Modular Industry's Approach to Market Instructive for CMs?
Originally published by: Multifamily Executive — July 22, 2015
The following article was produced and published by the source linked to above, who is solely responsible for its content. SBC Magazine is publishing this story to raise awareness of information publicly available online and does not verify the accuracy of the author’s claims. As a consequence, SBC cannot vouch for the validity of any facts, claims or opinions made in the article.
Editor's Note: To read how one component manufacturer has followed a similar path to success outlined in the story below, read The Great Value Proposition: CTF's Efforts to Provide Value to the Market , from the January/February issue of SBC Magazine.
Tony Moayed may have figured out how to bend time. Or at least compress it by about 25%.
As CEO of Sacramento, Calif.–based Tricorp Hearn Construction, Moayed has been able to collapse the construction schedule at his latest multifamily build. Eviva Midtown, a 118-unit mixed-use community just steps from the California State Capitol, will feature luxury amenities, 5,000 square feet of retail space, and an underground parking garage. The community is scheduled for completion in spring of 2016, or just 18 months after Moayed turned his first shovel of dirt at the site, instead of the 24 months originally estimated.
"We should be able to cut it down by about six months," Moayed says. "That time savings has been a big seller on this project."
Moayed's time-collapsing weapon? Modular construction. All of Eviva's units will be stacked, one by one, atop the project's ground-floor retail space. Measuring 12 by 64 feet, and weighing 35,000 pounds each, the "boxes," as they're known in modular parlance, will then be stitched together, with mechanical, electrical, and plumbing (MEP) runs strung between them, until Eviva reaches its full, six-story height.
Aside from the building's stucco façade, once the units are in place, there will be next to nothing left for Moayed's subs to do. The units, supplied by Boise, Idaho–based Guerdon Modular Buildings, will arrive at the site almost completely finished out. Paint, flooring, baseboards, cabinetry, counters, lighting, faucets, showerheads, tile, mirrors, windows, switch plates, thermostats, and even appliances, will all already be in place.
"We were up at the factory yesterday, and it was 100% done," Moayed says. "There was electrical to each of the units, so you could turn on the lights and fans. Everything's operational, everything's complete. Including payment."
Only the Beginning
While popular in Europe, modular construction is still in its infancy for multifamily in the States and barely registers as a blip on the data screens of most apartment tracking firms. Indeed, modular only accounted for 1.3% of all construction categories followed by the Charlottesville, Va.–based Modular Building Institute in 2013. But the trade group's lodging category, which includes MDUs, showed an annual uptick in activity of 31%. Indeed, some notable apartment developers have brought communities out of the ground—and out of the factory—using modular construction in recent years.
Those who have tout shorter cycle times and the elimination of material cost overruns (since you know the price of each unit up front, there's no fudging in the numbers once on site), as well as more consistency in the finished product. Because modular units are built in the controlled environment of a factory, spec drift and exposure to the elements can largely be taken out of the equation. With components built in a factory, fewer union wage hours are worked on site. And the finished product can be more energy efficient and have more sound-dampening qualities than site-built apartments.
But those same vets who appreciate modular's advantages say putting up a factory-built structure isn't really cheaper than on-site construction and may, in fact, cost more: Because each unit has its own structural framing, walls, ceilings, and floors are essentially doubled up, and more material—as much as 50% more—is used in the process. Transportation costs to get the units on site add up, too. And finding companies with the capacity and know-how to build the boxes for large-scale multifamily developments, as well as the tradespeople to stitch them together, poses another challenge.
All that said, several developers who've tapped modular construction for their multifamily projects are experiencing unequivocal success.
Take the Domain in San Jose, Calif., a 444-unit, luxury community developed by Equity Residential that opened in late 2013. The largest modular apartment project completed in the country to date, the building recently took best-in-show honors in the Modular Building Institute's 2015 Awards of Distinction competition. A quick look at some of the building's beauty shots tells why: No cookie-cutter development of blocks upon blocks, Domain is virtually indistinguishable from a site-built community.
The layout includes cascading, elongated windows looking out onto the building's sunny courtyard pool deck, while interiors boast 9-foot ceilings, granite countertops, casement windows, stainless steel appliances, and washers and dryers, which were already installed and in place when the modular units were delivered to the site. Each unit also offers patio space, and top-floor apartments have a walk-out, private rooftop deck.
But it's not just Domain's good looks that have been winning it accolades. Started in 2011, the property went to market about nine months sooner than would normally be anticipated for a similar, site-built project—even though it cost about $2 million more to build—and reached full occupancy an entire year earlier than the underwriters' pro forma estimates. With the historic growth of rents in the past five years, and whispers about the top of the cycle emerging for multifamily, having that kind of jump getting to market can make a staggering difference.
"Anytime you can get to market faster and start earning rents sooner, you're going to have more money in your pocket," says Mark Tennison, Equity's executive vice president of development. "Domain has been a great asset and a real joy to manage in our portfolio."
The project has also given Lad Dawson, CEO of Guerdon, which supplied Domain's units, an opportunity to press modular's multifamily case.
"[Equity was] able to generate nearly $15 million more in gross revenues on that project than they would have if they'd gone with site-built construction," says Dawson, whose firm has manufactured approximately 8,000 modular apartment units since 2005. "That's a pretty remarkable return on investment for that extra $2 million they spent up front."
Other modular multifamily buildings abound too.
In New York City, modular development Carmel Place (formerly My Micro NY) has been gaining attention as a solution to some of the city's notorious housing shortages. Located at 335 E. 27th St., the building's 55 units, manufactured by Capsys in the Brooklyn Navy Yard, started stacking up in May, and the project is slated for completion this fall. With units that range from 260 to 360 square feet, the development was heralded by former mayor Michael Bloomberg as a way to help combat the city's housing crisis. But first, the Big Apple had to waive zoning and density rules limiting apartments to no less than 400 square feet, a critical victory for housing advocates. Rents will start at $2,000 a month, a bargain for Manhattan.
