For Multifamily Residential, Modular Construction Is ‘Red Hot’

Labor and housing shortages are leading more builders to embrace prefab.

There’s an apocryphal story that on June 2, 1925, first baseman Wally Pipp asked for a day off due to a headache. Lou Gehrig took over for him and didn’t stop until he’d played another 2,129 games. It’s important to be ready when your moment comes, and for off-site manufacturing, that moment may be here.

The hospitality industry was among the first to embrace prefab construction. For example, last year Marriott announced it would sign 50 hotel deals (13 percent of its North America signings) that would involve prefab guestrooms and/or bathrooms. Now prefab is heating up in the housing industry as well, particularly for multifamily dwellings.

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“I’ve been doing this 15 years and I’ve never seen interest as high as it is now,” said Tom Hardiman, executive director of the Modular Building Institute (MBI).

It’s a combination of lack of skilled labor, or the cost and availability of it, coupled with a real crunch on affordable housing,” he said. “They know they need to build more and at the same time, they don’t have the labor to do it.”

Modular was still just over 3 percent of all commercial housing in 2016 according MBI, but that’s an increase of more than 30 percent over 2015. With the number of permits issued for multifamily housing nearly doubling in the last 25 years to 41 percent of all building permitsthe interest in multifamily housing has been steadily growing for years. The National Multifamily Housing Council projects a market demand for 4.6 million new apartment units by 2030.

The demand for multifamily is so strong that some modular builders are changing their strategy.

“A lot of the guys that were traditionally single family modular home builders are jumping into multifamily because it’s red hot, which is creating a little bit of a void on the single family side,” said Hardiman. It’s getting so busy that many modular manufacturers are picking and choosing their projects.

This flurry of interest on the commercial and multifamily sides is putting more pressure on the modular industry to keep up. “Right now [Marriott has] three modular factories that work with them and they need six or seven more — just for Marriott,” said Hardiman. “Then you’ve got all the other hotel chains interested, and fast food chains interested.”

While capacity for manufacturing modular components is growing, it’s concentrated in certain regions of the country, particularly when it comes to residential manufacturers and builders.

“It’s been strong in the Northeast and the mid-Atlantic and Midwest, like Ohio, Indiana and that area, but surprisingly weak in the Southeast and even out West. There’s just not a lot of modular manufacturers out there,” Hardiman said. “Part of it is that the labor rates are generally lower there for traditional construction, so you’re not getting as much of a cost savings.”

Of course, the further you have to ship components, the more expensive they become and the longer you have to wait for them.

“It comes back to, ‘Do I have a factory near me that can do this, preferably two to three factories so I have a little competition?’” said Hardiman.

To ensure they have the components they need, many builders are vertically integrating modular manufacturing facilities into their companies. Noted Hardiman, “We’re seeing builders open additional plants, and a lot of the larger, traditional contractors are establishing a modular division within their framework.”

On July 25, Chicago-based firm Skender announced a new advanced manufacturing facility for modular building. According to a press release, approximately 100 new jobs will be created “related to the production of modular buildings for multifamily, healthcare and commercial buildings.”

While multifamily modular is hot, on the West Coast, another surprising driver of growth in prefab has been accessory dwelling units (ADUs), also known as “granny flats.” Cities including San Francisco, Portland and Seattle have seized on ADUs as a way to create affordable housing and greater density without impacting the character of the neighborhood or drawing the scrutiny that often accompanies the construction of multifamily housing units in residential communities.

Recent legislation in California has removed regulations and impact fees that discouraged building of ADUs. Bay Area modular builder Valley Home Development has seen so much interest in its one-stop ADU solutions that they are opening their own modular factory. 

“Three or four years ago, we used to do seven to ten ADUs in a good year,” said owner Steve Vallejos. “This year we’ll probably wind up doing around 40 units, and next year we’re shooting for 100 units.”

Chris Parker has been writing about business, policy, science, sports and music for print and online publications across the country for two decades.

Top Image Credit: Skender

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