return is predictability, and that means effectively managing risk. As I’ve pointed out, uncertainty is present in any sort of retail business. A taco truck might face a changing market, but the product is assembled to order, delivered, and then paid for in a matter of minutes.
In contrast, housing takes years to produce from acquisition of land to final certificate of occupancy. During that time many things can change from the global and local economy to tastes in housing type to regulation. The longer it takes to build, the greater the risk and thus, the higher the aversion to that risk by funders. How do funders or investors off set that increased risk? They charge more for the money they lend or invest. That’s why, “time is money.”
Tom Faliszewski an architect at Metric Modular, the builder of the modules at Cubix, has an important post about risk as it relates to the construction of modular housing. He uses the term “de-risk” to describe the advantages of modular construction. It’s a term I like. He says, completion timing, cost, and building envelope are de-risked. Here’s how.
- Completion timing — One technical point made at the event was weather. When the first vertical panels of framing go up maybe its a sunny day. But over time, that wood is exposed to the elements. Slowdowns in construction mean all the materials are being exposed over time to different sorts of weather, and that can impact their integrity. In a factory, that isn’t an issue and the process can be highly controlled and thus much more predictable. No more work stoppages because of bad weather, mistimed equipment or trades, or permitting issues.
- Cost de-risked — Faliszewski points out inputs like material and labor cost are set and there are far fewer overruns due to site conditions or multiple contractors. Imagine the difference between making a pre-made meal for dinner versus making the meal from scratch. With portions pre-measured, all the equipment available, all that’s needed is heat and serving plates. Similarly, modular comes with fewer change orders: it is what it is and there are fewer changes. Think about the principles that made the Model-T such a huge innovation for the automobile. The fact that structurally the car was the same meant it’s costs dropped and more people could afford a car.
- Building envelope — It is easy to forget as a housing consumer the degree to which what we expect as baseline performance from our living spaces. Windows should open and close and keep air in or out, for example. Faliszewski says, “factory environments, with their good lighting conditions, quality assurance systems and high safety standards, allow for a greater level of attention to details around such things as window openings, wall assembly penetrations and flashings.
Again, as a consumer none of these risks seem all that important to the price I pay for my mortgage or rent. But as a former developer (one project) I know how many things can go wrong on site and just how unpredictable the process of demolition to going vertical to final certification can be. Remember, time is money and de-risking all those things, even at the margins can reduce costs, improve returns, and create value for the consumer in the form of lower rents. All this presupposes agreement that, indeed, more supply helped by lower costs and more predicability, will result in lower prices.
And there’s the problem. Social and ideological agendas are hijacking housing production. I warned someone at the event, just wait until labor unions and the political servants find out that construction takes place in Canada or a right to work state like Colorado. Right now, modular construction is not a significant percentage of multifamily construction. It is so small now it is hard to measure. If modular construction becomes a way for developers to be more competitive (yes, competitive advantage in the form or lower prices and higher returns is a real thing), it is possible local elected officials will pander to constituencies to begin regulating modular construction to control wages, for example, something that would kill the nascent industry in multifamily modular construction. Instead of that, why not de-risk all housing production? That’s the lesson we should take from modular construction.