"It's a high-profile project in a real estate– and construction-obsessed city," says Tobias Oriwol, project manager for Monadnock Development, which is leading the project. "Besides the size of the units, people have been drawn to the modular aspect of it since the beginning."
Similarly, The Stack, a 28-unit, six-story modular building developed by Jeffrey M. Brown Associates uptown in Manhattan's Inwood neighborhood, was assembled in just 19 days and opened to rave reviews in 2014, offering a mix of market-rate and affordable apartments.
Then, there's the 56-unit Chelsea Place, in Chelsea, Mass. Developed by Federal Realty Investment Trust and built with Oaktree Development's GreenStaxx modular system, the community was stacked into place by Woburn, Mass.–based Tocci Building Cos. in just nine months, and went from concept to occupancy in just 14 months, or 25% more quickly than a site-built project. Stacked up on a vacant lot that had been the source of neighborhood complaints, the building helped anchor Federal Realty's 20-acre Chelsea Commons shopping center in the same area.
"There are a lot of reasons why multifamily modular is gaining momentum, especially in urban markets," says John Tocci, Tocci's CEO. "You've got the high cost of unionized labor in urban areas, and congested sites and restrictive lay-down space for conventional construction. At the same time, increasing rents are driving up the importance of time to market. Everybody's looking for a way to reduce construction time."
The Other Side of the Coin
Yet, for all of modular's multifamily allure, it has its detractors. One of them looms, only partially completed, over Brooklyn's skyline and has become the poster child for what not to do on your next joint development project, modular or otherwise.
The 363-unit B2 BKLYN, which is being erected next to Barclay's Center, will be the world's tallest modular building—when it's completed. But Forest City Ratner, the project's developer, had an acrimonious and very public falling out with a U.S. unit of Skanska, the Swedish construction giant it was originally partnered with on the deal. Cost overruns and finger pointing eventually led to lawsuits, and the whole saga made for months of drama-soaked copy in New York's business press.
After Skanska sent a letter saying it couldn't guarantee that the building's self-sealing exterior wouldn't leak, Forest City Ratner bought out Skanska's interest in its joint modular manufacturing facility so it could forge ahead on its own. In June, Forest City appointed construction executive Susan Hayes as head of FC Modular, the firm's new manufacturing subsidiary, and is currently moving ahead with the project.
"It's been hard. It's not gone as planned. And it's cost a lot more money," said MaryAnne Gilmartin, CEO of Forest City Ratner Cos., during a recent Brooklyn real estate summit, according to The Real Deal. "This model is still yet to be proven, but I am a deep believer."
Indeed, while modular's building blocks, once delivered, can snap into place on a jobsite like so many Legos, pros with experience say planning a project out can be cumbersome. At Eviva Midtown in Sacramento, for instance, while construction is slated to be 25% faster than a conventional build, getting that construction started was a bear. One of the first issues Moayed encountered was finding a company with the capacity to meet his needs. The project originally contracted with North Highlands, Calif.–based modular manufacturer Zeta Communities. But it eventually switched to Guerdon and Dawson when it became clear Zeta's schedule and its own wouldn't line up.
Then, there's been the ramp-up time.
"This is my first modular project, but I've already got three years of expert experience," Moayed chuckles. Some of that time has been consumed addressing overlapping design issues—once with structural and architectural designers at Guerdon's factory in Boise, and then again with structural and architectural designers on site. "We're really trying to streamline the process so we've got one cohesive team," Moayed says.
In fact, while modular's time savings can come from a foundation being poured at the same time units are being manufactured, you've got to spend more time in the planning stages initially.
"Provided that adequate up-front design and manufacturing time is allowed, on-site construction can be cut by 15 to 40%," Tocci says. "But your typical 200-unit project is going to require approximately four months' more lead time, even with production split between two facilities."
And you'll likely have to educate your banker about construction draws, as well. Because multiple phases, such as foundation and unit manufacturing, can happen simultaneously, you'll need more cash sooner to fund the project.
Finding skilled trade professionals who understand the different variables of assembling modular construction on site can be a pain point too. "Getting the subcontractors who really understand what it is we're building has been a challenge," Moayed says. "I've got 118 units, and 200-some modular units, which translates into more than a thousand mechanical, electrical, and plumbing chases. If you don't do it efficiently the first time, you multiply your mistakes by 1,000."
On top of that, there's the fact that in order for modular to pencil out, you have to reach certain economies of scale. That was certainly the case for Marcus Toconita, partner at Philadelphia-based Callahan Ward Cos., when he ran the numbers for a recent infill project.
"We haven't priced out anything on the scale of a 200-unit building, but when we looked at it on the scale of a 10- or 20-unit building, modular didn't make sense for us," Toconita says. "We both develop and manage the construction of our projects, so our costs can be lower than other developers who hire a general contractor to do their build."
Petr Vancura, director of communications at New York–based engineering and architectural firm Gilsanz Murray Steficek, deconstructs modular's break-even point thusly: "In order to offset the higher setup, material, and transportation costs, modular projects work best with a single design prototype," he says. "Then, once you've got that single prototype, you have to have enough units to get the per-unit cost down and achieve economies of scale. You need a higher number of units for the project to remain economically feasible."
And yet, while modular's challenges go far beyond what's inside the box, its benefits are many, including reduced cycle time, increased production control, lower labor costs, and, ultimately, a quicker time to market.
With an increasing number of developers starting to look at modular technology for multifamily, and pressure mounting to build at a quicker pace and start collecting rents as the cycle matures, don't be surprised if a bunch of big boxes start stacking up in a market near you.