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Developers Still Reluctant To Go Whole-Hog With Modular Construction

As a cost- and time-saving technique, modular construction has long had a great future ahead of it. Arguably, it still does, with off-site manufacturing of essential building components a useful strategy for some projects in a time of projected construction labor shortages and higher material costs.

Yet obstacles remain. Even before the coronavirus pandemic, modular construction suffered from lingering and generally outdated recollections of cheap prefab components or the early days of the mobile home industry, according to builders who use the technique effectively. Then the pandemic hit, knocking the construction industry for a loop, and with it modular construction, especially its use for building hotels.

A component of a future citizenM Hotel ready for shipment from the hotel chain's factory in Europe.

"There's still somewhat of a stigma to it. People hear modular or off-site construction and they instantly think 'mobile home,' which is kind of funny, considering that we use modular construction to build very high-end luxury townhomes," Resolute Capital Partners Managing Director Candace Powell said.

Modular construction is used in only about 5% of commercial and residential development projects in the United States. The Dodge Data & Analytics Prefabrication and Modular Construction 2020 report found that the top obstacle in the U.S. for the adoption of modular construction is that company owners aren't interested in the technique — possibly the old stigma rearing its head — but there are also strong concerns about the availability of components.

Not only that, some kinds of development are less suitable than others for modular construction. Among the more suitable property types, the report notes, are healthcare facilities, hotels, multifamily and student housing — those designs that tend to have uniform or at least consistently variable unit sizes. Less suitable projects include public buildings, warehouses, high-rise offices and retail properties.

The modular approach has the potential to generate cost savings, a 2019 report by McKinsey found, though that is still more the exception than the rule.

As supply chain players advance along the learning curve, leading real estate players will make the shift as well, perhaps realizing more than 20% in construction cost savings, the report said. Also, under moderate assumptions of penetration, the market value for modular construction in new real estate construction alone could reach $130B in Europe and the United States by 2030.

"I've found advantages to using modular construction for my past projects, assuming the modular provider is experienced and has a track record of success," said Real Estate Development Consulting principal Cara Houser, who has a background in residential development.

"The benefits include direct savings, shorter scheduling and better quality control, and are most readily available for projects with built-in efficiencies, such as hotels, studios and other projects with easily replicable layouts and designs," Houser said.

Recent advancements and new entrants in the modular space have led Capstone Development Partners to revisit modular construction in high-cost, urban markets to provide more affordable housing options for students, said Chad Izmirian, the company's senior vice president.

"If pricing proves comparable or beneficial, enhanced quality in controlled environments, better cost predictability and the potential for improved delivery schedules would make modular a good fit for us," Izmirian said.

Resolute Capital partnered with Paradigm8 to develop Village Walk Skyline, a townhouse project in Truckee, California, just north of Lake Tahoe, the first phase of which will include 12 units of about 3K SF each. Architecture and construction firm sagemodern designed the units, which were manufactured off-site at homebuilder Method Homes’ factory in Washington state. Then the modules were transported to the development site in Truckee, where construction was completed.

One of the main considerations in turning to modular construction for Village Walk Skyline was the time savings involved, Powell said. The construction season is particularly short in the mountains near Lake Tahoe, so getting the units put together elsewhere proved to be essential to meeting that tight schedule.

"There's very little time to get your buildings buttoned up before the end of the season, which is about five months," Powell said. "A modular approach is more of a simultaneous build, because while you're getting your foundation done, the unit is being completed elsewhere."

As far as a direct cost savings, modular construction didn't shave that much off of development costs for Village Walk Skyline, Powell said, except in the very real sense that time is money. The project was Resolute Capital's first project using modular construction, though not Paradigm8's, which has a good deal of experience with it.

"We'd certainly consider it again," Powell said. "It was an education for us, and I believe that as more of the industry has a similar experience, the more modular will be accepted."

The impact of the pandemic on the future of modular construction isn't certain yet. Appleseed Strategy did a survey of 22 architecture, engineering, landscape architecture and other firms to gauge the impact of the pandemic on their businesses. Almost all of the respondents reported a slowdown in projects last year and said they expect business to be down this year as well, though most are still receiving RFPs. The survey also found renewed interest in modular construction techniques.

"The pandemic is expected to accelerate ongoing trends in real estate toward further vertical integration of construction services," Appleseed Strategy principal Kacey Clagett said. "That includes reliance on building information technologies and modular construction."

A product from manufacturer Mighty Buildings known as Duo B, which is 3D-printed using steel components and a proprietary synthetic substance called Light Stone Material that hardens when it is exposed to UV light.

