The state of modular construction
In 2019, McKinsey & Company published a study on the potential market impact of modular construction. The report projected a $130 billion overall market value for the new construction modular and prefabrication industry in Europe and the United States by 2030, driven by technology gains and broader economic conditions in the labor and housing markets.
Modular construction has several important benefits. It speeds the construction process through controlled offsite component manufacturing, reusable designs, reduced foundation complexity, and simplified onsite assembly and construction. Lower project-by-project design costs, streamlined and repetitive processes, and a limited need for subcontractors can reduce overall project costs. Innovative technologies and sustainable materials can help develop buildings that have lower embodied carbon than traditional construction. Finally, labor costs can be significantly reduced as traditional skill-intensive work can be moved to offsite facilities and standardized.
Four years later, these benefits are even more important to consider as skyrocketing construction costs, a widespread construction labor shortage, and a chronic undersupply of housing continue to drive the cost of housing far beyond the affordability limits of many US households. In Boston, construction costs rose 14 percent between 2020 and 2021 after rising only 3-4% per year during the preceding decade. Associated Builders and Contractors projected a 430,000 person shortage of skilled construction workers (as of 2021), which will only grow as $1 trillion in federal infrastructure spending ramps up over the next few years. Despite new housing starts finally picking up over the past year, chronic undersupply from a decades-long lag in construction versus household growth perpetuates a massive shortage of housing across the country, according to research from the Joint Center for Housing Studies at Harvard University.
However, these challenges also create the perfect conditions for modular construction to gain traction in the real estate industry – the McKinsey report found labor and housing shortages to be the biggest predictors of industry uptake. The question is not will modular construction and prefabrication gain traction, but where and how.
Modular construction provides cost savings by reducing hard costs for labor and materials. As a percentage of total development costs, this can vary depending on the price of land; in high-cost markets, rising land costs account for a much greater portion of total development costs than weaker markets. However, hard costs for labor and materials can be frustratingly consistent across markets, particularly when part of the same regional labor economy.
In lower cost markets where land is relatively affordable but development cannot generate enough income to cover the cost of construction and labor, reducing these hard costs through modular construction can make development feasible. More development at lower costs can create much needed middle-income and affordable housing. When combined with other economic development, transportation, and regional planning initiatives that increase the capacity of residents to access jobs across regions, these places of the country have the potential to add significantly to the housing supply.
What conditions does modular construction need to be successful and gain traction in these markets? A 2022 report from the Terner Center for Housing Innovation at UC Berkeley provides some ideas. Local governments can streamline permitting processes, particularly for affordable housing, and states can improve inspection procedures for offsite manufacturing. Philanthropy and impact investors can offer funding that directly supports projects that use off-site production, providing the industry with strategic infusions of capital to bring it to scale. Housing developers can prioritize off-site construction and act as conveners, sharing information and best practices and encouraging further uptake across the industry. Additionally, cities can also help by developing uniform design standards that support modular construction and creating transparent development pipelines to encourage and support new development in line with local priorities.
As labor shortages persist and construction costs remain high, the inherent potential in the modular construction industry to address these challenges continues to grow. With support from policymakers, industry stakeholders, and local governments, modular construction can become a catalyst for sustainable development and provide a pathway to build affordable and middle-income housing at the scale we need.
By Emma Bonanno (MUP '23)