Housing Dollars and Sense: On Modular Housing and Rebuilding California’s Housing Production System

San Franciscans have come to understand that “disruption” often means gaining competitive advantage by undermining regulatory standards, shifting risks onto workers, and destroying a local industry. Earlier this month wealthy investors and modular housing manufacturers, along with their allies in the real estate industry, took to the Chronicle’s news pages to sell the disruptive virtues of funneling large amounts of affordable housing spending to their factories. Their misleading narrative is rooted in tales of out control labor costs, recalcitrant unions, and unrealistic promises of massive savings through outsourcing construction. This is to set the record straight and offer sustainable housing solutions that rebuild the construction industry California needs.

Factory Built Modular Housing has been around the US since the 60s and today’s housing crisis is leading to its rediscovery. Richard Nixon’s Department of Housing and Urban Development launched Operation Breakthrough to pioneer innovative construction methods to help address another affordable housing crisis. The industry never took off in the United States due to technological failures and economic factors but today’s atmosphere of crisis and the potential of billions of dollars in public funds are leading to renewed attention from real estate interests. The economic obstacles remain, so it is no wonder the spin machines are working overtime to claim those dollars.

San Franciscans reject outsourcing as a matter of policy. But the rush to Modular is essentially an outsourcing and vertical integration play underwritten by workers’ wages and public dollars. Local factories do not make economic sense because for all the talk of savings through efficiency, architects estimate modest savings of five to ten percent — and only if everything goes right — not the twenty or thirty percent sold by boosters. These promises of modest savings are only possible through deep wage cuts; wages in the Bay Area’s unionized factory top out at approximately at about $29 per hour with a benefit package of indeterminate quality. This is less than two-thirds of the $45 per hour “housing wage” a full time worker needs to afford a “Fair Market Rent” studio in San Francisco and $3 per hour less than the lowest paid experienced workers earn on a San Francisco job site. Non-union factories in the Central Valley and Idaho pay far less. Existing factories only have capacity for a few thousand apartments per year so the out-of-state and foreign factories that will be built to scale up production will depress wages further.

Marginal short-term savings come with significant long-term costs as more than $5 is removed from San Francisco’s local construction economy for every dollar of potential bottom line savings. San Francisco has long relied on its construction spending as part of its workforce and local business development strategy. In just the past few years locally funded affordable housing projects led to at least 1 million Local Hire hours and more than $65 million in wages for residents of the City’s neediest neighborhoods. Shifting production out of town slashes opportunities for these new construction workers and excludes the contractors who help make local hire work and contribute to our city’s tax base. Based on records from one local modular project, nearly forty percent of the project’s construction expenditures are shipped out of town. None of those dollars are lost to the industries employing the white-collar professionals most vocally boosting Modular.

More than $5 is lost to San Francisco’s construction economy and local workers lose more than $2 in wages and benefits for every dollar of prospective savings from outsourcing.

San Franciscans also believe poor families are as deserving of quality housing as everyone else and have required affordable housing to be built to the same standards as market rate product. Rooted in equity this requirement is also a practical decision to avoid stigma, neighborhood resistance, and early degradation of publicly funded apartment complexes. Modular undermines these principles because an insidiously interpreted legal loophole allows it to avoid complying with local building code standards. Although the City has ensured the projects it has funded so far comply with local standards this is only applicable to affordable housing projects developed with the city’s close involvement. Allowing a class of housing to evade local building code standards undermines this principle.

California’s housing crisis stems from a variety of factors but one of the most pernicious is the state of the residential housing industry itself. Commentators often focus on zoning, local opposition, and permit fees but pay less attention to the decades of cost-cutting that have left the housing production system structurally unable to produce the homes California needs. According to Federal data the number of General Contractors building new housing in California shrunk by 15% and their employment shrunk by 47% between 2006 and 2018 while the number of Building Foundation, Exterior, & Finishing contractors and workers declined by 8% and 31% respectively. Productivity is at historic lows and wages continue to fall as developers seek ever-cheaper workers. Meeting Governor Newsom’s ambitious production goal of 350,000 units per year would require tripling the state’s residential construction workforce. COVID’s impacts are likely to hit the sector further but not all is bleak as the number of contractors and workers in the Building Equipment Contracting sector grew by 17% and 12% respectively.

Construction industry capacity constraints are concentrated in new housing construction and building exterior contracting. Building equipment contractors are seeing significant growth.

Declines in California’s overall construction workforce have taken place as inflation adjusted blue collar construction wages fell by 25% since 1990, even as all other employees kept pace. Housing prices significantly outpaced inflation in that time period. Consequently, construction became an unattractive career option.

Residential construction productivity fell dramatically during the mid-2000’s housing boom as years of wage cuts finally took their toll. Productivity began a rebound after the Great Recession but remains significantly below the 1990–2005 average.

Devoting attention and resources to silver-bullet tech fixes is tripping over dollars to pick up nickels. Addressing California’s housing crisis by building the affordable housing our state needs will require actively rebuilding the housing production system through investment in workers and the state’s contracting base. Because local participation is critical to making affordable housing projects happen, local governments should emphasize labor standards and training, alongside local workers, contractors, and suppliers. As legislators consider appropriations and bills to streamline development, they should incorporate prevailing wage requirements and skilled and trained workforce standards to help grow the construction workforce and incentivize investments in training and safety. The results will not be immediate but will begin to pay dividends in the near term as apprenticeships graduate skilled workers and the state’s contracting base recovers. Anything less is to embrace the failures that have brought California to this point.