It’s safe to say that the multifamily sector had one heck of a year in 2022. Demographic shifts and pent-up demand from the COVID-19 pandemic drove some markets in the U.S. to experience more rent growth in the first six months of this year than they had seen in the five years leading up to 2020, according to Freddie Mac’s 2023 Multifamily Outlook. The uptick in demand has driven construction activity, and multifamily units across the country are being built at a record pace with few signs of slowing down. However, the rate of construction starts and construction completions are two different stories. Factors like labor shortages and supply chain delays are putting a huge damper on these much-needed developments, and those hindrances are driving multifamily developers to embrace prefabricated construction despite the fact that it has been historically stigmatized as “cheap.”
The prefab multifamily buildings are constructed in the same way that single-family modular construction that many people associate with prefab are built: on an assembly line in an off-site factory. But whether it’s a multifamily development, a luxury residential unit, or a cost-effective mobile home, prefab as an industry has been cast in an unflattering light for a few decades now, much in part with the industry’s link to mobile home development. Mobile, modular, or manufactured homes are all types of prefab construction that have been built on an assembly line, and in the past have been perceived as lower-quality alternatives to conventional construction. This misconception stems from a few factors. One was the idea that prefabricated buildings were primarily made of unsafe materials. While it’s true that toxic materials like formaldehyde foam insulation (FFI) and asbestos were commonly used in mobile homes built in the 1960s and 1970s, health and safety regulations were virtually nonexistent in the construction sector during that time. In fact, it took Congress until 1976 to pass a building code for mobile homes, almost 30 years after they had become a hot housing trend in the United States.
Another reason for the negative connotation to prefabricated construction was a pervasive belief that because manufactured developments typically cost less to build, putting up a prefab building would negatively impact nearby property values. That belief was seemingly supported by one 2004 study, however, the data pool of that study was extremely limited because the study only examined three counties in the state of North Carolina, and even if that wasn’t an issue, the study concluded that “structure variables,” (like square footage of the building, the year it was built, and total acreage of the property) “accounted for most of the variation in property value.” The fact that a home was categorically prefabricated wasn’t the determining factor as to whether or not nearby property factors would go up or down—and no other studies have come along to re-examine that idea. Nevertheless, the stigma surrounding prefab has prompted many local governments to restrict prefab homes with zoning and land use regulations, which has only reinforced negative stereotypes that prefab construction is less than ideal as a real estate investment.
An overwhelming apartment supply shortage is causing many developers to rethink prefab altogether. The U.S. is currently contending with an apartment shortage of 600,000 units, and 4.3 million new apartments need to be built by 2035 just to break even with projected demand. Not only that, the timelines for conventional construction builds are getting throttled as construction sites face delay after delay from dire construction labor shortages to waiting around even longer for raw materials to show up thanks to a mangled supply chain. Multifamily developers know that these places need to go up fast, and without sacrificing quality. Fortunately, the prefab industry has made huge strides in technology and building materials, so today’s builds hardly reflect the lawless builds from over half a century ago.
Steve Glenn, the CEO of Plant Prefab, a prefabricated design and construction company based in the United States, told me that prefab is a growing market for multifamily construction. But you don’t just have to take his word for it. A recent report from the Modular Building Institute shows that the multifamily sector has been and continues to be the largest growth driver of the technique. Just last year, the industry accounted for around 23 percent of commercial modular output. “It’s an important market to be in,” said Glenn. “Housing’s got to get denser, and [prefab] allows us to build more efficient housing at a faster rate.”
There is a misconception that prefab construction is cheaper but building cost reduction isn’t what’s luring multifamily developers to jump on the prefab bandwagon. “I think people feel like prefab will save them a lot of money, but that’s not often true,” Glenn explained. “Sometimes it can save you money compared to an on-site build, but sometimes it can cost you more. But prefab allows you to save time, and that’s huge if you’re a developer because you really want to be able to trust your schedule, which means you can better trust your budget.”
When it comes to development, faster is better. So even if modular costs are neck-and-neck with conventional builds, the ability to get a building up and running on time is prefab’s biggest selling point. After all, prefab builds are assembled in a climate-controlled facility, meaning that construction would never have to yield to rain or snow or any of Mother Nature’s whims, stopgaps that have only gotten more severe with climate change. Incidentally, ESG concerns are also making prefab buildings look more attractive. As of last year, over 100 cities in the U.S. have pledged to accelerate net-zero emissions, and Los Angeles is taking that pledge to a new height with the unveiling of its Green New Deal that mandates that all new buildings be net-zero carbon by 2030.
Not only does the multifamily sector urgently need new building stock, it needs carbon neutral building solutions, and the prefab sector may be the one form of construction that can deliver on that promise the fastest. Prefab construction requires 67 percent less energy than traditional building methods, and these builds often come with renewable energy systems attached to them, not to mention the fact that conventional construction has double the amount of material waste that prefab construction tosses out. Plant Prefab, Glenn’s company which has achieved carbon-neutral operations, has already been mounting a campaign for sustainable design. “We specifically look at energy use, water use, material composition, and carbon output in our builds,” Glenn said. “We’ve had over 30 homes certified LEED platinum, and we’re only just getting started.”
Plant Prefab may be the first prefab company to make ambitious carbon reduction efforts, but since prefab construction opens a pathway for more sustainable builds, they aren’t the only players offering net-zero builds. Chesapeake Energy Homes in Maryland and Deltec Homes in North Carolina are two other companies among several others in the prefab marketplace that currently offer net-zero builds.
Prefab construction has existed for decades as a cost-effective alternative to traditional construction, but this current economic backdrop is giving the industry a big enough resurgence that it’s finally shedding its deep-seated stereotypes. Speed of delivery and quicker accessibility for carbon neutrality are the two advantages of prefab construction so alluring that real estate developers are finally beginning to see the sector’s appeal.