Homes are built with hundreds or thousands of different products. Those products move through the supply chain in several ways and then they have to arrive to the job site. This all requires numerous modes of transportation at a time when transportation costs are rising exponentially.
Since January 2020, long distance truck transportation has gone up more than 30%, water transportation has increased 21%, and the arrangement of freight and cargo has increased 50% according to David Logan, who serves as the director of tax and trade policy at the National Association of Home Builders.
These costs can be prohibitive to building new homes at a time when there is a critical need for more supply.
Looking At The Numbers
Transportation has a big impact on whether a project is done onsite or offsite, but it takes a much bigger role in offsite projects. Ken Semler serves as the president and CEO of West Virginia-based building company Impresa Modular and is one of the biggest advocates for modular construction, but sees that the building process has been slow to take off.
“The reasons our industry hasn’t grown so fast is because I must have all the department of transportation rules in my head, not just if I use a 2×4 or a 2×6,” he said.
Many times, the transportation issues for offsite aren’t limited to getting modules to the site either. When the modules arrive, there must be cranes to put them in place. Semler ordered cranes for his new factory that are taking more than a year because of supply chain issues.
In addition to that, he says that another consideration is the type and quantity of carriers that will be used, and sometimes those carriers have to store the modules, which might be occupied for just a matter of hours or for many weeks, depending on when all the parties can be arranged for the set crew.
“Crane cost has gone up more than 30%, and set crews are specialized and hard to come by now,” Semler said. “Setting requires a unique set of tools that are custom made and fabricated. They are unique and there aren’t enough of them. There is also a shortage of truck drivers. It’s a small miracle when I set a house now. I have to have a set crew, modules and crane show up all at the same time. It’s getting harder than ever. But, it’s even more difficult for site builders.”
Semler’s company raised $13 million for the new manufacturing facility it just opened. Alongside that capital expense, is a fleet of carriers that cost anywhere from $12,000 to $125,000 each depending on the capabilities of the carrier. He explained that factories that own and operate set crews will invest in the better carriers to get the jobs done faster and to move on to the next project faster.
“If you are delivering all your own homes and doing the set, you are at a million dollars just to get your carriers,” Semler said. “Some have 200 carriers because they have to sit out in field so long. So, it’s also a large capital expense.”
Getting Closer to the Job Site
J. Don Overton is principal at Arkansas-based real estate developer Terra Verde and is focused on providing workforce housing solutions in underserved Arkansas communities. His development team is building a centralized factory to serve several areas of the state, allowing the company to leverage the benefits that offsite construction offers like higher quality, faster delivery and less waste.
The factory is currently in the design stage and is expected to cost between $10 and $15 million, and when up and running is projected to produce 1,000 to 1,500 boxes per year. For the company’s workforce housing product, two boxes connect to create one home, so the factory should be able to produce 500 to 750 houses per year, with a projected full payback on the construction cost of the factory investment in just 3 to 5 years.
The reason Terra Verde can achieve these results is because the model his team has developed utilizes a limited amount of variations for the workforce, built to rent homes, with the same two or three units repeated throughout an entire neighborhood. With this type of scale, Overton says his team should be able to meet or beat the costs of onsite construction.
Currently he’s not planning any automation and will just rely on the lower cost of labor in Arkansas to complete the boxes up to 95% before they are shipped to the job site. Overton estimates that the total costs of transportation for this modular construction business will add up to 4.5% of the total overall building costs.
“Really, the whole reason we are working towards full offsite construction is the speed,” he said. “The sooner it’s completed, the sooner it can be sold or rented. We should make up the 4 to 5% in transportation costs with the economies of scale of using the factory model, because of the quicker turn, less waste and higher quality. There is a 25 to 50% increase in volume of units completed to certificate of occupancy from doing it offsite as opposed to onsite for the same product. Plus, there are no weather conditions to deal with offsite, crews can work when it is freezing cold, raining, or any other weather, and you can have several shifts.”
Making Proximity a Nonissue
Many of the offsite home products that are currently being shipped around the country are nearly completely assembled, like Terra Verde’s concept above. However, that means that a lot of empty space is being shipped and paid for at growing, astronomical prices.
Jordan Rogove serves as COO at New York-based builder Liv-Connected and is co-founder of the architecture firm DXA Studio and has a plan to change those dynamics. The group’s new, flat-packed home design eliminates the need for wide loads so that more of the house can fit on a truck, creating better efficiencies for the overall building and shipping processes.
Rogove and his firm partner Wayne Norbeck worked with Joseph Wheeler, a professor of architecture at Virginia Tech School of Architecture and Design, who also has been entrenched in modular construction practices around the world, to arrive at this unique design that has the ability to be flat packed.
“There was careful design of the components to break down and be re-assembled in a simple way including the roof panels, wall panels, and key components, such as the kitchen and bathroom,” he said. “We worked very hard to coordinate with our team to consolidate building systems within individual components, or to accommodate simple connections between components.”
Now, because of this innovative design, larger than a 500-square-foot home can be broken down to fit on one truck and shipped anywhere in the country at regular shipping rates, then it can be assembled in just a matter of hours once it arrives to the site.
“In disaster situations, or for market rate sites where holding costs are a challenge, this is a huge advantage,” Rogove said. “One home is broken into several components, only some are flat packed. Others are actual cartridges that carry the brain of the unit and have the electrical and plumbing. So, we’re shipping technology not space.”
