Disruptive Forces in Construction | John Burns Real Estate Consulting

Disruptive Forces in Construction

Margaret Whelan, an industry investment banker who has successfully raised money for several innovative housing companies, explains why this time is going to be different with respect to off-site construction. While there is a wide spectrum of construction possibilities in the future, Margaret focuses on what is happening today, which is “precutting lumber in a controlled environment in a factory, bringing the lumber to a jobsite via a kit, and installing it via a crane.”

US off-site construction has quickly moved from a discussion to a reality, with technologies that have been perfected overseas moving to the US. Consider the following:

  • Several successful apartment communities have already been built off-site by RAD Urban and others with orders for more.
  • Katerra has raised more than $1 billion and reportedly has several billion dollars in orders in backlog, mostly for big buildings.
  • KB Home used Entekra’s FIOSS™ (Fully Integrated Off-Site Solution) process to build a pre-insulated frame and roof in just two days.
  • Japanese builders Sekisui House and Daiwa House build more than 100K homes per year in Japan this way, and the UK mandates off-site construction to the point where they no longer allow a dumpster at a construction site.
  • BMC’s ReadyFrame® technology has reportedly become so popular that they can’t keep up with demand


Read the Episode Transcript


What’s different this time?

  1. Scale. The US now has two national builders building 50K homes per year, and multinational building product companies like Louisiana Pacific and CertainTeed, who have seen success overseas, are investing in US factory-built homes.
  2. Costs. Substantial tariffs are directly impacting the cost of building a home, and undocumented low-cost labor is no longer available. Off-site construction can take 10% off the build time on a home, offering a better return on capital as long as the costs are the same or lower than building on-site. The extra transportation costs are offset by substantial reductions in wasted materials.
  3. Technology. BIM (building information modeling) has improved to the point where homes can be perfectly designed and tested on a computer ahead of time.
  4. Consumers. Consumers tend to be demanding the latest and greatest technology within their budget. They will figure out that:
    1. The US stigma associated with factory-built homes stems from very low quality homes built decades ago, and today’s homes are different.
    2. Their home can be built faster. In Orlando, where a majority of builders have been using RCI’s off-site construction for years, consumers have been asking their builders why the home next door (using RCI) is being constructed so much faster than their home.
    3. Their utility bills will be lower (every home in France already has a HERS score), every spot in the house will be certified for high-speed wi-fi, and the air quality will be much better. Thrive Homes, winner of the Department of Energy’s Innovation in Housing Award for five years in a row and Professional Builder’s 2017 Builder of the Year, has delivered net-zero homes in Denver for as little as $200,000.
  1. Affordability. As Margaret says, “Necessity breeds invention.” D.R. Horton Express and LGI Homes have been successful selling very simple homes. Homes don’t need to be complicated.
  2. Capital. Money has been flowing into the space from overseas as well as building products companies that have seen successes internationally. In addition to Softbank’s investment in Katerra, Louisiana Pacific invested in Entekra, and Certainteed invested in Unity Homes.
  3. Government. California’s mandate for all solar by 2020 is putting the industry on notice that the construction process needs to improve, and the thermal envelope of new homes needs to be better.

Margaret believes that the winners in this race are going to be the big builders, the building products companies who figure it out first, and the large single-family rental companies who will build simple houses for rent. Clayton Homes, the dominant player in factory-built US housing, could also be a winner. The losers are likely to be the lumber producers who stay complacent or even get replaced by new materials, as well as small production builders who may not have access to the technology if the plants are running at capacity.


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