Magazine | March 25, 2019, Issue

Modular Housing Is Affordable Housing

A crane places a modular house in Slidell, La., onto stilts to protect it against floods. (Tyrone Turner/National Geographic/Getty Images)
How new construction techniques can bring the mortgages and rents down

Imagine you are building a house. Carpenters will craft forms for concrete finishers to fill and then throw up skeletal walls for electricians to wire and plumbers to pipe. Drywall installers and bricklayers will lend the house its form before painters add life. In all, an average of 22 trades will parade through the construction of a typical single-family home, a process that has barely changed since the Industrial Revolution.

If we wonder why the United States is suffering a dire housing shortage, or why real-estate prices are soaring out of reach for millions of Americans, we should also question the outdated ways we build our homes. In a long, thin warehouse on the Brooklyn side of New York’s East River, the startup FullStack Modular is joining a bevy of new firms that manufacture houses much as we build cars: on an assembly line, in a factory. What’s known as modular construction marries Henry Ford to LEGOs in a way that may offer hope for our housing woes.

Construction productivity in the United States has barely budged for 80 years. For a sector that generates more than $640 billion in GDP, employs some 7 million people, and builds $1.3 trillion worth of structures every year, the cost of doing nothing new adds up. If construction productivity had risen at the same rate as manufacturing productivity (1,500 percent over the same eight decades), the world would be $1.6 trillion richer every year.

Somehow we are getting worse at building new homes. America is in the midst of a historic housing shortage; the rate of new housing units being built every year is more than 20 percent below the average between 1975 and 2000. Last year alone, the United States fell 400,000 homes short of the total needed to keep up with population growth. As supply fails to keep up with demand, home prices nationwide are rising at twice the rate of incomes and three times the rate of inflation. In other words, the construction industry is broken, and we are paying the price.

America’s sweeping land-use regulations have built a wall of unaffordability around our most productive cities. But even waving away building restrictions would address neither the problem of rising construction costs nor the industry’s labor shortage (which go hand-in-hand). Try building affordably in San Francisco when construction alone costs roughly $425,000 a unit plus another $100,000 in fees. Construction prices have risen by nearly a third in the past three years across California’s Bay Area. Nationwide, “after falling or remaining flat for three decades, real construction costs have increased sharply since the mid-2000s,” according to BuildZoom’s Issi Romem, with differences in cost between cities being driven by labor more than materials.

There are simply not enough workers. The residential-construction labor force is down nearly a quarter since 2006, alongside similar declines in higher-skilled trades such as plumbing and electrical work. Contractors laid off scores of construction workers during the Great Recession, many of whom never returned to the industry, and soon many firms also went out of business. The homebuilders who hired them also often filed for bankruptcy or drastically consolidated in the years after the downturn. As a result, today’s rising demand for housing is being met by fewer firms using fewer contractors hiring fewer workers.

So we must build differently, and this is where modular housing can help. This moment is how FullStack Modular’s waterfront warehouse gave to Brooklyn the company’s 32-story modular tower — the world’s tallest — a reddish and gray-hued stack of residences staring down at the borough’s Barclays Center. Another off-site construction company, Katerra, the IKEA of homebuilding, has been projected to be worth $4 billion by the end of the year. “If you’re not increasing the productivity of the built environment, you’re not getting anywhere,” FullStack Modular CEO Roger Krulak tells National Review.

Modular construction is, technically, the offsite manufacturing of prefabricated units that are later assembled on-site. Boxes are built, transported, and put together. Asking how they are built, with what materials, and where quickly leads one down a rabbit hole that emerges at the realization that “modular” is a term broad enough to nearly lose meaning. Stick or steel, tower or triplex — the sheer variety in materials and housing types that can be modularized beggars the imagination. Yet every modular-housing firm can be plotted along two axes: how much is built offsite and how densely the modules are assembled — how much Henry Ford and how much LEGO.

Sweep the image of a dusty construction site from your mind. Imagine instead the cooled, cavernous interior of a warehouse smelling of sawed wood and fresh paint, echoing with pulsing nail guns or crackling welders. Or a Brooklyn factory such as FullStack Modular’s, filled with steel frames strung out on an assembly line to be wrapped, wired, and welded together as walls for rooms. Or perhaps there are sheets of Katerra’s highly engineered mass timber, light and strong, which, when fully assembled, become stackable modules for apartments, houses, or even towers.

