Is Modular Building the Answer to the Affordable Housing Crisis?

In the early days of the COVID-19 pandemic, a viral time lapse video showed the Chinese government building an emergency hospital in just 10 days. In Georgia, mobile isolation units were constructed at breakneck speed in order to address the rising hospitalizations. In what felt like an overnight transformation, New York City’s streets were flooded with new outdoor restaurant seating.

How was it all done so fast? By using modular construction.

Modular construction is a specific type of prefabrication, or ‘prefab,’ construction — a term that describes housing that is built and assembled in a factory rather than the traditional on-site method. Traditional construction relies on the ‘stick method’: where experienced tradespeople assemble raw materials to build a skeleton that panels, walls and floors are built over.

Depending on the size of the project, a building using modular design is broken into smaller sections, ranging from a bathroom to an entire floor, that are built to snap together. Modular construction companies can even build entire apartment buildings by stacking shipping container sized units on top each other, like Legos.

While modular construction has existed in some forms for hundreds of years, the modular construction industry is just starting to take off. A 2019 report from McKinsey projected that the modular construction industry, between Europe and the United States, could reach $130 billion. A 2020 report from financial research firm Artizon estimated that the global market will grow to be $171 billion in the next five years alone.

Only 54% of families in America’s metropolitan areas can afford to buy a starter home. According to a 2018 Pew report, 38 percent of all rental households were rent burdened — a term used when residents pay more than 30% of their income on rent. This was a 19% jump from 2001. In the same time, severely rent burdened residents jumped by 42%.

While the COVID pandemic has caused rents to fall in certain city areas, the affordability crisis in the United States is still a looking threat. A recent report from Freddie Mac found that the U.S. is 3.8 million homes short of demand, and particularly short on entry level homes.

Advocates and experts say the moment demands cheap and efficient housing that is erected fast. “We need to build more homes. Supply is critical in the current environment,” Steven Yeun, the chief economist at the National Association of Realtors, told NPR.

Modular construction may be the answer.

The Costs of Local Control

The earliest model of prefabricated houses are manufactured homes. Manufactured homes are built entirely in a factory and delivered to their location as an entire unit. Manufactured homes in the United States began to gain some traction in the 1950s as a potential solution for more affordable housing.

While manufactured housing can cut production costs in half, discriminatory local zoning ordinances and aesthetic standards that specifically targeted manufactured homes in municipalities have driven up the price of manufactured housing in the U.S. — and even prevents them from being built at all.

“[Local ordinances] require that the roofs not be flat, or they require that the roofs be pitched a certain way,” says Daniel Mandelker, a law professor and a leading expert on land use law at Washington University of St Louis, told me in an interview. “And then the homes don’t comply, or they require a certain kind of facing on the wall of the home, and that raises the cost. They require an expensive facing on the manufactured home that raises the cost of the home.”

These local ordinances are driven by residents’ false assumptions that the introduction of manufactured houses in a neighborhood will drive down property values, according to Mandelker’s research in The Urban Lawyer, a law journal published by the American Bar Association. And these rules are on the books of countless homeowners’ associations nationwide.

“It’s a completely discriminatory policy that prevents more affordable housing from being built,” Mandelker said. These land ordinances are a major reason why, even after decades of the technology being available, manufactured homes still only make up 6% of the US housing stock, according to Mendelker.

Manufactured homes are required to be built on a permanent chassis due to regulations set by the Department of Housing and Urban Development (HUD). Modular homes are built upon permanent foundations and, therefore, are purview to the same local and state codes that traditional on-site construction are held to.

While this differentiation precludes modular homes from being subject to some of the local ordinances manufactured homes are beheld to, the cost of modular homes can be driven up by other land use regulations.

Ingrid Gould Ellen, a faculty director at the Furman Center, a housing policy think tank at New York University, says that while modular homes can help offset some of the production costs of building affordable homes, they can’t be a panacea to the market factors that drive up home prices across the country.

