Sunday, June 9th, 2019 June9th2019

Sell for More Trivia: Does modular construction make sense for the commercial real estate business?

Published on June 9th, 2019

Sell for More Trivia is a weekly blog series that playfully presents a trivia question about commercial real estate.

 

Commercial real estate experts expect increasing demand for modular construction in the healthcare, industrial, education and multifamily sectors.

The U.S. modular construction business has doubled in size to $8 billion over the last five years, according to the Modular Building Institute.  Of general contractors already using modular construction, 67% expect modular use to increase over the next three years, 24% expect demand to remain the same, and none expect it to decrease.

General contractors use modularization mostly for constructing exterior walls, building superstructures and fulfilling mechanical, electrical and plumbing requirements. Around 69% of general contractors in the Northeast use modular components, leading the rest of the United States. Contractors in the South use the least of these modular components, at around 24%.

In order to replicate something on a modular basis, there has to be a level of similarity.  There’s a start-up cost associated with producing any individual footprint for a module. So, you want s design that is repeated.  Any time you have a lot of the same units, then there are going to be efficiencies through going modular.

But securing loans for modular construction is challenging for developers. For example, modular construction requires a significant upfront deposit for building materials. This totals around 25% of total construction cost typically.

From a lender’s perspective, that’s really awkward. You are spending a lot of money for materials that aren’t at the job site.  You’re having them shipped to the factory.  It makes the lender feel a lot more exposed financially than they would on a traditional construction project.

Rectifying mistakes can also be more difficult once the components are delivered to the construction site.

Shipping completed modules from the factory to the job site can be another nuisance.  For a 120-room hotel, countless truck trips are needed to deliver all the pieces to the site for assembly. This process is usually outsourced to a trucking company, but is yet another level for a prospective lender to get comfortable with.

The reality is that execution can be difficult.  And on a direct construction cost basis, modular construction is not cheaper than traditional construction. However, modular building can shorten construction schedules by up to 30%.  This means the revenue and occupancy stage can begin much sooner, accelerating investment returns.

Off-site construction in a controlled environment also addresses rising labor costs and the low supply of qualified construction professionals. Around 88% of contractors are concerned about the cost of skilled labor, and around 95% percent of contractors are concerned about whether workers have adequate skill levels, according to a 2019 U.S. Chamber of Commerce Commercial Construction Index report.

Many believe modular construction is the way of the future.  I suppose we’ll find out soon enough.

 


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About Beau Beach, CCIM

Beau is a tenacious Commercial Real Estate Broker, author and adoring father of four. His clients appreciate his no-nonsense demeanor and his legendary work ethic.

Beau leads Beachwood which is a commercial real estate broker for sellers in the Nashville, Milwaukee, South Florida and Chicago markets.

He’s the author of the books The 3 Reasons: Why Most Commercial Properties Don’t Sell and True Wealth: What Every Seller Should Know About 1031 Exchanges.

Beau can be reached at 414.324.4938, 615.603.9770, click to schedule a call or Beau@ProwessIRES.com