Avanath Jumps Into Modular Housing As Housing Shortage Threatens To Widen

A California affordable housing operator that for years has been focused on buying and preserving aging apartments as affordable and workforce housing properties is pivoting to something new as the housing shortage continues to roil major cities: building apartments in factories. 

Avanath Capital Management is partnering with New York-based modular construction firm Vessel Technologies to fund and build modular apartments in major markets like Boston, Los Angeles, New York City and Chicago. Avanath founder and CEO Daryl Carter told Bisnow his goal is to build 5,000 units within five years geared toward renters earning 80% of their area's median income. 

“We've embarked on a number of new development ventures really focused on building a modular product,” Carter said. “Think of buying something from Ikea and putting it together very quickly.”

Carter said he is embarking on this new effort to combat the affordable housing crisis that has worsened over the past decade. The U.S. has a shortage of 7.3 million affordable rental units for those earning either below federal poverty guidelines or 30% of their area median income, according to the National Low Income Housing Coalition.

While developers have delivered record numbers of apartments in 2023 and 2024, most were built for high-earning rents, and the pipeline of new units has slowed considerably. There were 773,000 multifamily units under construction in December, according to Census Bureau data, down 21.5% from a year earlier. Permits for new housing units also fell 3.1% year-over-year.

That is why Avanath partnered late last year with panelized modular housing developer Vessel. From a plant in Pennsylvania, Carter said Avanath and Vessel construct apartment panels, then ship and assemble them on-site at a fraction of the cost of developing a complex from the ground up.

The apartment panel system also allows the partnership to ship them across the country, without the geographic limit from the factory that prefabricated modular typically has, Carter said. 

“This panelized system — again, think Ikea — can be shipped by trucks and ships and trains or whatever, but it fits and it comes together very quickly,” he said. “So it's a different approach.”

Vessel’s system keeps the cost to build a modular apartment unit controlled to $300K or less, Carter said, compared to units built today that could cost between $700K and $1M to build. The process allows Avanath to keep rents down without leaning on public subsidies.

While it represents only a fraction of the multifamily housing industry, modular construction has grown in recent years. Modular construction starts grew from 2.1% of the U.S. construction market in 2015 to 6.6% in 2023, according to the Modular Building Institute and ConstructConnect.

Greystar, the largest U.S. apartment owner, is also pushing into modular construction, completing its first project outside Pittsburgh last month. It has five more in the pipeline.

Avanath operates and owns 100 apartment communities and 16,000 units in 15 states, most of which are geared to renters requiring affordable and workforce units. Its bread and butter is to buy existing apartment communities, so the modular development efforts are a change-up from its traditional model.

“What's attractive is they can be built very quickly — six, seven months or so,” Carter said. 

Avanath purchased two Vessel communities in Connecticut totaling 166 units that are still under development as part of the partnership’s first phase. Beyond these two projects, Avanath and Vessel plan 10 more properties by the end of 2025 in high-rent markets like Seattle, San Francisco, Washington, D.C., Denver, Austin, Dallas and Orlando, Florida.

The firm typically buys 10-to-15-year-old properties and renovates them while preserving their affordable rates for those earning 40% to 80% of a local market’s AMI.

“We’re in a space where our average rent across our portfolio is $1,600 to $1,700 a month, which is very affordable in the markets we’re in,” Carter said. 

On the financing front, Carter said Avanath uses institutional investors to help fund its acquisitions and entirely avoids using federal affordable housing tax credits, which he said complicate the business model and deter traditional investors. 

While U.S. institutional investors — who once shied away from affordable housing investments — have increased their activity in the sector in recent years, Carter said most of Avanath's capital sources are from other countries.

European investors especially have a fundamental understanding of financing affordable housing, since regulated, low-cost housing has been part of their cultures for generations, he said, and it is attractive to a larger swath of renters than Class-A units. 

“One of the things we learned over time is that a lot of foreign investors, particularly in countries like the Netherlands, Germany and the UK, they invest in affordable housing as a matter of course,” Carter said. “There are more people who shop at Walmart and can pay $1,700 rents than there are people who pay $5K in rents and shop at Neiman Marcus.”