“But it’s also about NIMBYism and land use regulations that increase the cost of development,” she wrote in an email to me.

NIMBYism is short for “Not in my back yard” — a term used to describe residents who oppose development and advocate for strict land use laws. When the city of Toronto tried to build modular homes for the homeless, the residents of east york neighborhood delayed the development due to worries about crime. And while NIMBYism isn’t unique to modular housing, modular housing is still constrained by the policies that hinder all affordable housing from being built.

Gould Ellen said that although they are politically challenging land taxes are one of the best policies for preventing rising costs. Land taxes help create affordable housing by increasing the housing supply. A land tax system would have the same tax rate for a Target and a high rise residential tower since it’s only the land that is being taxed. In Gould Ellen’s view, this would help incentivize more housing so that developers could maximize their profits.

Modular Economics

While modular construction can streamline much of the construction process and reduce labor, it comes with its own set of issues.

“In the construction industry, not only do you have the issue of unique characteristics of a construction site, you also have the issue of it being the most volatile major industry in the US economy,” Peter Philips, a labor economist at the University of Utah, whose research focuses on the construction industry at large, told me in an interview. “And what I mean by volatile is that demand swings widely, so that you have periods of labor shortages, and you have periods of labor surpluses, that are more dramatic than in other most other industries”

The traditional construction industry has insulated itself from some of the volatility in the market by using contractors and subcontractors to offset potential losses. But modular construction, because it is made in a factory, requires upfront capital that may not be recouped when the business cycle is on a downtrend.

The other major problem with the modular construction industry, experts say, is that the construction trade is heavily dependent on customization, given the unique challenges different geographical areas can bring.

“Almost every building site has unique characteristics to it. And many building sites have a plethora of unique characteristics that require customized as opposed to routine production. And so, once you get into the world of customization, then all of these assembly line mechanization advantages begin to fade,” Philips said.

While customization is a unique hurdle for the modular industry to overcome, those in the field see new developments in technology as a potential way to overcome it.

In The Future of Modular Architecture, author and New-York-based architect David Wallance argues that the technological advances that modular architecture provides are dwarfed by the infancy of the market. The book separates the modular industry into two separate camps: ‘the legacy industry,’ which he describes as the regional companies commonly used for residential projects; and the ‘intermodal approach,’ which describes an integrated business approach that standardizes modular construction for a global market.

The intermodal approach, utilized by Wallance’s firm DRA/W, integrates the structure and facades of modular houses with the parameters of a shipping container in order to make delivery cheaper and possible for the use in a global housing supply chain.

“So the companies that build with steel frames, the legacy industry, who take the contract approach, where a developer comes to them with an architect and they want to take an architect’s design and build it using modular technology, they try to build the largest possible modules that can be rolled down the highway, in the belief that that is where efficiency comes from the idea that fewer modules, fewer crane picks fewer joints to finish in the field is that is the path to efficiency,” David Wallance told me in an interview. “This is this fundamental issue. The problem is that their trucking range, economical trucking range is about 125 miles.”[1]

In other words, Mendelker’s research argues that individual business tweaks can’t overcome the transportation costs inherent to a small regional market — which modular businesses predominantly operate in currently.

Since the modular industry is largely still in its infancy compared to the behemoth that is the multi-trillion-dollar global construction industry, Wallance argues that the primary challenge for modular companies to break into the larger market is to reduce transportation costs between the on-site construction site and the factory in which the modules are produced. Wallance has approached this problem by using what he calls a Volumetric Unit of Construction, or VUC for short.

VUCs are constructed by adding steel floor plates to a thin wire metal frame. Traditionally modules are built with concrete, which both add to construction time and greenhouse gas emissions. The roof is added next and welded to the top of the VUC, ensuring it is strong enough for on-site construction workers to stand on top of. The rest of the module panels are then assembled onto the container. The VUC approach differs from the legacy model as it is an open frame rather than a closed box allowing greater customization.

