Here’s Why Modular Homes Are Having a Moment

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Kevin Purvis, a Los Angeles-based real estate investor, was discouraged. Ready to embark on a build-to-rent single family project with an accessory dwelling unit (ADU) in Corona, California, he checked out modular construction, thinking it could lower costs.

With traditional construction, he says, “There are always overages” — now more than ever. What he liked about modular was a sticker price that would stick — despite pandemic-induced pandemonium in the construction world, causing supply chain nightmares and kangarooing lumber prices.

“This is the price,” he says. “I pay the price and it’s delivered.”

Modular homes and investment portfolios

After examining offerings from at least 10 modular builders, though, he couldn’t get numbers to crunch to his advantage. Factory-built components and fast assembly could reduce delays in the building process, but at $250-plus per square foot, it was still pricey.

But Purvis found a way to make his modular vision a reality. His two-bedroom ADU is almost ready to rent for close to $2,500 a month, and the bottom line of $180 per square foot, not including site work and permits, was a pleasant surprise.

“I didn’t pay a general-contractor fee,” he says. “It’s pretty great.”

After decades of steady percolation, modular-home makers are offering diverse products that are faster, and in some cases cheaper, than traditional “stick-built” homes. Modular homes look better than ever and hit goals that many builders now have for ESG (environmental, social and governance).

Modular could be a fast track to expanding a rental portfolio. Has the modular moment arrived? It depends on who is asking, the funds available and location, location, location.

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Modular is a quick way to put up a house

We can build faster,” says Ken Semler, the founder and owner of Impresa Modular.

Semler’s company, now licensed, registered and certified in 42 states, has a dedicated factory in Greenwood, South Carolina, and began franchising in 2020. Impresa manufactures some 3,000 block-by-block residential designs in traditional styles, producing 500-700 dwellings a year at a price point just below $200 per square foot.

The company’s product can currently be assembled and finished in three to four months, whereas a standard stick-built house typically takes at least seven months.

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For companies specializing in build-to-rent developments — also known in the business as horizontal multi-family — the time savings go right to the bottom line, since the rentals start generating cash flow more quickly.

“That’s operational revenue,” Semler says.

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Modular is poised to grow in the market

Modular is currently a tiny part of the American housing market. It accounted for 13,415 homes in 2020, the Modular Home Building Association says; that’s just 1.2 percent of the single-family housing starts market, according to the most recent Survey of Construction by the Census Bureau and the Department of Housing and Urban Development (HUD).

Total market share for non-site-built single-family homes — the modular and panelized parts of system-built — was 3 percent in 2020, according to the Census Bureau’s Survey of Construction data, with analysis from the National Association of Home Builders (NAHB). NAHB forecasted system-built’s share to rise in 2021 and beyond, thanks to construction labor shortages.

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Labor Shortage

Due to labor shortages, “the industry must adapt to new methods to keep pace,” wrote Joanna Schwartz, CEO of Quartz Properties, a Massachusetts-based “modular-centric homebuilder,” in “How Can the Country Solve the Housing Shortage?”, a November 2021 Forbes Business Council analysis.

“There is huge potential for modular to disrupt the U.S. residential real estate construction market,” Schwartz remarked, “specifically as a labor shortage solution.”

According to the Business Research Company, the global market for single-family homes designated “green,” including modular, should expand from $105.91 billion in 2020 to as much as $164.62 billion by 2025.

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Construction chaos

The construction chaos brought by the Covid-19 pandemic — mounting labor scarcity, the scramble for materials, and supply-chain issues — could act as a boon for modular.

“We don’t see those issues going away anytime soon,” says Dalton Elliot, director of inside sales for Lima One Capital, a South Carolina-based lender offering build-to-rent loans.

Elliot, who also hosts the podcast Real Estate of Things, says, “In terms of supply-chain issues, going modular offers a massive efficiency gain.” Buyers save, moving in or renting sooner.

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Construction challenges create opportunity

Michael Cook, who is the chief investment officer for MCB Capital and the chief administrative officer of ResiShares, both in the Dallas-Fort Worth area.

“If it were true it was cheaper,” he says, “you’d see more modular coming out of the ground.”

It’s not always easy to make the numbers work right when it comes to modular build-to-rent, it seems. Transportation is costly; a building location close to the manufacturer is key, limiting design choices. Getting a project up fast is not guaranteed, as many companies have waiting lists.

Finally, most manufacturers require upfront payment but can’t guarantee against production — or local permit — delays, which discourages lenders.

