Building Blocks: Modular Construction and the Future of How We Build

Francesca Whitehead
G2 Insights
Published in
7 min readFeb 8, 2022

Construction is one of the largest industries in the world, with over $10 trillion spent annually on construction-related goods and services. And yet even with its size, economic impact, and social importance, the industry has been slow to develop and integrate new technologies. As a result, construction has lagged behind other industries along key metrics, such as productivity growth and environmental impact.

This lack of innovation, however, makes the industry ripe for disruption. While verticals such as construction software and smart building have seen investment and development in recent years, a key area for innovation — and one with the potential to address the American housing crisis — is the construction process itself. Here, we explore one such technology. Modular construction (MC), accounts for less than 3% of completed single-family homes. But due to market dynamics, it’s expected to grow quickly and take substantial market share.

As MC becomes increasingly prevalent, it’s important to understand the challenges and potential for a modular approach.

What is modular construction?

Prefabrication as a construction method is not new: it had widespread use in the post-World War II period to meet the rising demand of soldiers returning home and to quickly renovate war-torn cities. While prefabrication has a long history, recent years have seen tremendous technological advances in areas such as robotics, automation, and new building materials that have driven increases in prefabricated quality and consistency, as well as decreases in environmental impact.

MC refers to a prefabricated method in which components are constructed in an off-site precision-production factory and then shipped for assembly. Modules can be fabricated and connected (like lego pieces), or near-finished buildings that are craned onsite.

The former method is called panelization: the constituent elements of a building are fabricated in a factory, flat-packed and shipped, and then assembled in situ. This method has lower transportation costs, allows for easier-to-scale production facilities, enables more customization, and can handle more use-cases (e.g. retrofitting). However, it creates more work on-site and introduces more variability in the onsite construction process.

The latter process, volumetric fabrication, involves building entire rooms or units in a factory, shipping the units, and then craning them into place. This process involves less work onsite and offers more consistency, as a great proportion of the work is completed in a factory-controlled setting. These benefits must be weighed against increased shipping costs, the need for local factories, and less customization potential.

Source: Building Green, The American Institute of Architects, and National Institution of Building Science: Design for Modular Construction

What are the current U.S. market dynamics?

Sweden and Japan have been frontrunners in modular construction: 84% of Sweden’s housing construction utilises panelized modular construction, and 15% of Japan’s homes use panelized and volumetric modules. While the U.S. currently trails behind in both technological sophistication and widespread adoption, MC is expected to grow at a 6.4% CAGR from 2021–2028.

What is powering this adoption? Interestingly, the market drivers that spurred MC in the 1950s and 1960s are once again key factors driving its adoption: labour shortages and rising housing demand.

There is a severe housing shortage in the U.S., with an estimated 4M home deficit concentrated in 29 states. The supply/demand asymmetry has driven up home prices, creating a national affordability crisis. Exacerbating the issue is the shortage of skilled construction labour, with the current 430,000 shortfall reaching an estimated 1M in coming years.

Source: Associated Builders and Contractors (2021)

MC has the potential to solve these problems. MC can generate up to 50% schedule compression relative to traditional construction methods, driven in part by the ability of offsite modular production to progress in tandem with permitting and onsite foundation work. And while cost savings of MC are not yet proven, they are expected to be realised as the scale of modular production increases.

MC also lowers the need for skilled onsite labour, instead allowing workers in a single location to build modules for regional or national projects. The factory-controlled environment turns higher-skilled onsite tasks (e.g. electrical, plumbing, and finishing) and standardises them offsite, enabling lower-skilled workers to oversee the tasks. Technological advances in automated production also increase the productivity in factories relative to on-site construction workers, generating significant efficiencies for MC relative to in situ construction.

Taken together, MC offers schedule compression, increased productivity, and decreased demand for higher-skilled labour. With high consumer demand and substantial labour shortages driving the national housing crisis, MC has the potential to alleviate key pain points for efforts to increase the country’s housing stock. If cost savings can be achieved, MC will likely take even more market share.

Finally, MC also has the potential to make a climate impact. Construction is a heavy polluting industry, and MC technology can reduce waste and emissions in the construction process, drive the adoption of recycled or new materials, increase occupant energy efficiency by 15% to 20%, and enable easier emissions tracking given the standardisation of the fabrication process.

