Solve for how millennial young adults--more of them--can attain homeownership, which is what 22-to-37 year olds want and what many of them are working for, and reports of the demise of the American Dream will be exposed for what they are. Fake news. Or at least misleading headlines.
If Millennials aren't buying homes, including new homes at the lower price tiers about as fast as builders can build them, that's news to builders.
Or maybe it's news that dates back a few years, to 2015 or 2016, when the spigot of demand among young adult buyers began to open up, and when housing finance's credit box showed first signs of easing up on the excessively tight clamps of qualification, and when home builders in general rekindled focus, product development, and operations on the entry-level, high-volume parts of their strategic models.
A snapshot now of where young adults are versus their age-equivalents of generations past may or may not be helpful in support of investment, development, design, and value engineering of new-home products.
Suffice to say that lots of evidence shows these days that the difference between Millennials' housing behavior latency and a structural new direction in consumer behavior is huge. If Millennials actually didn't want to own homes, and if they didn't play the "wait-and-hurry-up" game of trying to accelerate their path to homeownership once they hit age 35, that would be real news.
A handful of years ago, experts were ready to proclaim the "Renter Generation," as though the rite of passage into young adulthood had forever changed, and that homeownership no longer exerted powerful, practical influence on individuals' personal financial goals.
The question of whether Millennials' progress through the housing preference continuum was merely delayed or permanently aborted has largely been answered as the vanguard of the generation has passed its mid-30s and embraced homeownership in ever growing numbers. Yes, there are impediments--most of them financial, having to do with house prices, high rents preventing savings for down payments, college debt payments, sluggish wage growth, etc.--but to say, "millennials can't buy homes" is more than a little misleading.
Part of the thing is, the stock of homes--old, new, or otherwise--is not what it was in prior generations, and housing finance has been much more of an inhibitor in a post-Great Recession, Dodd-Frank regulatory era. Millennials' behavioral economic conditions, market conditions, and supply-demand conditions have all been headwinds. Still, although 35 might be the new 25 in terms of household type behavior, it appears they're all in on the deal. It's just a question of how ably the business of new home construction and development can respond to a rising tide of unmet need.
This, to cut to the chase, means simply, "if you build it, they will come."
And a corollary of that would be, "if you can build it faster, more affordably, and smart, they will come twice as fast."
To that end, we have news this morning that Katerra, a Silicon Valley start-up with a $1 billion-treasure trove of investor backing bent on transforming construction processes and economics and turning the affordability issue on its nose, announces this morning its plans to take a quantum leap in its capacity to produce building components, wall panels, floor systems, roof truss assemblies, windows, cabinets, and finishes with a new 577,000 square foot factory facility in the Bay Area in Northern California, effective within 12 months.
The announcement is intriguing on a lot of levels, not in the least for its signal of an emerging capital and operational "arms race" in off-site factory infrastructure at a moment when developers, builders, and operators are early in their adoption stage of off-site as an integral workflow model.
Katerra's new facility, complementing is fairly newly up-and-running factory in Phoenix, and its mass timber production facility in Spokane, Wash., boasts the following upgrades, according to a company statement.
Katerra’s integrated factory model seamlessly connects building design to the factory floor and job site. Compared to its first factory located in Phoenix, Ariz., Katerra’s next generation plant will be an advanced manufacturing facility with significantly more automation. The operation will include fully automated wood frame wall production lines, automated floor lines, automated cabinet and finish areas, automated roof truss lines, an automated window line and a light gauge steel production line. The factory will be able to produce, on an annual basis, the equivalent of 12,500 multifamily units.
Additional facts and figures about Katerra’s Tracy factory include:
- The new facility will be strategically located near rail, shipping ports and freeways
- To support the factory’s operation, more than 500 jobs will be created in San Joaquin County, which is designated by the state as a high unemployment area
- Production is slated to begin in 2019
Of particular interest here: the new Tracy, Calif. Katerra facility will be just under 19 miles to the east of Entekra's plant in Ripon, Calif., serving identical geographical market areas.
We'd reported earlier this year:
The Ripon plant is in continuous production mode, and McCaughey and his co-founding COO Bran Keogh expect it to reach its 500-home annualized run-rate in mid-2018. Revenue for Entekra gets its rocket fuel if and when the firm can tap enough growth capital to open a second, 175,000-square-foot factory in Northern California by the fourth quarter of 2019, capable of delivering 3,000 homes annually on single shifts of production.