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A long history of ‘system-built’ construction

Modular builders have been around for a while. Their Lego-like products hit in the 1950s and have since ridden a market-share rollercoaster.

Popularity surged in the ’50s with development of highway systems that assisted with delivery, again in the ’70s when quality increased, and at the start of the new millennium.

Dwell Magazine, founded in 2000, sparked enormous interest in modern homes, and nearly 80,000 modular domiciles were built in the U.S. in 2002, NAHB data says. But the figures dropped sharply after 2006, and stick-built still dominates.

Pandemic-related issues particularly affect the stick-built model. System-built has been more resilient. Boutique makers of modular and prefab homes are booked out a year or more, but larger operations are accepting orders and cranking out buildings.

While the cost of non-luxury stick-built is at $150-250 per square foot and increasing, according to Matt Ferrell, who hosts the YouTube show Undecided, it’s possible to find modular products ranging from $50-250 per square foot. This number generally does not include land, site preparation or assembly.

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Batch production ‘in the house’

System-built iterations automate steps, working in giant, climate-controlled facilities to avoid weather delays. Assembly lines let builders multitask, working on several orders at once.

Workers install features and surfaces from electric hookups and plumbing fixtures to tile backsplashes, wood flooring and quartz countertops. The pouring and curing of a foundation takes about two weeks and can occur simultaneously, compressing the schedule. Makers then haul homes in blocks or slabs to their foundations for assembly and finishing.

Steve Glenn, CEO of Plant Prefab, says his company is focused on “custom, sustainable, architectural prefabricated homes.” The company’s Rialto and Ontario, California, factories can produce 30 to 50 architect-designed homes a year at a price of about $275 per square foot.

“Some clients report 25 percent savings,” Glenn notes. Others report no savings, he says, but a quicker turnaround is likely. “Our projects are often finished 30 to 50 percent faster.”

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A cost-control advantages

A key cost-control advantage is that the hangar facilities of system-built producers allow for stockpiling.

“Because of our purchasing power, we negotiate better prices,” says Kaveh Khatibloo, co-CEO of Seattle’s Stillwater Dwellings, a panelized-prefab builder of multimillion-dollar homes.

One build-to-rent project that the company completed now leases for $40,000 a month.

Totals on Stillwater’s $475- to $700-per-square-foot dwellings have increased, but not ballooned, he says, even when pandemic-fired lumber prices skyrocketed by multiples of up to 7.

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Modular and the housing gap

The U.S. is upwards of 5 million homes short of supply, a major driver of increased prices. Census figures reported more than 12 million households forming in the last decade or so, but just 7 million homes going up.

“People are looking for affordable houses,” says Dave Busche, an Austin, Texas-based business-development manager for Skyline-Champion Homes.

Skyline-Champion offers hundreds of sustainable modular designs going from blank foundation to family-occupied in under a week, and for less than $200,000.

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Modular versus manufactured

Busche says there’s no real difference between modular and manufactured homes, and investor Kevin Purvis agrees.“

Modular designs are governed by the International Residential Code (IRC), like stick-built houses, based on permit municipality. Manufactured houses, like mobile homes, are built to the standards of the U.S. Department of Housing and Urban Development.

Modular has also proven to show the same sort of appreciation in value as traditionally built homes.

When he learned that Skyline-Champion had a modular line, similar to its manufactured homes but built to local code, Purvis went for it. He waited seven months for his modules, then stored them for two more as he waited for final permitting. He still came in on budget.

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Modular’s environmental edge

Sustainability is essential now, and modular builders have a stronger claim to it than other building methods, with an ability to limit waste in their facilities. Centralizing allows materials conservation; instead of dumpsters full of trash, one home might produce a single bin.

The U.S. Environmental Protection Agency (EPA) estimates that America generates 600 million tons of demolition and construction debris, more than double the country’s municipal solid waste.

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Healthy homesteads

Modular also scores well on Net Zero and Passive House ratings.

Modular homes operate around 15 percent more efficiently than site-built, Undecided’s Ferrell says, thanks to insulated envelopes and factory-installed solar panels.

“Make it airtight and then ventilate right,” quips Bill McDonald, founder and CEO of Phoenix Haus. The Grand Junction, Colorado-based company makes “healthy homesteads” delivered as panelized prefab packages, meeting energy-pinching Passive House standards at a price of about $110 a square foot before site, permit and construction costs.

McDonald says that as a “little-volume producer” of prefab single family homes, he welcomes the pressure of increasing interest.

This article originally appeared on Mynd.co and was syndicated by MediaFeed.org.

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