This may all sound slightly fanciful, like a Space Age cartoon, and in a way it is. Modular housing was a favorite of the 20th-century visionary Buckminster Fuller, whose futuristic “Dymaxion Houses” were to be mass-produced dwellings fit for the Baby Boom. A block along Burnham Street in Milwaukee is lined with prefabricated residences crafted by Frank Lloyd Wright in the early years of World War I, an unrealized vision by America’s most famous architect to build well-designed affordable houses on a global scale. Immediately after World War II, more than 70 modular-home manufacturers were up and running, ultimately producing some 200,000 prefabricated homes for returning soldiers. But this boom was not to last. Modular construction became a plaything for architects dreaming of brutalist piles and “plug-in cities.” Today, modular and prefabricated construction is used to build just 2 percent of new single-family homes and 3 percent of new multifamily housing.

But changes in technologies and taste are giving modular housing a new importance. Projects are digitally designed and streamlined with exacting precision before assembly begins. Factories can now reasonably claim to cut construction time in half and reduce costs by 10 to 20 percent. A multifamily apartment building that would take 14 to 16 months to build using traditional methods goes up in seven to nine months using modular construction. Time is money, and shaving months off carrying and operating costs, along with having more-predictable timelines and budgets, helps more housing projects pencil out.

Up to 80 percent of modular-construction processes can occur off-site using leaner work forces of moderately skilled, less-expensive labor. Work once done on-site by specialized labor costing upwards of $80 an hour in the Bay Area can now be done for $30 an hour in a local factory or for $15 an hour in Boise. Those in the building trades are still in demand, but now there is a larger pool of labor. And because the laborers work in a climate-controlled factory, there are no delays because of inclement weather and no hazardous operations to endure.

Vertical integration makes firms such as Katerra and FullStack Modular something like one-stop-shops for housing, from design to build. Layers of architects, builders, and contractors are eliminated to streamline the building process. And large-scale manufacturers pay lower bulk prices for standard materials. These gains in efficiency free up dollars for research and development to boost productivity. As it stands, America’s construction industry spends just 0.5 percent of its annual value on R&D, compared with 3.7 percent for the auto industry or 8.8 percent for computing and electronics.

The tech industry, often based in expensive locales, is taking notice. Google recently spent upwards of $30 million on 300 modular housing units built by the Bay Area–based Factory OS for its Silicon Valley employees. Microsoft is doling out half a billion dollars for new housing in the Seattle area. And there is a growing list of modular startups — such as Blokable in Seattle and RAD Urban in Oakland — sprouting up to disrupt the construction industry in high-flying tech hubs.

The government also wants a slice of the action. In the eastward stretches of Brooklyn, a new low-income-housing project shows the public sector’s willingness to try anything to make more housing available. For the first time, New York City’s affordable-housing agency is explicitly requiring modular-housing construction for a different, mixed-use development, part of a larger effort at financing more than 25,000 affordable homes a year. On the opposite coast, Seattle is spending $12 million on three pilot projects that seek to house the homeless in modular construction.

But housing crises are not solved in a day. New construction technologies have long failed to be embraced by risk-averse builders, fragmented customers, and unionized or specialized laborers wary of losing their protected spot in the labor market. For modular construction, the challenges compound. Lenders are not used to providing the large upfront loans needed for a run of modules. Real-estate demand is fickle, too, and factories need continuous demand to keep the lights on. This is why modular startups such as Factory OS reuse old spaces.

Being a niche player in the housing market earns you no favor from regulators. America’s cities and counties use roughly 93,000 different building codes, posing a problem to mass-produced housing. Then there is the permitting process. Inspections must now occur not only at the building site but on the factory floor, which might be in a different state. And manufacturers can’t forget the transportation departments: They have strong opinions on nighttime shipping and daytime assembly, which can involve holding modules on the street until they are moved into place. State regulators should simply certify a factory and its modular prototypes and write up standard procedures for moving and stacking modules.

As housing prices grow farther out of reach for millions of Americans, the smaller budgets and faster building times of modular housing could be an affordability game-changer. Builders and regulators are still working out the details, but modular technologies are already building every type of living quarter imaginable.

Gazing up at the Tetris-like 461 Dean on Brooklyn’s Atlantic Avenue, the massive tower of blocks that gave birth to FullStack Modular, imagining the future of housing doesn’t seem so hard anymore.

This article appears as “A Low-Cost LEGO House Decree!” in the March 25, 2019, print edition of National Review.

Michael Hendrix is the director of state and local policy at the Manhattan Institute.

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