Manufactured off-site and delivered via railroad for on-site assembly, more than 70,000 single family homes—many including complex central air, plumbing, and electricity—were delivered by a single company to markets across the U.S. during the heyday of modular construction. Offering upward of 340 different floor plans, the company sold enough houses to necessitate the launch of a mortgage finance unit, and the homes were field-customized to a level that makes them hard to identify as factory-built homes to this day.
The company, of course, was Sears, Roebuck & Co., and the Sears Modern Homes division, which sold houses out of mail-order catalogs from 1908 into the 1940s, likely still holds the top spot for volume (not to mention inflation-adjusted revenue) as the country’s first and foremost modular builder.
While roof truss and wall panel component shops have increasingly helped boost the speed and efficiency of production builders since the 1980s, true off-site construction of detached, single-family homes, in the form of finished wall panels and roof and floor assemblies that are quickly connected on the jobsite, has yet to scale meaningfully since Sears closed up shop prior to WWII.
“There’s a place for modular, but the comparisons to stick-built construction are still very much apples to oranges,” says Sergio Rodriguez, a second-generation builder who spent a decade with Eden Housing and Baywest Home before founding Integrum Construction in 2019. “Modular companies continue to sell the model as faster and less expensive, but the data doesn’t seem to support that. In many cases you have to get on a waitlist, or you have to pay high delivery fees, and you still need to build a foundation and run utilities and have a skilled general contractor manage assembly. Plus, you’re limited on the design end.”
Pandemic Impact
The recent meteoric rise and crash of Katerra offered many in the modular construction world a vivid—albeit brief—glimpse into the promise and pitfall of attempting to scale off-site construction into a viable production model. Even with $2 billion in venture capital investment and some 700 multifamily projects in the pipeline, Katerra failed to build a production blueprint beyond two manufacturing locations (the company at one point had 14 distribution centers planned) and shuttered its doors within five years, laying off some 7,500 employees in the process.
In a 2021 bankruptcy filing, Katerra cited COVID-19 as a major catalyst in the financial collapse of the company. But modular construction, in fact, was turbocharged by the pandemic, driven in large part by the surge in popularity of accessory dwelling units (ADUs) as Americans sought new additions to their homes for office space, studios, and units for additional family members during shelter-in-place restrictions.
“The pandemic changed everything,” says Rodriguez, who shifted from remodeling and custom home building early on to accommodate the market for ADUs, which now make up nearly 70% of his business. “People stopped going to the office, and California and many other states relaxed permitting restrictions. We have not seen the slowdown and have doubled our business in ADU builds between 2021 and 2022. That’s where we see modular likewise struggling to keep up with demand. They’re bottlenecked right now as they look into leasing more and more factory space in order to increase volume.”
Shift in Perspective
Kurt Goodjohn is the founder and CEO of Dvele, a San Diego–based modular builder. He, like many grappling to meet demand, is positioning the company toward adding additional manufacturing space. Dvele has also shifted its perspective on data and production metrics to a factory mindset rather than measuring growth in starts, homes, or subdivisions.
“We’ve transitioned our metrics over the last 18 months as we’ve worked to build out our digital design to smart factory integration and moved to the number of modules per year as our main metric instead of the number of homes per year,” Goodjohn says. “Our sales backlog is fully locked in for 180 modules in 2023, and the platform we’ve developed has been focused on profitably producing 264 modules in our current facility and then replicating the systems to new facilities designed to produce at least 1,200 modules per year.”
After securing $42 million from investors in December, Rialto, California–based Plant Prefab is likewise focused on factory expansion, with a majority of those funds earmarked for the company’s 270,000-square-foot automated production facility in Tejon Ranch outside of Los Angeles. But even as Plant Prefab prepares for growth, CEO Steve Glenn acknowledges that the modular model has niche requirements that challenge scale.
“Modular construction is great because you can build in parallel to the site and sometimes leverage lower labor costs and greater labor availability at a factory location, which is also an all-weather jobsite,” Glenn says. “The downside is that modules remain expensive to ship and have somewhat of a redundant structure, and sub-trade work like plumbing, cladding, drywall, millwork, and paint is still conducted on-site.”
Formerly an Olympic mountain biker, Jeremy Nova got into the ADU business in 2008 after building a backyard shed to house his bikes. He has since evolved his Studio Shed business to a point where the company is testing its first dedicated single-family home offering. A 30% increase in sales in 2022 positioned the company to triple production capacity at its manufacturing facility in Colorado by adding 20,000 square feet of space and investing in new equipment, fabrication stations, and employees to ship up to 1,000 square feet of product per day.
“Builders are incentivized to build bigger to achieve lower per-square-foot costs, which tends to reflect itself in lower quality fit and finishes,” says Nova, who has moved his family of four into a 996-square-foot Studio Home prototype in Hawaii. “We think there is unmet demand for really high-end, high-quality housing where square footage is not the primary consideration, but we are still wrapping our heads around the opportunity. There is a reason builders still stick-build things, and we think prefab works better the smaller it gets because of the increasing ability to create streamlined manufactured components that go together easily in the field.”
Modular Advantages
One area where modular builders are making inroads versus traditional construction is on the front end of the design-build process. Waiting lists aside, the repetitive nature of modules and looser restrictions around ADUs have allowed modular builders to provide a measure of resiliency to communities that have been devastated by wildfire and other natural disasters.
“We do see fire-affected communities like Boulder and elsewhere where municipalities are fast-tracking ADU construction permits in order to get people back on their properties faster, even as they perhaps rebuild a larger home,” Nova says. “And that’s definitely about speed: One of the advantages of modular and prefab is there is far less time consumed by design and permitting. You can often generate a fully engineered permit plan set in a number of days that’s specific to a given building site. It’s a clear advantage [versus traditional construction].”
Challenges to scalability aren’t keeping production builders out of the modular game. In the fall, Pulte announced the opening of an off-site construction facility in Florence, South Carolina, as part of its Innovative Construction Group subsidiary’s efforts to fuel framing activities at PulteGroup communities in Myrtle Beach, Charleston, Hilton Head, Rock Hill, and Columbia.
Meanwhile, Lennar announced in November 2021 it would leverage its $200 million investment in Hayward, California–based panelized modular builder Veev to begin construction on a community of 102 homes in Northern California. Neither Pulte nor Lennar responded to requests for comment updating the status of their off-site construction programs.
As Plant Prefab prepares to bring its Tejon Ranch Hub production facility online, Glenn sees an opportunity for modular to take market share in single-family, multifamily, student housing, and high-end custom home building, as well.
Like Dvele, Plant Prefab has dispensed with measuring success in terms of starts and homes and communities. Instead, it has a target set on simply manufacturing 900,000 square feet of housing, a volume the company ultimately distills down to 800 housing “units,” suggesting that, in the ultimate quest for scalability and business growth, modular housing and traditional construction will remain an apples to oranges comparison, after all.
