Jared Levy is taking a new approach to transforming the way housing is built and delivered. After more than a decade with prefab company Connect Homes, he is stepping away from the startup to take a consulting and advising approach to help other prefab companies and developers.
Trained as an architect, Levy began his career focused in the modern single-family sector. He was quickly “frustrated with the industry” and struck by “how broken the home building process” was and how inefficiently the sector used its resources.
In 2004, during his time with Marmol Radziner, the company wanted to develop a prefab side of the business, marking Levy’s entrance into the space. However, he became disillusioned as the company found itself in the niche market of custom building for high net worth customers. He co-founded Connect Homes more than 10 years ago with the goal of transforming how homes are built and developed.
Following his decision to step away from Connect Homes, Levy spoke with BUILDER about the origins of the company, lessons learned in prefab, the outlook for the future of prefab construction, and common misconceptions about the space.
Can you discuss the origins of Connect Homes and your initial goals for the company?
We knew residential construction was broken and decided to focus on the single-family home space. We chose that space because when we looked at multifamily construction, with projects ranging from 50 to 500 units, they essentially utilize a factory in the field model.
They have economies of scale, they have standardization, and many times the developers building these projects have their own in-house capabilities. We thought it was going to be really difficult to offer a competitive solution with prefab.
But when we looked at single-family housing, homeowners have very little options other than local mom-and-pop general contractors, who really have no innovation, technology, or economies of scale to drive down their costs.
The other co-founder of Connect Homes, Gordon Stott, was working with me at the time at Marmol Radziner Prefab (MRP), and we both saw that if we could hit a lower price point we could unlock a much broader mass market of people wanting new homes.
Taking our lessons learned while at MRP, we knew we needed to tackle three things when we started Connect Homes.
One, we needed to turn the home into a product. We needed to standardize our product line while still giving the ability for homeowners to customize and personalize their home. We made the process of building a home more like buying a car than the bespoke process of custom home building.
Second, once we had a standard product, we could develop an assembly line process to manufacture homes at scale. We did this and reduced our build time by 90%.
And third, if we were going to scale and be able to serve that broader market, we needed to solve the logistics of delivering homes cost effectively. For this we developed a patented modular system that allowed our building modules to plug into the intermodal shipping network, giving us all the benefits of that logistics network without having to use shipping containers for our homes.
What factors contributed to your decision to step away from Connect Homes?
I’m never really sure how long one can say they are a startup, but it sure always felt that way at Connect Homes as we tried to change an industry.
After 10-plus years of pushing aside any obstacle that got in our way, I decided the time was right to step away from Connect Homes. I still feel I have unfinished business in my pursuit of transforming the way housing is built and delivered, so I have started to do consulting and advisory work for other prefab companies and developers looking to explore off-site strategies.
And with that work, what I have found is that there are a lot of companies out there with some very interesting strategies to tackle our housing crisis.
How has the prefab/modular space changed in the past two decades plus? What hurdles has the sector overcome, and what additional hurdles remain?
Unfortunately, it hasn’t changed that much. A lot of companies have come and gone in our space. The success rate is pretty low. Sometimes I fear in the prefab space there have been too many companies with solutions looking for a problem.
We have had a couple of high-profile failures in our space that have made the capital-raising environment more challenging. The reality is that if you want to disrupt the housing industry, you sort of need to build big things. And that takes capital.
When we started, we would go to Silicon Valley and be met with bewilderment that we wanted to raise money to build homes. Not only was it not a software SaaS model with 90% margins, it was hardware, and it was the biggest kind of hardware you can make at that.
So investments were off the table, but there was always interest in buying one of our homes. After a few years, Silicon Valley started to catch on to the enormous opportunity in the construction space and that it was the last remaining industry that really hadn’t been industrialized. And being in the midst of a perpetual housing crisis in the U.S., the bet that technology and innovation in construction could solve this crisis started to seem like a good one to make.
And with that environment, the Katerras of the world jumped in. With their failure and others like them, it becomes more and more challenging for companies in our space to raise the capital they need to disrupt the industry. I think we just need a good high-profile success story in our space, and that dynamic will quickly change.
What are the biggest lessons you have learned during your time in prefab?
