Pivotal Year for Modular 2013
The development and Construction industry is coming to the realization that they simply cannot keep providing products the way they have in the past expect the result to be any different than they were previously.
There are many projects on going that continue to fuel to shift in attitude towards a pre-fabricated solution.
· The 32 story apartment building in New York
· The 100 unit apartment building in Los Angeles
· Several multi-family projects and hotels in the Bakken oil fields.
· In Seattle a 49 unit will break ground in Q2 followed closely by another 4 story project in Seattle.
· In the San Francisco an infill multi-family project was completed in 2012 with another 4 story planned for Oakland.
· 75 units and 26 units of affordable housing in Seattle.
These are just a few of the projects that are on the books and designed and seeking permits and or financing at this time.
I have had the opportunity to work on several modular multi-family projects over the last year. One of the gratifying aspects of the job was to see the shift in perception away from the “ how much” to the “ how am I benefited” frame of mind. Developers embraced the lessened construction time frames, fewer weather delays/issues and early rent ups as actual monetary benefits.
Congratulations are also in order to the AIA community, who has come to realize that
their scope is not eliminated but that they are, in fact, an integral part of the process.
Not every project can be pre-fabricated but analyzing this possibility and alternative at the start and then either progressing or rejecting it, may save significant money in the Pre-development phase of study.
There is more to be accomplished but this has been a big step for the industry in providing an alternative to the traditional way of building.
Typically developers have used modular as a form of providing single and multi-family residential products. There is so much more to the off site construction industry.
One of the fastest growing segments of modular construction is in hotel development. Perhaps there is no more critical need for modular than in the hotel business. In this case speed is everything. Having the units fabricated, delivered set and finished as quickly as possible so that revenue can be generated is the optimal goal of modular hotel development.
It is true that in multi-family much the same can be said, however in hotels, the cost factor, while important, is secondary to speed. In areas of the country where housing is at a premium ( North Dakota) having a hotel up and operating, quickly, is what drives the developer to use modular building.
What about college dormitories? Again the speed issue is critical. The use of modular technology to begin fabrication off site while the site work is being prepped for the delivery of the product, allows great flexibility to a college housing administrator.
There is minimal disturbance of the campus during classes, since site work is all that takes place. The project can be completed over the summer months when most dorms are closed. The speed allows the college to generate revenue faster for the next year’s classes, and the costs of building are typically the same as site built.
Medical buildings, offices and schools are other applications of the modular alternative form of construction.
The use of modular begins with the development team acknowledging they need to think of a different form of product delivery and be willing to accept the changes to scope each member has. Once this decision is made, the benefits will become apparent. Without that “buy in” from ALL members of the team, the shift from traditional methods to new technology can’t take place.
The due diligence phase of your next project has taken you to the point of considering the use of modular as an alternative construction technique. We can all agree that there must be a different way to accomplish our objectives than the same way we have in the past.
Where do we start?
The first order of business is to assemble a team that shares the same goals and objectives, not just in the project itself, but in the use of modular technology to accomplish the common goal. This means the selection of an architect, engineer and general contractor all need the” modular mind set”. While there are many of these professions who claim to be in tune, in reality there are few who are looking out into the future for a different way to satisfy their customer’s needs.
Selection of an architect is key. There are limitations and requirements for modular building that need to be addressed early on. There are several firms in the region who know what these are and can be of great benefit to the process. The design of a project can begin as a modular oriented one and then can be easily changed to site constructed, while it is much more unwieldy to go from site to modular design.
Typically an architect who is familiar with modular design also knows a structural engineer who can become a valuable member of the team.
Selection of a general contractor who is open to the concept is a requirement. The GC can make suggestions and ask questions during the design phase that assist in the projects affordability. The development of work scope at the outset assists the factory in deciding what they do and what the onsite GC will do. This will lead to a smoother and more cost effective conclusion. A GC who understands that modular building is really not much more than “one big sub” are usually open to the concept for they do not lose scope or can modify various functions to the benefit of the customer.
There currently exist several factories, located in the Pac NW, that have varying degrees of track record. Knowing who these factories are and their capabilities requires teaming with consultants who work directly for the developer, either through the A and E budget or the GC budget. Hearing from a factory representative only, does not give the developer a broad view of what is available in the market place to assure a successful and cost effective project.
Once the team is assembled a simple black line drawing, with floor plan, elevation and section drawing, along with an agreed upon specification, is all that is required to go to the factory marketplace and see where the costs come in. All projects are different and all budgets are different. The greatest determining factor of cost, in factory building, is the efficiency of the module itself.
The site construction variables will remain as they always are but if the vertical construction can be produced for the same cost, whether site or factory built, but the time frames can be shrunk by 1/3 to ½ . Shouldn’t the factory concept be considered?
Recently MCG has had the opportunity to work with 2 non-profit affordable housing providers.
This has been a real eye opener, not only in working with the development staff but learning how their system works and what goes into an affordable housing product.
The non-profit developers, I have worked with, have a genuine mission in mind as they work through the various hurdles that all developments have as an inherent part of the overall process. They go about feasibility, due diligence, budgeting and how to stretch a dollar just as for-profit developers do. Their task is more difficult, however. They are trying to fill a need for housing for people who may be at the 80% AMI level and not “market” rate. This means they need to be extra creative with their pencil.
As these 2 non-profits realized, there needed to be an alternative method for product delivery that assists them in bridging the affordability gap. They turned to modular as a solution in controlling costs. While many developers both for and non-profit continue to try and address budget limitations the same way they have for years, others are exploring a different construction technique altogether. More general contractors and architects are seeing the viability of modular as that different construction technique and are making strides in accepting and implementing modular as another way they can satisfy their client’s needs. Credit should be given to these industries as well.
Modular Consulting Group just finished a summary on a recent RFP. The findings of the RFP were interesting but not surprising. The purpose of the exercise was to compare factory building side by side with site building. MCG was engaged to produce the factory side and another consultant was engaged to obtain site built quotes from 3 GCs. Over the next month this exercise took place and the findings were presented to the developer. I will take a moment to commend this developer for his foresight. His decision to go this route was based upon providing the best execution in both time and budget for his partnership. It was worth the investment to find out which method of product delivery made the most sense to his partnership. The results showed that factory building was less money on a per foot basis and significantly faster in construction time. From the Notice to Proceed until C of O it was scheduled at 140 days. This project will be constructed in Seattle, which is one of the last markets in the country to jump into factory building.
As I discuss the many advantages of using modular/off site construction techniques, one subject comes up frequently. The comment usually goes like this” so what you are saying is it is faster so I save some interest carry at the bank?”
Well, yes, that is what I am saying and in many cases that is a true statement, however, there is more to the speed issue than just interest savings.
You also have the opportunity to generate cash inflows rather than ongoing cash outflows. There is the opportunity to get to the occupancy rates required for permanent financing requirements and of course being able to get to the permanent loan and off the construction loan faster. These factors all play a part in the overall IRR of a project, which is how you should determine the feasibility of using modular.
A new advantage to modular/offsite construction has surfaced. Beating the market.
There have been articles written, of late, that are predicting the possibility of an overbuilding in the multi-family sector of the market. I am speaking primarily of the Pac NW. What modular/offsite construction can then offer in addition to the above mentioned “speed” comments, is the possibility of having your project finished, rented and cash flowing while others continue site building and may be lagging behind you in the market.
I have heard this referred to as the “musical chairs” part of development. When the music stops do you have a chair to sit in?
There is more to the “speed” issue than simply savings on the interest carry at your lender.