The benefits of turning housing construction into housing production

Much residential housing is still built the same way it was 50 years ago, despite emerging technologies that can help reduce costs and increase affordability.

Housing affordability is a bedrock of diverse and equitable communities, and fundamental to the health and economic opportunities of city residents. But it’s become harder and harder for Americans across income levels and professional backgrounds to find a comfortable and affordable place to call home. In many U.S. metros, housing shortages have left people with fewer options, and the gap between housing costs and incomes is stretching wider than a McMansion lawn. More than 1 in 4 renters are “severely” rent-burdened, paying at least half their income for housing each month.

As part of Sidewalk’s ongoing mission to reimagine cities, we’ve been studying the many factors that limit housing affordability in the U.S. — among them, a limited supply of land, restrictions on land use and zoning, outdated business and financing models, the rising cost of construction, and the rising cost of building operations, maintenance, and retrofit. We’ll write more about these in time. This particular post will focus on the cost of residential construction and its relationship to decades of under-investment in construction innovation.

In most places today, residential housing is still built the same way it was 50 years ago — despite emerging technologies that enable wider adoption of automated manufacturing, digital fabrication, and lightweight materials. When you reimagine construction with those advances in mind, you start to see how housing construction can become housing production, and how cost of living falls as a result.

Of course, this is not to say that simply reducing the cost of construction will solve the housing challenge, but it’s one of many levers we can pull to help improve affordability. In some markets, land-use restrictions are so out of balance that even reducing new building cost to zero would still not have much impact on affordability. But there are plenty of places where reducing construction costs will move the needle on market-rate housing, as well as potentially increase the quality of traditional affordable housing.

The high price of low innovation

Innovation in residential construction has been slower than in other industrial sectors due to a combination of thin operating margins, boom-and-bust cycles in real estate and development, and ever-present fear of litigation. Today, many firms lack the capital required to substantially invest in research and development to develop productivity-enhancing technologies. Under-investment in R&D is especially bad in the U.S., with key construction industry stakeholders investing at 0.5 percent of annual construction value — far below that of other manufacturing-oriented industries like automotives (3.7 percent) or computing and electronics (8.8 percent).

The net result is that buildings are made the same way they were during the mid-20th century: workers perform highly repetitive tasks and custom-fit stock materials together on-site. In fact, labor and capital productivity in construction has been falling in the U.S. for 20 years, even as sectors like manufacturing have made gains by embracing cutting-edge technologies and continuous process improvements. Bottom line for affordability: Those increasing costs of construction have contributed to higher rents for tenants, and at times may even prevent developments from getting built at all.

Sluggish innovation contributes to rising building costs in three particular ways: material efficiency, labor productivity, and commodity pricing.

(Data via McKinsey)

Material Efficiency. Comparing in-situ home construction to factory manufacturing, we see important differences that make construction less material- and labor-efficient. For instance, a large part of cost reduction in manufacturing stems from high volume and repetition. Simply stated, on a per unit basis, it’s often cheaper to make 100,000 replicas of the same widget than 10 unique ones. But diverse building standards and one-off designs in residential construction limit scaling and repeatability across the housing market, undermining any potential savings from product standardization.

Labor productivity. Ongoing shortages in skilled labor often force general contractors to be more strategic and selective in heated markets, meaning cities aren’t able to build as fast as they need to while market conditions are favorable. More advanced building economies like Japan and Sweden employ increasing amounts of automation and robotics to increase productivity while maintaining affordability. Such innovations have yet to impact the U.S. market significantly, and would require policymakers to have important conversations about how to support workers whose jobs might be at risk.

Commodity pricing. Traditional building procurement begins with a developer selecting an architect to prepare construction documents. These documents are then released publicly, or to a select group of general contractors, who bid on the total project cost, taking into account material prices and a multitude of subcontractor bids. The gap between ordering and delivery of materials can be several months, during which the prices of wood, steel, cement, and other commodities can rise; even a swing of 10 to 20 percent can cut developer margins significantly. To insulate themselves from this risk, contractors tend to price themselves high, and this margin of error is passed on to the developer, and ultimately on to the homeowner or renter.