One line of thinking regarding the pandemic is that it might help spur modular construction's use as developers and contractors have had more time to consider reports of cost and time savings.

"The past 12 months have given some owners an opportunity to rethink and replan," Chicago-based structural engineering firm Buro Happold principal Patti Harburg-Petrich said.

They are also becoming better acquainted with some advances in modular construction, such as digital fabrication capabilities in the industry like 3D printing that allow for bespoke design solutions.

"Digital fabrication in particular is a new capability that allows us to take advantage of industrialized construction without sacrificing unique and interesting design," Harburg-Petrich said.

"Also, the number of people and the time on-site is minimized, which is particularly advantageous in an active environment like an airport or a university campus," Harburg-Petrich said. "Buildings and spaces adjacent to the project can stay operational longer, and there is less construction traffic and disruption."

Modular construction requires a greater design effort upfront, and coordination is critically important, which might pose a sticking point when it comes to wider adoption of the technique, Harburg-Petrich said.  

"A collaborative design and construction team is essential for the advantages to be realized and for the project to be successful," she said. "Modular requires a very different way of thinking about how we build."

Modular construction as a tool to develop affordable housing might catch on further in the parts of the United States where affordable housing is lacking. For example, as California tries to figure out how to respond to its housing crisis, modular construction will be increasingly important, Clagett said, especially because of the cost savings associated with getting some kinds of projects completed more quickly.

"That will be the way to do it, from putting up ADUs — granny flats — to building something that's taller," she said. "It can be pretty compelling to put that jigsaw puzzle of individual units up in a matter of a few weeks compared to what might be months for stick-built structure."

"Housing continues to be the most critically needed resource,” Downtown [Los Angeles] Women’s Center Senior Director of Communication and Development Lorena Sanchez told Bisnow.

Her organization will provide services at Oatsie’s Place, a 45-unit Daylight Community Development project to serve homeless women and survivors of domestic violence that will begin work in Van Nuys in April. Among other cost-saving strategies, the developer is using modular construction, with elements of the property manufactured by indieDwell, an Idaho-based specialist in modular affordable housing units.

In Europe, the technique is more popular than in the United States, especially for the development of affordable housing units, which are in short supply in that part of the world as well. From 2021 to 2026, the market for modular buildings in Europe is predicted to grow about 5.5% per year, driven by the demand for low- to mid-rise residential buildings and public housing, according to a Mordor Intelligence report.

Sweden, for instance, has one of the highest acceptance rates of modular construction in the world, with off-site manufacturing used to build at least 45% of its new houses and at least 30% of new multifamily buildings, Mordor reports. Other European nations with high usage rates include Austria, Switzerland, Poland and the countries of Scandinavia.

Whatever the new advantages of modular construction, the industry isn't going forward in the United States if demand for building components isn't there. That was illustrated clearly last year with the closure of Skender Manufacturing, a spinoff of Chicago-based Skender Construction that produced modular and prefabricated components for developments, including steel frame units containing kitchens, bathrooms, sitting rooms and bedrooms.

The development of U.S. hospitality properties essentially ground to a halt because of the pandemic, and that proved to be a mortal wound for the company, as financing to keep the operation going dried up. It might prove to be a blow to further adoption of modular construction as well.

“It’s a chicken-and-egg problem,” Skender Manufacturing CEO Mark Skender told Construction Dive. “How do you get that scale when there's a lot of uncertainty?"  

For hotel brands that are still opening properties, however, modular construction is still viable. In fact, Dutch hotelier citizenM Hotels, which has properties in the U.S. and Europe, builds all of its hotels using the technique, with components made in the company's own factory.

"Cost savings are usually the result of schedule reduction rather than savings in direct cost, as modular construction can reduce construction time by 10% to 30%," citizenM Hotels U.S. Managing Director of Development Menno Hilberts said. "In markets with labor shortages and high labor rates, these development cost savings can be significant."

Modular construction works for citizenM, but it isn't appropriate for every development scenario, Hilberts said. Urban developments on the coasts are more suitable for modular, with construction costs tending to drop. The transportation cost of modules rises the farther a development site is from port cities.

"Also, the design has to fit," Hilberts said. "If your design cannot be 'divided' in blocks with a maximum dimension of about 12 feet wide and about 50 feet long by 10 feet tall, there is no case for modular. So hospitality, student housing and urban residential could work, but open-plan offices are less suitable."

Moreover, Hilberts said, the developer, financing source, design team, contractor and modular supplier all need to be committed to modular for the project to be a success. 

"While modular construction is simple compared to other areas of industry, it's very much leading-edge technology in the construction world," Hilberts said.