“The legacy industry is trapped in a distribution range that is very small. It’s really not big enough to give them economies of scale to insulate them from market cycles, to allow them to generate the kind of revenue that’s needed for serious research and development to apply advanced manufacturing technology,” Wallance said. “So they remain stuck in a certain regional market. And they don’t sell on cost, they only sell on time.”

While modular construction companies argue that they can cut down the time it takes to build, that hasn’t always panned out.

In 2012, Forest City Ratner development, now Brookstone Properties, started building the largest modular high rise tower in the world — a 32-story residential building at 461 Dean Street in Brooklyn. They said it would be done in 18 months but ended up taking four years, making it the one of the longest construction projects in New York City history for a one-off tower.

After Forest City Ratner completed the project, they got out of the modular market and sold their share of the business to Roger Krulak, a former Forest City executive. Krulak turned the business into Full Stack Modular, which is now one of the biggest modular housing firms in NYC.

When I asked Krulak about the problem with 461 Dean Street, he attributed it to mismanagement, not the technology behind modular construction.

“The problems were that there were two companies that didn’t get along, which happens in almost every construction project. And they decided to fight about it instead of solving the problems,” Krulak said. “So that’s really what happened, it had nothing to do with the modular process. It really just had to do with the management of it, both from the developer [Forest City] and from the general contractor [Skanska] at the time.”

When asked about the problems currently facing the industry, Krulak said that the market in the United States “is a little clumsy” and “a little dispersed” compared to models like Singapore or the United Kingdom, in which the government has more direct planning in social housing. In the U.S.,the major stakeholders are the banks and insurance companies, who provide bonds for affordable housing developers.

“In the US, they [banks and insurance companies]have not jumped on the bandwagon… but they’re starting to. And there are finance companies and banks that are financing modular buildings, but that’s new. There really weren’t any several years ago,” Krulak said. “Modular doesn’t solve affordable housing in the true sense of the word, because affordable housing is more broken than any construction methodology can overcome”

Affordable housing in the U.S. is largely built off of federal subsidies that lower the cost for both the landlord and the tenant. These subsidies allow affordable housing units to be pegged at 30% of a tenant’s income.

“So if [an affordable housing unit] is serving somebody that makes 20,000, and it’s 30% of income, that’s usually the standard that’s used. They can pay $500 a month that probably barely covers maintenance and operation. And so in order to create that housing, somebody couldn’t pick up the whole cost of building it and provide an operating subsidy,” Mark Willis, a senior policy researcher at the Furman Center, told me in an interview.

“So the math is a problem.”

The Future of Modular

Prior to the pandemic, which caused New York City rents to fall for the first time in over a decade, rents there had been consistently increasing each year since the Great Recession.

The Bill de Blasio administration introduced “Housing New York 2.0” in 2017 — a plan to try and tackle the affordability crisis, which included modular construction as one of its core planks. The pilot program for Mayor de Blasio’s modular initiative was created through the Build it Back program — a $2.2 billion federal emergency response program to build new housing and make repairs after the damage from Superstorm Sandy.

The Build it Back’s repair program was riddled with controversy and inefficiencies. City Comptroller Scott Stringer called it a “case study is dysfunction” in a 2015 report that highlighted how changing procedural requirements, severe mismanagement by subcontractors, and duplicate paperwork created a system in which contractors got paid $17 million while residents were waiting for repairs to their homes.

De Blasio utilized the funding to build 100 single family units in Queens and Staten Island that were destroyed by Superstorm Sandy. Due to the success of the program, the mayor has pushed on with his calls for over 300,000 modular housing units to be built in New York by 2030 as part of his Housing New York 2.0 plan.

Construction has already started for a 167 modular housing block at 481 Grant Avenue in Brooklyn, led by CEO Roger Krulak. Whether the plan will be able to provide actual affordable housing remains to be seen.

“You cannot wave a magic wand that’s modular and expect it’s going to get cheaper and better,” Krulak told me. “And everybody keeps waiting for that to happen. It will never happen.”