As the country’s housing crisis has come more to the forefront of the political conversation in recent years, so have ideas to help solve it. The simplest solution, most agree, is to simply build more housing, especially on the affordable side. But creating more housing is not easy at the moment. Land prices have skyrocketed, construction costs remain high, and rising interest rates are creating a difficult landscape for developers. Even for developers who do manage to put together a plan that pencils out, the timeline from conception to completion often takes years.
So many are looking to modular construction methods to help make building buildings faster and more economical. On its face, it seems like a no-brainer. Since the Industrial Revolution, we have known how much more efficient it is to build something in a factory than on-site. But we have not seen anything close to the widespread adoption of modular construction methods. On the contrary, some of the most highly hyped (and funded) modular construction companies have called it quits in the last few years. The reality is that even if it is theoretically easier to build a building in a factory, doing so is much more complicated than it seems.
A longtime niche
Modular construction methods are getting a lot of buzz right now, but they are nothing new. The origins of constructing buildings through modular methods have been traced back as far as the 1600s when it was used by colonial American fishermen to build a home. Modular’s popularity began not long after the turn of the century when the once-ubiquitous Sears, Roebuck & Co. catalog offered prefabricated homes to Americans between 1910 and 1940. After World War II ended and veterans returned home, the demand for housing skyrocketed, and modular homes became a popular option for families seeking a lower-cost alternative to traditional construction methods.
Over the next several decades, as the modular construction industry grew, it expanded from single-family homes into commercial projects, including offices, schools, and even classic diners. By the 1970s, modular construction really began to pick up steam, and a range of buildings were using the method. It wasn’t until 2014 that the first prefab apartment building in New York City opened in the Upper Manhattan neighborhood of Inwood, and several more have followed since. In nearby Brooklyn, developers behind the Atlantic Yards project—later renamed Pacific Park—used modular construction on a residential tower that rose next to Barclays Center. “Because it takes half the time, we can rent out the units and generate income much quicker, and the carrying costs are lower,” said Kim Frank, one of the co-developers of The Stack, NYC’s first modular apartment building. The building’s developers said using modular methods cut the project’s costs by 10 to 20 percent.
Lower costs are one of the biggest benefits touted by the modular construction industry. The savings happen in a few different ways. By using modules constructed in a factory offsite, which just require stacking and connecting, the overall project typically has a shortened construction timeline. This can also mean much fewer weather-related delays. Additionally, while the modules are being built, foundation work can proceed at the construction site simultaneously.
Modular builders also point to the method as a greener way to construct buildings. By using a controlled process in a factory, less waste is generated by recycling materials, controlling the inventory, and protecting building materials, according to the Modular Building Institute (MBI). Buildings with modules also have the potential to be disassembled and the modules relocated to other locations or refurbished for another use. Factory-built modules can also mean safer construction, as an indoor environment reduces the risk of accidents that can occur on a traditional outdoor site.
Barriers to expansion
The push for more modular construction over the last few years has been driven by the worsening housing crisis, developers seeking lower-cost alternatives, and efforts to build more sustainably. In 2022, projects using modular construction accounted for just over 6 percent of the total square footage of all new developments, according to the MBI. Elected officials in some of the nation’s most expensive cities, including New York, San Francisco, and San Jose, have all touted modular construction as one of the solutions to getting more housing and other kinds of buildings done faster. But despite all this momentum, modular hasn’t become as widely used as many hoped it would have for several reasons, according to those in the industry.
One hindrance involves proximity to modular fabrication factories. For developers interested in using modular construction, the local presence of a manufacturing facility is critical, and right now, there is a shortage. “There’s probably a greater level of interest than the ability of the modular industry to meet that interest,” said Rommel Sulit, founder and principal at the Austin-based architecture and design firm Forge Craft. His company’s first modular project took shape in 2016, and in the years since, they have worked on several more modular developments using different types of modules, including volumetric modular, wood modular, and steel modular. “It was something that was always on our radar,” Sulit said. “We started our firm in 2013 with a goal of finding solutions for housing shortages in the world.” In that time, modular began to emerge as one of those solutions. Now, Sulit and his team are involved in about a dozen modular projects.
Another ongoing issue for the industry surrounds building codes. Around the country, there are more than 30 states that have modular building programs, but despite all the industry’s attempts, there is still no common code for modular construction. The MBI, the largest modular industry group, has been lobbying for years for more recognition in the International Building Code (IBC). The group has been successful in adding more modular-friendly language but has not yet been able to get its own standards adopted and referenced with the IBC. The MBI is also working to get more states and Canadian provinces to adopt its standards.
