Reimagining residential construction: Our incubation and investment in Aro Homes
By Scott Brady and Josh Rapperport
The crisis of aging American infrastructure is well documented and has been clear for many decades. Despite that, as a society, we’ve had a very difficult time coming up with radically better ways to construct, redevelop and upgrade the built environment around us. In fact, construction has seen little to no productivity gains whatsoever over the last 70 years.
This flatlining of progress comes in particularly stark contrast to the incredible productivity gains in manufacturing over the same time period. Thanks to advanced manufacturing techniques, automation, scale, and process optimization, we have seen truly profound improvements in our ability to produce products from technology to commodity goods and meet rising global demand. For example, the automotive industry is the poster child for utilizing precision engineering and manufacturing at scale.
Housing poses a unique challenge and opportunity within the construction space as it’s the largest asset class in the world, highly fragmented — and though not obvious at first glance — it already has a blueprint for success. That blueprint is the likes of companies like Clayton Homes, building mostly prefabricated “mobile” homes and shipping them, as well as Lennar, building large, greenfield developments. These builders utilize many of the techniques that have made manufacturing incredibly productive and achieve mind-boggling efficiency and low costs.
Nothing like these production builders exists at scale for cities and dense suburbs, where there is little land for greenfield development. The inefficient, stick-build approach used by most builders has left the housing stock of America old and getting older. The average home in California is 45 years old and takes 540 days to replace. These end-of-life homes have failing mechanical, electrical, and foundational systems, and are also wildly inefficient from an energy consumption perspective, given their outdated heating, cooling, and insulation. In fact, residential real estate represents a massive amount of end energy consumption, producing 23 percent of global greenhouse emissions — 10+ tons of carbon emissions per home per year. Traditional methods of construction lead to low performance, unaffordable homes, massive delays, and an inability to efficiently redevelop this aging housing stock. Furthermore, there is little repeatability, as each home is treated as a custom or semi-custom project.
At Innovation Endeavors, we have been focused on investing in technology applied to construction and the physical economy for over a decade, with investments like Canvas, Mosaic, and Third Wave Automation. Over the last five years, innovation in residential construction became an obsession of ours, and we met dozens of companies in the prefab, modular, and next-gen construction space. None of them captured the opportunity we saw, but our conviction in the idea remained strong. Therefore, in 2021 we brought in an internal research team to deep dive on what an ideal company might look like and determine if the opportunity made sense for incubation. Nine months later, we had our answer, and Aro Homes was born.
Aro Homes is building the highest quality, most energy-efficient homes on the market, six times faster than an average builder. The core innovation is threefold: offsite manufacturing, end-to-end integration, and a single efficient design that can be modified to meet the unique needs of every community. This approach, much like automotive, grants Aro Homes the ability to load their build schedule without waiting for orders to come in and without extensive customization. Combining this efficiency with process parallelization and data-driven property selection allows Aro to accelerate the construction process so dramatically that they profoundly increase return on invested capital (ROIC) and deliver 3x the margins of a normal builder. Furthermore, the 90–120 day delivery time — as opposed to the industry average of 540 — means minimal market exposure. In short, Aro is redefining the value of a day in construction.
With their novel approach to redeveloping single-family homes with disruptive speed and quality, Aro Homes has an opportunity to design the world’s most energy-efficient home from first principles. Aro partnered with an internationally renowned architecture firm (to be announced) to reengineer the home of the future from the ground up. Data science played a critical aspect in the design, as the Aro Home is engineered to meet the zoning requirements across counties and tens of thousands of lots. The contemporary style is optimized to minimize time on the market and maximize sale value. The result is a brilliant design, a negative carbon footprint, and a much lower cost of ownership (electricity, water, maintenance, etc.) for the homeowner.
Despite buildings being responsible for such a large portion of emissions (i.e. HVAC alone is responsible for 15 percent of global emissions) there are only nine Passive House Rated Homes in all of California. Aro Homes surpasses this high bar with 50 percent less energy use than a standard home, 50 percent less water use, and produces more power than it consumes. Aro expects its home to produce more energy via solar in a given year than it will use.
Building such an incredible company requires a unique team, one that brings together experience from the automotive industry — which has mastered lean manufacturing — and construction, along with the storytelling and product skills of the best technology leaders. We are incredibly excited about the world-class team assembled at Aro Homes, led by Simon Boag and Carl Gish. Simon spent 25 years at the leading edge of auto manufacturing. He was the VP of Manufacturing at GM, Chrysler, then Daimler, then returned to Chrysler to serve as the President of Global Parts and Service. Carl has been CMO and VP at some of the largest brands in the world, including Unilever, eBay, Dyson, and Affirm, and was an early VP at Amazon, leading several product categories, including books. Fortuitously, Aro Homes was able to hire the top 1 percent of folks out of Katerra across architecture, systems engineering, and manufacturing to round out the 30 person team. The lessons learned from Katerra about what not to do and what worked have proven invaluable.
In the end, a home is a product. Amazing products, like an EV car or a smartphone, inspire and delight. A home should be no different. Precision engineering and horizontal integration will allow Aro to produce the home of the future and reinvigorate our aging housing stock. The opportunity couldn’t be bigger. We can’t wait to see the impact they’ll have on the industry.