Saturday, November 30, 2019

Why Modular Home Factories Need to Expand Right Now!

Just in case you haven’t looked out your window lately, new home construction is happening everywhere, especially on the East and West Coast.


Traditional new home site builders are facing labor shortages in not only skilled trades but also in basic framing. This shortage is having a ripple effect on the cost of hiring people from a shrinking pool of skilled labor creating rising costs and longer build times.

That is why panelized wall and truss factories like Katerra, Entekra and Builders FirstSource are producing more product. SIP manufacturers are also ramping up production. Every type of offsite production factory is either expanding their facilities or building or buying additional factory space to produce more product.

Modular construction on the other hand has always been much slower to ramp up to meet demand for a variety of reasons.

The big reason is the cyclical demand for new homes. 2008 is still a painful memory for the modular housing industry, especially in the East where many factories closed their doors forever due to no homes to build or having filed bankruptcy.

Asking the surviving factories to expand to meet the demand for new custom and standard planbook homes simply isn’t in the cards for many factories. Fear of another recession is ever present.

Another reason many factories are reluctant to ramp up goes back to the beginning of the recovery after the 2008 recession. For East Coast modular factories, Hurricane Sandy destroying homes along the east coast saved many factories from further losses as production improved dramatically.

At the same time several modular factories were approached by large hotel chains to build modules for new hotels. Once it became a proven way for building new hotels the demand increased dramatically. Now those modular factories have ingrained building commercial projects into their standard offerings which is having the unforeseen effect of not being able to produce single family modular homes for their builders in a timely fashion because the factories never expanded to meet both the growing commercial and modular home demands we face today.

And finally, the new modular factories being built and ramped up today are not designed to build single family homes. They are building affordable housing projects, commercial projects, homeless projects and high rise hotels. Investors are only interested in big projects where cookie cutter type modules can be built by the hundreds. Nowhere is this more evident than in the West, from Colorado to California.

This is also a breeding ground for all that West Coast investment money that realizes modular is becoming a major player in offsite construction. What those investors haven’t learned are the fundamentals of modular construction. They are simply going from 1st gear to 4th without realizing there are 2 gears in between. Those two gears can take years to master but are being purposely overlooked because the need for affordable housing is so strong in the West.

When housing slows down, and it always does, that’s why it’s called cyclical, overlooking 2nd and 3rd gear could prove to be disastrous for many of those new investors who were simply looking to build the latest and greatest automated modular factory and investing tens of millions to get it.

But there is a more sensible way to expand. Today there are modular home factories for sale, especially on the East Coast, that are being passed up simply because investors are really not interested in anything but 1st and 4th gear. These factories and the people that manage them appear to ‘old school’ has-beens to the new breed of Millennial investor.

However, when that downturn happens, those old school people, who survived the 2008 housing crash and know what 2nd and 3rd gear are used for will become some of the most valuable assets in modular housing.

The big question is “How do we expand both the single family modular home market and keep the commercial side strong?”

I’m sorry to be the I to tell you but it isn’t going to be easy. In fact, it will take a couple of ‘old school’ modular home factories to begin finding ways to expand while keeping their financial exposure to a minimum. That’s just some of the stuff found in knowing how to use 2nd and 3rd gear!


Gary Fleisher is a housing veteran, editor/writer of Modular Home Builder blog and industry speaker/consultant. Contact modcoach@gmail.com


3 comments:

Anonymous said...

second and third gear people are considered outdated by today's new modular factory owner. I've seen the staffs at a couple of those new startups. Mostly young people sitting around discussing how to improve the modular process without any thought of how we got here.

Today's young people are using the same mentality when it comes to the future of our government. Go from first gear to fourth and forget all the history, pain and valor that got us here. They just want to change things.

Mel Stone said...

Dead on.

If anyone is looking for the 2nd and 3rd gear industry veterans who can help your plant scale intelligently from 1st to 4th, Piedra Group would love to chat.
connect@piedragroup.rocks
www.piedragroup.rocks

Anonymous said...

Overgeneralizing will only cause "today's young people" to lean harder into dismissing old-school wisdom with phrases like "OK Boomer."

We need to provide solid reasoning and respect the millennials and Gen Z'ers position instead of just assuming they indiscriminately want to "just change things." We should commit to building a bridge of understanding to the younger folks, but to do so, we need to see our similarities, instead of focusing on only how we are different.

Just food for thought.