The wider use and acceptance of modular is very much intertwined with geographic location. In addition to the size of the site, the surrounding features, the demographics, and the proximity to modular factories, there can be vastly different attitudes toward the method. “Every location is different is number one,” said Ken Lowney, the president and CEO of Lowney Architecture, an architecture and design firm based in the Bay Area, about what’s holding back modular from wider expansion. Lowney’s firm has done a number of modular projects over the years and has eight offices around California and one in Honolulu, Hawaii. In California, a state that’s generally thought of as the heart of the housing crisis, he sees a distinctive split in attitudes toward modular construction.
“It’s so interesting—Northern California is a little shy of modular because of perceived disasters or big problems, while Southern California is totally gung-ho about the great possibilities of modular,” said Lowney. It can differ widely by state as well, often in large part due to the strength of the economy. In Hawaii, modular has not been as accepted, and unions there are wary of factory-built multifamily housing and view it as something that could put them out of business, something Lowney attributes to lack of development, unlike in California, where new projects are more plentiful. “If a construction worker loses a job in LA, there’s 10 more jobs out there,” said Lowney. “But in Hawaii, they lose a job, and that really hurts because there aren’t that many jobs out there.”
The right fit
As the industry has grown, a number of modular housing startups entered the market, including Veev, Katerra, and House. But they have all since gone out of business, leaving many in the industry to wonder if creating a modular-specific company that combines all aspects of the process into one package is financially feasible. One of the things that all of these failed modular construction companies had in common was that they all were pursuing a vertically integrated business model, where they would be the ones to design, fabricate, and assemble each building.
It doesn’t work to be vertically integrated because each chain in the modular process needs to stay solvent and efficient.Ken Lowney, President and CEO of Lowney Architecture
“It doesn’t work to be vertically integrated because each chain in the modular process needs to stay solvent and efficient,” Lowney said. Rather than trying to take over the entire process, Lowney argued that a modular construction firm needs to be embedded in wider ecosystems within real estate rather than being essentially a division within just one company. “There’s so much required to keep each piece in business, so having just one vertical stack would never work,” he said.
Although modular construction represents a very small fraction of the overall construction methods used across the U.S. and the world, the increasing interest and growth in the industry have many looking at it as a potential disruptor. Pushback from construction trade unions has not been uncommon. In San Francisco, construction trade unions wrote a heated letter to the city’s mayor in 2020, where they came out strongly against modular housing unless it was built with union workers and craft-specific employees. The leader of the building trades group said that modular construction methods lower construction standards and reduce wages. In the years since, city officials have been more cautious about using modular projects, a reversal from a previous announcement by the administration in 2019 when Mayor London Breed pledged a commitment to building a modular factory in the city and put $100 million toward projects to help get it up and running.
One of the most frequent criticisms that modular tend to get is that it eliminates the ability to customize a project. Building using modules means much more uniformity and locking in plans very early on, and for many developers and architects, that tends to be a dealbreaker. But it’s not always considered a downside. For certain projects, especially hotels, dorms, or SRO buildings, where repetition is the name of the game, modular is a particularly good fit. “The more market-rate you are, the more difficult it is to make modular work because it demands things to be adhered to in advance in a totally preloaded timeline than other traditional ways,” Lowney said. “If modular is a little bit better than site-built, it’s probably not good enough to go on. It has to be a lot better.”
One of the big hopes for modular is the ability to build a large amount of housing fast—while saving money. There is a lot of pressure on construction projects to stay on track, particularly with borrowing costs going up. When a developer misses deadlines and pushes past prescribed dates for closing out a given project, it can push some developers into a dire situation. But if the modular construction industry can prove that they can cut construction time, it could sway developers to consider trying modular out. “Even if it was cost neutral, getting it out to market is a better outcome for most folks,” Sulit said. “That way of mitigating risk is a really lucrative sort of promise in modular delivery.”
Modular construction methods, for now, remain a small but growing niche in the greater construction industry. There are a lot of barriers preventing greater adoption of modular, namely the perception of modular as a disruptor, the inflexibility of using factory-built modules, and the lack of a local factory presence in many areas. Industry groups will certainly continue to advocate for wider acceptance of modular and work on solving the issues that are preventing it from happening, like adding modular methods to the IBC. We may never see modular construction become the leading method of choice for real estate development in the US, but as many have pointed out, it is a method that has big advantages for the right projects and, when supported and done right, could be a game-changer for cities across the country.