Going into 2020, the company’s strategy calls for yet another 3,000-unit-a-year facility in Southern California, allowing it to cover home building epicenters from within a 250-mile range. By then, McCaughey and Keogh plan to be running a $166 million operation, with gross margins of 27% and net income of $13 million.
An extensive analysis of the burgeoning investment, strategic, and operational focus on off-site factory production of house components by the home building equity analysis team at Deutsche Bank research under research analyst Nishu Sood makes some helpful conclusions on how and where offsite construction facility infrastructure would fit into current home building and development geography. Here's a snippet of the report that addresses the Bay Area marketplace in particular.
Based on the criteria uncovered from our analysis as laid out above, we can apply these criteria to other locations across the US to see where a factory might make sense. Using the two requirements of density we identify eleven potential locations for hypothetical factory locations. First a location must have sufficient home construction volumes to drive 2,000+ units through a factory. Second, the units must be within 100 miles roughly of the factory, as we described in our analysis of NVR and Toll above. In order to assess the volume criterion, we looked for locations where there are 15,000 single-family housing permits within a 100 mile driving radius. We do this because we assume that a builder could gain 15-20% market share that would then be sufficient to generate 2,000+ units of production. Finally, we selected locations where it would be economically viable to buy the land, build a factory and fully staff it with a local workforce.
Hypothetical plant location examples: Atlanta, GA & Bay Area, CA
To better describe the process for identifying markets for hypothetical factories we highlight two examples, Atlanta and the Bay Area as shown in the figures below. While the city of Atlanta met our volume criteria it is not reasonable that a factory could be built and operated in the city center given the extent of urban sprawl in the market, so we chose the town of Campbellton, GA which is a 20+ mile drive from the city center and would serve construction all around Atlanta. For locations where one market alone may not meet our volume requirement filter but the addition of a second or third market does (as long as all markets in question are within 100 miles), We chose a more central location that splits the difference between the hypothetical markets it supports. An example of this multi-market situation is the Bay Area in Northern California where we chose the town of Rippon, CA which would be able to serve San Francisco (80 miles), Sacramento (70 miles) & San Jose (80 miles). In the Figures below we compare the two examples of Atlanta & The Bay Area as described above.
Sood and his team note that 100 miles is about optimal for a factory to serve communities from an off-site facility, with 2,000 plus units being the minimum volume necessary to support the plant.
Bay Area and NoCal volume certainly supports two such facilities, but it will be fascinating to observe how both Katerra and Entekra gain traction as they expand their capacity in the same market.
Meanwhile, if they build it, and they build it attainably, millennials will come.
Here's the Katerra announcement.
Menlo Park, CA – July, 2018 – Katerra, a technology company redefining the construction industry, today announced its plans to open a new advanced manufacturing factory in Tracy, Calif., where it will produce building components including wall panels, floor systems, roof truss assemblies, windows, cabinets and finishes. Manufacturing of building components in a factory setting allows for rapid assembly at the job site, significantly reducing construction time, costs and waste while improving quality.
Katerra is expanding its U.S. operations as it delivers on $3.7 billion in new build project bookings. With its new 577K square foot factory, Katerra’s manufacturing presence in Tracy will add more than 500 jobs. This new manufacturing facility will complement Katerra’s existing California operations, including its headquarters in Menlo Park and office in San Francisco.
“Establishing a manufacturing presence in the Central Valley made sense to efficiently serve the West Coast market while gaining access to talent to operate advanced robotic equipment,” said Michael Marks, chairman and co-founder of Katerra. “We’re excited to be adding jobs to California’s economy as we apply technology to deliver high-quality buildings faster.”
Katerra’s integrated factory model seamlessly connects building design to the factory floor and job site. Compared to its first factory located in Phoenix, Ariz., Katerra’s next generation plant will be an advanced manufacturing facility with significantly more automation. The operation will include fully automated wood frame wall production lines, automated floor lines, automated cabinet and finish areas, automated roof truss lines, an automated window line and a light gauge steel production line. The factory will be able to produce, on an annual basis, the equivalent of 12,500 multifamily units.
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“We are very excited about the economic impact that Katerra will bring to the City of Tracy and the region,” stated City of Tracy Mayor, Robert Rickman. “Tracy’s proximity to workforce talent, affordable land, and state-of-the-art building opportunities, provide a business supportive environment for advanced manufacturing companies such as Katerra to thrive. I would like to welcome Katerra to the City of Tracy and thank them for ‘Thinking Inside the Triangle’.”