While these key benefits are driving growth in the MC market, it’s unclear to what extent it will take-off and become a significant player in overall construction spend. No company has reached scale yet, though many start-ups are attempting to create capital light solutions to avoid unsustainable capex and unit economics.

Source: McKinsey: Scaling Modular Construction

Beyond technology: how does multi-stakeholderism impact modular construction?

For MC, the problems to solve are far from solely technological. Construction as an industry has a number of key stakeholders that impact the building process, including the government, architectural firms, general contractors, developers, and homeowners or renters. If any stakeholder doesn’t understand or support MC, its adoption will be significantly slowed.

For architects, contractors, and developers, the challenge is getting each party onboard with a modular approach. This ecosystem is highly concentrated and intertwined, with much of the business remaining relationship-driven. This makes it difficult for new entrants to break into the industry. Across all stakeholders, a key element will be education as to MC’s benefits.

Commercial developers are generally the most important part of the chain and will likely determine the adoption of MC. Their primary motivation is timing, as each month delay is associated with an estimated 50 bps reduction in IRR. Across each cost item for commercial developers, the compressed timeline has the potential to generate cost savings, and these productivity gains are the main drivers of permanent modular adoption.

However, MC carries complexities, most notably demand planning, financing, and regulation. Demand for construction ebbs and flows, and current construction sites can hire temporary workers as needed. Yet for manufacturing operators, predictable and consistent demand is necessary to run an efficient factory with productive employees and low turnover, as well as maintain high factory utilisation rates. For lenders, MC pushes cash draws earlier in the project lifecycle, and they will need to gain comfort with the nuanced cash flows associated with a modular approach. Finally, for governments, various regulations throughout the construction process impacts the adoption of MC, ranging from transportation of large modular components to permitting and certification. A key regulatory challenge is the locality of construction-related laws; for example, components might be up to code in the location of the factory, but not at the final build site. This regulatory heterogeneity causes difficulties for companies and developers alike. It is for these (and other) reasons that company expertise is the primary factor associated with selecting a modular manufacturer.

While the regulatory environment poses challenges, the public sector could also generate significant tailwinds for MC. Policymakers recognize the need to speed up the market to increase housing stock. For example, NYC recently put out an RFP for affordable housing in Brooklyn that is being met by a modular construction solution. California passed a law that allows for ADU permits to be granted within 60 days without a hearing. Both the infrastructure and BBB bills create more available funding to increase the housing stock with a focus on sustainably, which could be met by a modular approach.

Source: McKinsey: Modular Construction, from projects to products

As MC continues to gain momentum, investors will play a key role in supporting companies developing this important sector. MC, as discussed above, is not new. As a result, venture investors need to differentiate between the many home builders that use a modular process and the companies with a venture-backable technological edge. The key areas for investors to consider / diligence are the modular type (volumetric vs. panelized), real estate type (i.e. commercial, multi-family residential, single-family residential, ADUs, or mixed-use), business model (B2B vs. B2C, full-stack, etc.), regulatory landscapes, proprietary technologies, and traction.

In summary, the national housing and skilled labour shortage is driving the adoption of new construction processes. The development of faster and less labour intensive construction will be key for solving the housing crisis while supporting sustainability efforts. MC offers one such approach, with key benefits such as schedule compression, increased productivity, decreased demand for higher-skilled labour, and sustainability improvements. The current MC market is far from mature, and no players have reached significant scale. While all industry participants will need to be brought onboard to see mass adoption, the construction market is ripe for disruption and MC is well-positioned to grow its market share.

Sign up to discover human stories that deepen your understanding of the world.

Free

Distraction-free reading. No ads.

Organize your knowledge with lists and highlights.

Tell your story. Find your audience.

Membership

Read member-only stories

Support writers you read most

Earn money for your writing

Listen to audio narrations

Read offline with the Medium app

Published in G2 Insights

G2 Venture Partners is a venture and growth capital firm investing in transformative technology companies at their inflection points to build a sustainable future. | www.g2venturepartners.com

Written by Francesca Whitehead

Climate-Technology Investor at G2 | Previously at GS (Investment banking) & KKR (Global Impact) | Brown

No responses yet

What are your thoughts?