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How modular construction is changing commercial real estate

Prefabricated building has doubled in size over the last five years, but it's not without its challenges

May 04, 2019

Regions across the U.S. experienced an abnormally volatile winter this year, with weather disrupting the flow of life across the country.

That included construction projects. Yet there was one setting where the unpredictable winter didn’t slow down work — the vast indoor spaces where firms have increasingly been creating homes, offices and hotels.

The method of modular construction — where pieces of buildings are manufactured in one place, and then delivered to construction sites for assembly — has boomed in recent years. The business in the U.S. has doubled in size to US$8 billion over the last five years, according to Tom Hardiman, executive director of the Modular Building Institute which is a non-profit trade association based in Charlottesville, Virginia.

There are about 225 modular manufacturers in North America, including the companies that do single family modular homes. “And the sector is still growing,” Hardiman says, adding that about 50 manufacturers act as their own contractors on projects, while the rest provide building modules to contractors.

Made for uniformity

Modular construction lends itself to projects where uniformity is the norm, such as chain hotels; student, senior and affordable housing; or office buildings.  

“With ground-up construction, you take into consideration the architecture of the city and the neighborhood,” says Carlos Serra, managing director of JLL’s Project & Development Services. “Modular buildings require a standardization in design. They have to be boiler plate, which limits the level of customization.”

Hotel companies in particular have found benefits to working in such a way. “They like the quality control aspect,” says Bruce Greenfield, a principal at California-based Architects Orange. “Factories know how to build to a hotel brand’s standards, and that saves training a new crew of field people every time.”

Architects Orange was behind the design and architecture of the new Marriott TownePlace Suites and Courtyard Hotel in Hawthorne, California, which opened in 2018. The 354 rooms were constructed, furnished and decorated in Boise, Idaho. They were then trucked into Hawthorne. 

While an efficient mode for uniform buildings, Serra cautions against modular construction being viewed as end to all construction nightmares, saying that execution can be difficult. 

“It has to be driven more by repetition than by one-off projects,” he says. “It works best when a developer can say ‘here’s a mock up, now push out hundreds or thousands of these in standard finishes.’ That’s where we will see the savings. But developers may be getting something that is less architecturally or aesthetically pleasing.”

Speed and cost

Modular construction can accelerate timelines by up to 50 percent, because various parts of a project are undertaken simultaneously, Hardiman says. As the site is being prepped for construction, for example, the actual building and inspections can take place offsite.

Cost advantages depend on a number of factors. In a recent study by FMI Corp., most general contractor firms reported that they expected to save 5 to 10 percent of field labor costs by switching to modular. In reality, the most common savings level reported was 0 to 5 percent, demonstrating the inherent challenge in adopting new technology.

“In high cost labor markets, it might make more sense to shift that work to an offsite modular factory that utilizes fewer labor hours per project due to an industrialized and streamlined process of assembly,” Serra says. “In other markets, it may not.”

Challenges to overcome

Challenges to rolling modular construction out more widely remain. Chief among them are a lack of understanding and transparency.

“Modular construction requires greater communication and coordination before the project begins,” says Hardiman.

To mitigate problems down the road, he advises that developers and contractors heavily research the modular manufacturers they are considering collaborating with.  

The biggest challenge to overcome: The stigma attached to the construction type. 

“There is still that thinking that if a building is modular, it should be of a lower value,” says Serra. “The perception is that it is worth less needs to be disrupted for this mode of construction to fully thrive.”

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