Permanent modular buildings are considered real property, built to the same building codes and requirements as site-built structures, and can be financed, sold, and depreciated in a similar manner. As such, the markets for permanent modular construction are similar to the markets for site-built contractors, with few exceptions. One of the fastest growing markets for modular construction is the multi-family sector.
Modular construction offers the ability to provide condominiums, apartments, and student dorms in about half the time as traditional, site-built construction methods. Federal, state, and local governments around the world are struggling with policies to help address the growing housing crisis. So how big is this problem?
According to a recent report called “The State of the Nation’s Housing 2018” issued by the Joint Center for Housing Studies of Harvard University (JCHS):
Homeownership rates among young adults are even lower than in 1988, and the share of cost-burdened renters is significantly higher, with almost half of all renters paying more than 30% of their income for housing. Soaring housing costs are largely to blame. The national median rent rose 20% faster than overall inflation between 1990 and 2016 and the median home price rose 41% faster. While better housing quality accounts for some of the increased costs, higher costs for building materials and labor, limited productivity gains, increased land costs, new regulatory barriers, and growing income inequality all played major roles as well.
In California alone, about 180,000 housing units are needed annually to keep pace with population needs, yet only about 80,000 housing units come online. Each year, California falls another 100,000 housing units behind. In a recent New York Times article, it was reported that the federal government now classifies a family of four earning up to $117,400 as low-income around San Francisco’s Bay Area.
The Housing Crisis Solution Coalition (HCSC) believes the nation has reached a crisis point. HCSC focuses on policies and legislation aimed at bringing a new perspective to the housing policy debate. “For the two decades between 1960 and 1980, ten million apartments were built in the United States. Volume supply met demand at rental rates affordable to most American renters. By contrast, between 2000 and 2020 less than five million multi-family units will be built; with only 20% (or one million units) considered affordable. At the same time, renter household formation exceeded seven million new renters creating a shortfall of six million affordable housing units.”
Perhaps it should come as no surprise that the multi-family sector was the fastest growing for the modular industry in 2018. Total production of multi-family modules more than doubled from 1,136 units in 2017 to 2,314 units in 2018. California, Massachusetts, Florida, New York, Washington, New Jersey, and Colorado were the top seven states (in order) with the most modular multi-family units, based on state labeling data. These states also represented 87% of all multi-family modular units manufactured in 2018.
Based on state label information, the multi-family market accounted for about 8.9% of all industry production in 2018, up from 5.0% in 2017. This production still represents less than 1% of all new multi-family developments in 2018, indicating a huge market opportunity for an industry that can deliver on speed to occupancy.
The Modular Building Institute (MBI) analyzed project data from 17 modular multi-family projects constructed over the past four years. On average, the projects were 33,182 total square feet, with the modular portion constituting 27,261 square feet or 82% of the total project. On average, the projects consisted of approximately 50 modules each.
Accelerated project timelines are driving greater interest in multi-family. These projects were completed in just 241 days from approval to occupancy.
MBI obtained cost data on four projects in this market. The average value of these projects was $22,816,754 with the modular portion making up 33% of total value.
While the cost and value of the projects was comparable to traditional construction methods, the earlier occupancy had a significant impact on cash flow. For example, consider the following project at an initial construction cost of $10,000,000 and assuming the modular project is completed and ready to rent in eight months while the traditional project is ready in fourteen months. A complex with 35 units rented at $2,000/month with an occupancy rate of 90% would generate $63,000 in monthly rental income. All other expenses – including taxes, insurance, and maintenance – remaining equal, the modular project would generate an additional $378,000 in revenue for the owner due to earlier occupancy.
This cash flow difference alone is enough to encourage many developers to consider modular construction. The added benefits of cost certainty, quality, and worker safety make this an obvious growth market for the modular industry.
With so many jurisdictions struggling with affordable housing concerns, we feel that the modular construction industry can help play a vital role in helping to alleviate the housing gap.
Tom Hardiman has served as the Executive Director for the Modular Building Institute (MBI) since 2004. The Modular Building Institute is the international nonprofit trade association serving the commercial modular construction industry for over 35 years. As the Voice of Commercial Modular Construction™, MBI promotes the advantages of modular construction while advocating for the removal of barriers that limit growth opportunities. Through its long-standing relationships with member companies, policy makers, developers, architects, and contractors, MBI has become the trusted source of information for the commercial modular construction industry.