Factory-built housing is increasingly being hailed as a solution to the housing shortage and affordability crisis.
But the world of modular housing, which includes multi-unit apartment buildings and conventional-looking houses, is littered with companies that have gone bust. One of these was Katerra, a SoftBank-backed firm that sought to be a one-stop shop for factory-made buildings. After investors poured billions of dollars into the much-hyped company, it filed for bankruptcy in 2021.
Mark Erlich, a former officer of the New England Regional Council of Carpenters and the author of "The Way We Build: Restoring Dignity to Construction Work," chalks many of the failures up to inexperience with the construction industry. Investors from outside the industry have come in with ambitious plans to disrupt it but little of the expertise necessary to find and fill a niche in the market.
"Katerra was started by guys from Silicon Valley who were going to show the stupid construction industry what a bunch of dinosaurs they were," Erlich said. That "arrogance" built the foundation for their demise.
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There are a slew of other examples of similar failures in the US and around the world, including the California startup Veev, which ran out of money late last year, and the UK company Urban Splash's modular business, named House, which collapsed in 2022. Business Insider has reported that the trendy Las Vegas tiny-home startup Boxabl is rapidly losing money.
Policymakers and housing advocates are looking for all kinds of potential solutions to the housing crisis. They point out that home-building productivity hasn't improved much in decades. Constructing homes in factories can be more efficient and less costly than traditional construction. While workers prepare the foundation on-site, the home can simultaneously be constructed in a factory without weather and other interruptions slowing down the process.
"Factory productivity —the ways that we build cars, airplanes, ships, too, nowadays —has increased a lot in the last 60 years or so. And so being able to unlock that productivity game in the residential space can and should bring costs back down," said Andrew Justus, a housing-policy analyst at the Niskanen Center, a nonpartisan think tank.
But layers of restrictive government regulations, including zoning laws and building codes, often stand in the way of more factory-made homes. Justus said the complex web of local and state regulations could make it impossible for modular-home companies to build the economies of scale they need to bring down costs and turn a profit.
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Erlich said these restrictive policies often reflected the lingering perception that factory-built homes are inferior to traditional housing. There's a stigma around trailers or mobile homes, which the federal government defines as manufactured housing built before 1976. He argued the modern versions of this housing were still widely considered unappealing.
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The federal government has made some efforts to cut red tape for factory-built housing. The Biden administration proposed loosening the Department of Housing and Urban Development regulations on manufactured housing to increase the supply, including by legalizing up to three units per factory-built structure. But cities and states would need to liberalize their own regulations to pave the way for more of these homes.
Obstacles for the modular-housing industry
Erlich said the policy landscape wasn't the most significant obstacle for the industry. More important, he argued, was the lack of consistent demand for modular buildings, the high costs of transporting a finished product to the building site, and the decentralized nature of construction. While the timeline for modular construction is consistently compressed, transportation and other costs can mean it isn't cheaper than building on-site.
Investors aren't convinced there's sufficient and consistent demand for modular housing in most markets. Modular construction is best for buildings that have repeated components, such as a hotel with hundreds of identical rooms, a dorm building, or a multi-family apartment building with identical units.
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"If you have to adjust for design details, at that point, it just becomes prohibitively expensive, and you're much better off to build it on-site," Erlich said.
Even in the right market, there aren't many willing investors within the construction industry. This is partly because the sector is so decentralized: Construction managers outsource much of the work, and subcontractors generally don't have the capital.
"You don't have a General Motors, you don't have a Tesla, you don't have somebody who's willing to spend 10 years before they make a lot of money," Erlich said.
Failures and successes
In addition to the failed companies, some messy major modular projects have also drawn attention to the industry's problems. A 32-story modular apartment building in Brooklyn took four years to construct after legal disputes and other delays.
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In Manhattan, a project that was supposed to become the tallest modular hotel in the world was scheduled to be finished in late 2020. But the pandemic and a shortage of funding paralyzed construction, while all 168 fully prefabricated and furnished hotel rooms sit on a dock in Brooklyn. In late December 2023, the hotel's lender, Avana Capital, filed a $33 million pre-foreclosure action in Manhattan court.
But some have found a way to succeed in the space. Erlich said they tended to be run by people with deep experience in the construction industry. A newer example is Factory OS, a firm in the San Francisco Bay Area created by established developers in partnership with the region's carpenters union that's delivering on the area's demand for factory-built affordable housing while also doing some on-site construction.
"They started with a higher degree of expertise and experience in the housing market," Erlich said of Factory OS. "They knew where the demand was and how they could satisfy it."
Factory OS's cofounder told The New York Times it had plans to expand its reach in California but appreciated the localized nature of the construction industry and wasn't looking to open factories across the country. And that approach could be the key to its success.
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Do you work in the modular-housing industry? Reach out to this reporter at erelman@businessinsider.com.