A new approach to delivering housing quickly, at scale and at cost

Over the past year, working with Sidewalk and colleagues in the Bay Area, I’ve been studying these pain points in construction innovation and prototyping new ways to overcome them. We’re calling our group the Build Lab, and we believe by taking a first principles approach to housing construction, we can make important strides toward increasing both the supply and quality of housing in cities. Reducing both construction and operating costs will help unlock new land to development and work towards increasing urban housing affordability for everyone.

Our early estimates suggest that project costs could be reduced by over one-third, and completion schedules shortened by over half, if developers made use of standardization and industrial approaches to construction, such as assembling buildings from prefabricated components manufactured offsite, and employing standard and reusable product catalogues. Modular design and construction drawings will develop repeatable labor skills, reduce design and engineering costs, and make procurement more efficient. Better buying practices (such as the ability to readily change vendors, as automotive manufacturers do) can also help reduce costs considerably.

There are signs that this type of thinking is beginning to take hold in other parts of the world. In Sweden, Lindbäcks Bygg is demonstrating a number of these innovations in purchasing and prefabrication, embracing both technological innovations while fostering a strong culture of continuous improvement on the factory floor. Seksui House is pushing the boundaries of factory automation, delivering multifamily prefab homes across Asia, Australia, and more recently the U.S. Legal & General are making major bets on the prefab space in the U.K., signaling a changing of the guard in the way many Britons think about residential construction. In the U.S., Full Stack modular recently emerged from the turmoil that was the B2 Project, having allegedly cracked the code on high-rise prefab in America.

These examples demonstrate that standardization doesn’t have to look like repetitive Cold War-era housing. Leveraging structural systems that allow articulated and expressive massing enables each project to formally respond to unique site conditions. Contextual landscape design and articulated facade treatments also serve to celebrate the uniqueness of place, while benefitting from the many cost and time saving advantages offered by lean production and offsite manufacturing.

A view from inside 461 Dean Street in Brooklyn, the world’s tallest modular building; the project demonstrates both the promise and challenges of offsite construction. (Inhabitat / Flickr)

The tools to move forward

Many of these ideas aren’t new. However, while transforming housing construction into housing production en masse is conceptually simple, it has proven stubbornly difficult to implement in reality.

Developing prefab or off-site construction capabilities requires significant upfront capital investments that can be justified only by high utilization. Investors must have confidence that sufficient, long-term demand exists in the market to see return on this capital — easier said than done in volatile housing markets. Boom-and-bust cyclicality is one reason offsite construction is not more widespread in North America, despite sufficient technological capacity for making construction more like manufacturing.

To optimize standardization for factory production, builders need digital tools and information to better manage housing delivery, such as building information modeling (BIM) that links 3D design drawings to real-time scheduling, resource management, and material pricing data. Because certain materials have greater lead times or are more expensive, accurate inventory control and scheduling services are critical. Tools like Enterprise Resource Planning software can dynamically respond to updates in a BIM model in real time with inventory status, incoming materials, and labor schedules to increase efficiency and reduce waste. The ability to drag and drop routing changes and swiftly update company-wide systems is crucial to achieving cost targets. Large IT companies like SAP, Apple, Google, and Autodesk can act as industry coordinating agents, defining and updating platform standards for both hardware and software in these production facilities.

Recent examples of offsite construction efforts, such as 461 Dean Street by Forest City Ratner, have demonstrated the potential pitfalls. They also point to the potential benefits for cities and their residents, such as safer work environments, quieter construction, reduced waste, and more thermally efficient construction. But without a shared perspective across suppliers and clients, the benefits of standardization will remain unrealized. Smarter design requires an integrated effort by architects, suppliers, general contractors, developers, and realtors. Large service and supply networks mean that one company’s innovative efforts do not make much difference if other players are not onboard.

Over time, the construction industry will improve the industrial building process at scale, train a labor force to develop related skills, and establish sustainable project pipelines to reward innovators who take the leap and investment in prefab factories. This shift will take time and money. But with enterprising entrepreneurs, risk tolerant capital, and a little government support (in the form of land use and density bonuses, expedited permitting, and reduced parking requirements, among other policies), there is reason to believe in a more affordable, sustainable, and equitable housing future for cities.

If you’re an entrepreneur interested in construction innovation and housing affordability, we’re looking for an Entrepreneur-in-Residence for Build Lab. And if you’re a city official or developer working on these challenges, we’d love to hear what tools might help you. Contact us.

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