Volumetric or modular construction often has to ship empty space, which the firm claims to be the root of the high percentage of failure for modular. Many compare the US’s latency with adopting modular to the wide acceptance of it in countries like Japan and the UK; however, shipping across those smaller countries isn’t nearly the distance as it is here in the US.
The Liv-Connected factory has the capacity to produce 20 homes per week. Then, when the home arrives on site, there are two options. If the home will be used for disaster relief and will be a non-permanent installation, the house is placed on top of a beam foundation. For a permanent installation, the points of entry, or the plumbing, electric and septic, would already be in place and the actual install would take about four hours, even though the elements have been flat packed.
The firm’s Conexus home is 500-square-feet and starts at $150,000, so the innovation is bringing much needed affordability to housing. With the modular foundation, buyers can add a bedroom any time in the future, which would cost between $30,000 and $40,000, a process that can happen online.
“One of the features that we love is that you can start with a one-bedroom, and you can add on and expand on a later date,” said Rogove. “It can be a lot like a car buying experience. The buyer can pick exterior finishes and build the model that they are interested in and can build it to those specs. Other modular manufacturers get stuck with endless customization, which just end up as delays.”
Norbeck also is excited that Liv-Connected has future-proofed its business by forming a strategic partnership with a group called Tiny Estates that will keep the Liv-Connected factory busy.
“With modular there has been a limit during boom periods, and during bust periods they have to close doors,” he said. “We have a new 10-year commitment with interest in Tiny Estates that have homes starting at $90,000. We love this concept that allows people to be financed, and the monthly mortgage is less than rent, but you are still building equity. This brings price down and is achievable. That diversification that we have sets us up nicely compared to other modular companies.”
Another strong asset for Liv-Connected is that the home factory and the homes were created by architects, so there was more concentration on creating an aesthetically pleasing design that is focused on improving health outcomes.
“As architects, we have a better ability to detail,” Norbeck said. “Our homes have more insulation, better water proofing, no formaldehyde, don’t have water penetration issues, which are all very meaningful from a health perspective. There is also slip/fall detection, night lighting, and technology to move cabinets up and down for aging in place. This is our longer-term mission and we’ll be updating catalogs to integrate more technology.”
Removing Silos to Solve the Issues
Bill Greene is the vice president of design management at Dallas-based apartment developer JPI Companies and speaks to the various factors that go into weighing whether one of his projects will move forward as offsite or onsite construction.
“In addition to geography and shipping distance, the lower labor cost in Texas versus union labor, and subcontractor resistance are factors as well,” he said. “But, with labor cost significantly higher since looking at modular pre-pandemic, modular might be worth a revisit.”
According to Greg Leung, the CEO of California-based modular builder Connect Homes, and a former supply demand management senior director at Apple, all of it adds up to be a matter of supply chain economics.
“This is why I went from Silicon Valley to modular,” he said regarding the complicated logistics of delivering more housing supply. “The supply chain is about getting the right thing to the right place at the right time at the right cost. There are different things that you can optimize for and it’s best to think about it in terms of cost to serve. There is inbound of raw materials and outbound of finished modules, and all the variable costs, where you are shipping them to, the cost of labor to turn raw materials into finished product and then the cost of labor to install. The problem is looking at just one aspect of the equation leaves out all the other costs.”
Leung uses an example from his time at Apple.
“Apple is an amazing operations and supply chain company,” he said while pointing out that the iPhone started with one factory and grew to seven factories around the world during his 11-year tenure. “There is a significant commitment in a factory even if you don’t have automation or equipment, which includes all the overhead, land, rent, and workforce.”
Where you put your factory depends on four factors – where customers are located, the cost of logistics from factory to customer, where the materials come from, and the shipping destination. While considering these factors, the owner also has to orchestrate global networks of suppliers to be aligned for the same goal, and at the same time to be responsive, agile, and flexible, all to go to scale.
In just under two years, Connect Homes has been able to deliver more than 600 modules that add up to 93 homes. The company was able to do that by not generalizing and separating out transportation as “the” challenge.
“You silo the challenge to modular as transportation, but you really should be asking what is the lowest cost to deliver,” he said. “What is holding modular back is that we are looking at these things in silos that are very adversarial and don’t work together. If you just solve for logistics and don’t solve labor, or do reverse it’s never going to take off and it doesn’t intellectually make sense to me.”
For instance, many modular companies ship very large modules, in sizes like 60’ by 16,’ which because of the size is very difficult and expensive to ship and therefore has a geographical limitation around the manufacturing facility. So, at that point, it only makes sense to have a factory right next to where the home needs to be delivered.
“We patented a mod that uses standard shipping and doesn’t need special permit fees,” Leung said. “We have shipped from southern California to New England, and it was only $24,000. That was for a standard single family home, but if it was an oversize load, it would probably cost $250,000 so it would be cost prohibitive. This is the story I have been preaching for the last couple years.”
He advises modular companies to vertically integrate to avoid the siloed thinking. Vertical integration also enforces a growth mindset to learn, iterate and improve the product quickly.
“What it means to be a product company distills down to focusing on the unmet needs of the customer,” he said. “We view the end customer as the homeowner and we’re trying to solve for their challenges. That’s what is broken with this industry. Apple is solving the issue of the end customer; they don’t tell them to go pick up the phone in China where it is manufactured.”