There have definitely been a few. Strategy alignment is a key to success in this space as we operate at the intersection of many competing forces—manufacturing and construction, standardization and customization, homeowner and developer channels, automation and inconsistent volume. Having alignment between your business strategy, manufacturing strategy, and product strategy is a challenge.
Another is making sure you understand your product market fit. This can’t be to simply build a great product, but building a product that addresses a gap in the market. A question you need to ask is does the market want what you are making and, of equal importance in our space, at the price you are selling it for? If your prefab homes cost the same as conventional construction and offer homeowners less options than conventional construction, it may be more of an uphill battle to meet your sales projections than you anticipated.
And last, the importance of a product platform. Having a product platform that can support product lines across multiple channels and revenue streams allows you to de-risk macro-economic trends and take advantage of any tailwinds in the market.
We had a product line for homeowners, for developers and for government supportive housing that all leveraged common components and processes. So, for example, if interest rates shoot up and homeowner demand drops off, you are able to take advantage of things like California’s Project Homekey funding, which provides capital to cities and counties to build more interim housing for the homeless.
What are the biggest misconceptions about prefab?
I think one is that prefab is cheap and of lessor quality. Most of that still comes from the mobile/HUD home comparison, but it still permeates into the modular prefab space as well.
I think those unfamiliar with factory-built modular homes would be surprised to learn how rigorous the quality control (QC) process is. The reality is that there is no QC process in conventional construction other than hoping the building inspector catches any mistakes in the field.
In prefab factories, there are detailed QC checklists for every single step of building a home, and the QC department needs to sign off on the work in a module before it can move down the assembly line.
I think another big misconception is that prefab needs to be cheaper than conventional construction for it to make sense. There are other benefits that are equally important to cost. We already touched on quality.
Schedule is another. Prefab work can happen concurrently to work on-site, drastically cutting down on the overall schedule. There are no weather delays or delays caused by having to wait for subcontractors or inspectors to show up. And many companies will offer fixed pricing.
So no change orders, which is a very big deal as they can easily add an additional 20% of hidden costs in conventional construction.
What do you think the future of prefab construction will be?
Right now we are an industry that is uncomfortably stuck somewhere in the middle between the construction process and an industrialized process.
Truth be told, we still aren’t even close to being in the middle. If you want to buy a new car, you do some research, test drive a few and go to the dealership to pick out your model, select the finishes and upgrades you want, sign your financing docs, and drive off in your new car.
It can all happen in a day. Now granted, it usually is a very painful day that drags on well into the evening, but you still leave with your new car.
Let’s compare that to building a new prefab house. Technically it starts the same way. You do research on different manufacturers, and, if you are lucky, maybe you get to walk through some model homes. Once you’ve made your decision, maybe even picked out your model and upgrades, that’s where the comparison ends. It will likely be close to a year before you move in.
That’s not because it takes a long time to build a prefab house. A lot of companies out there can output a home every day from their factory. The reason it takes so long is the regulatory process. You still need to get local jurisdictional approvals even though factory-built homes are approved by the state. There’s three to six months right there.
Only upon having a local permit will lenders initiate the closing process for your construction loan. Scheduling an appraisal and drawing all the closing docs, that’s another two to three months. So in a blink of an eye we just added about five to nine months before you can even start building your home.
I once had a really interesting conversation with a policy expert at one of the largest real estate lending institutions in the nation. He wanted to know what changes needed to happen on the supply side to help solve the housing crisis. I said it’s not entirely a supply issue.
There are plenty of prefab companies out there that can have a home come off their assembly line every day. But what good is it if just getting a loan appraisal takes 90 days for one home? You can build 90 homes in that time.
Let’s also talk about incentives and rebates. Our aging housing stock is more polluting and emits more CO2 than automobiles. Yet, when you buy a new Tesla you get a $7,500 tax credit, and when you build a new energy-efficient home, you don’t get anything.
We should be providing consumers incentives to replace the aging, energy-inefficient housing stock with new, efficient, and sustainable prefab homes.
If we want prefab to skew more toward being an industrialized product and less a construction project, we won’t get there through automation and robots. We will get there by changing the regulatory environment for building prefab homes. And when we do, someone can do their research, pick their manufacturer, order a house, and have it delivered the next week. That’s the future I would like to see.
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