This year, you are on track to build 500 homes. Congratulations.

What if next year, you were able to increase production by 40%, so you could then build 700 homes in the same time and at a lower cost?

That’s what is possible with modular construction. Carol Galante, I. Donald Terner Distinguished Professor in Affordable Housing and Urban Policy and the faculty director of the Terner Center for Housing Innovation at UC Berkeley, plus the chief innovation officer at Factory_OS, believes that when prefabricated construction is used adequately, it will give the industry a 40% boost in productivity, which leaves room for when it’s done optimally.

Galante has been studying the disaggregated system that makes up the construction sector. “The price of just construction, just buildings, not infrastructure, is outstripping the ability of an antiquated system to provide efficiently and cost effectively,” she says.

Through her research at Terner and her new role at Factory_OS, she has spent a lot of time looking at new techniques, which actually produced the paper Building Affordability by Building Affordably: Exploring the Benefits, Barriers, and Breakthroughs Needed to Scale Off-Site Multifamily Construction. She cites construction costs that have risen more than 25% since 2014 and labor shortages as the main factors for advancing new processes.

Cutting Time and Costs

The 2017 Multifamily Executive Concept Community took a look at cost savings from four different building types in a multi-use project, showing that there was more than 27% time savings from each project.

Similarly, Galante’s publication showed the off-site construction process can cut project construction time by up to 50%, because of new efficiencies that allow the developer to do more concurrently. For instance, while site work and foundation work are being done, the modules can be constructed in the factory. And, think of the related cost savings with lower on-site construction risks, security, contractor time, and rented equipment.

The article also showed that off-site construction projects save up to 20% on the cost of construction on a three- or four-story wood frame building. Galante asks if these lower costs could translate to lower home prices or lower rents at a time when the constraints of lack of new supply and shortage of inventory are resulting in increased housing prices and rental rates.

As Angel Ross from Next City points out in this op-ed piece, since 2000, median rents have increased by 9 percent, at the same time that the renter’s household incomes have gone down by 11%.

The Barrier of Financing

The cost savings during the project and the additional rent days that result from the shortened timeline should make modular projects an attractive investment. But modular projects don’t fit the mold. Conventional construction is usually heavily supported by construction loans that can be paid out throughout the process as various aspects of the work is completed.

But with off-site, modular construction projects, the work is done up front, so financing is also needed before construction begins. When one of the major benefits of modular construction is speed, the factory needs all the supplies up front in order to assemble the modules and get them to the site and maintain the expedited schedule. And, if the factory doesn’t have capital up front, they can’t pay suppliers in a timely fashion or pay out personnel.

Galante’s paper offers these solutions to the system:

  • Develop and deploy a digital tracking system to identify materials in the factory designated for specific project and take a collateral or security interest in those materials and allow for a construction loan draw for those materials in the factory (with proper insurance).
  • Send bank inspectors to the factory to assess percent completion and approve construction in process in the factory.
  • Require a limited form of completion and repayment guarantee from the factory, independent of the developer, and assess the factory’s overall capitalization and financial stability as is currently done for developers.
  • Engage philanthropy or government backing in the form of loan guarantees to assist lenders across the industry in gaining experience with this type of product and its risks.

However, the process may be gaining popularity and support. Developers like John Westrum, chairman and CEO of Westrum Development, have had a better experience capturing financing. Westrum has completed hundreds of moduar units in Philadelphia and has partnered with a number of different lenders who fully understand the process. The lenders have a new schedule of draws and still do inspections every couple weeks, similar to a traditional project, and Westrum funds the deposit as part of the equity. As soon as the modular units are in place, the loan is paid and Westrum pays his bills.

Stagnation is Death

Good leaders in every industry know that for business, stagnation is death. This is the sentence Galante’s team used to introduce the challenge of off-site financing.

This is one challenge that, when overcome, will lead to a new process that will reshape the industry. But what else will happen in the next decade, if we are freed from legacy practices and antiquated processes?

“From an innovation perspective, there should be continual improvement to change the paradigm and get greater adoption of modular construction,” Galante says. “There are a lot of changes that need to happen to get greater adoption – local codes, how architects view their work. There is a lot more juice. Definitely number one in my view.”

As a number two, Galante envisions a process to marry technology with social input so that the community is involved in community decisions. This type of engagement is happening today beyond special interest groups, like Neighborland, a software that engages civic leaders and residents to interact on, collaborate and prioritize design ideas.

And, as a not-distant number three, Galante wants to focus on innovative ways to provide financing for home ownership and for renting, including how to finance AUDs, intensifying single family neighborhoods to incentivize getting them financed. The current finance system is not structured to assist. Shared equity, mortgages, lots of innovation bubbling up and thinking about how to scale them and thinking about what kind of policy changes are needed.

Many of Galante’s ideas and her passion for affordability will be explored during the panels at the HIVE Conference, scheduled December 6 and 7 in Los Angeles.