Developers face plenty of challenges today: It’s difficult to find experienced labor. Material costs keep rising. And supply chain disruptions mean that it can be difficult to get everything from insulation to concrete and steel to construction sites on time.
That’s why it’s not surprising to many commercial real estate professionals that developers are slowly, but steadily, turning to modular construction when building restaurants, hotels, apartment projects and healthcare facilities.
Modular construction in the commercial development industry works much the same as it does with residential projects: Anywhere from 60% to 90% of a building — whether it be an apartment development, fast-food restaurant, hotel or school building — is built offsite in a factory or manufacturing facility.
These pieces, known as modules, are then shipped to the building site where they are put together to form a completed project.
The benefit here is that modular buildings can be developed in less time. They also require less experienced construction crews. That helps developers who are struggling with supply chain disruptions and a lack of skilled labor.
Modular construction, then, has the potential to play a far bigger role in the commercial construction industry than it has in the past.
This is one reason why REjournals is focusing heavily on modular construction during its Midwest Construction Double-Header event being held Sept. 8 at the Hyatt Regency O’Hare Chicago in Rosemont, Illinois. The second half of this event will focus on the ways in which modular construction can change the development industry. To sign up for the event, click here.
A growing demand for modular?
Dean Dovolis, principal, chief executive officer and founder of DJR Architecture in Minneapolis, said that the reasons for the increased demand for modular construction are many and complicated.
First, there are the societal reasons. As Dovolis says, many workers who are 55 and older have walked away from the workforce and retired. This has happened in the construction industry, too.
That has left a shortage of experienced labor in the construction industry, making it more difficult for construction companies to find the people they need to complete projects efficiently. Many of these companies are looking for a new way of building, and modular construction offers them a choice, Dovolis said.
“There is pressure to change our methods of construction,” Dovolis said. “We can’t build them like we used to. So much of the experienced workforce is gone now, your plumbers, carpenters, electricians, people in all areas of the construction industry. We have to change the method of construction we use, otherwise the pace of construction becomes slow and inefficient.”
New workers aren’t filling the void left by the departing experienced construction workers, Dovolis said. This means that the labor shortage we are seeing today is far from a temporary one.
“There are no replacement workers coming,” Dovolis said. “This is a permanent fact in the labor market.”
It takes less people to build multifamily buildings, schools, hotels and fast-food restaurants when developers rely at least in part on modular construction. Workers with less experience can get the job done.
“These societal issues aren’t going away,” Dovolis said. “They are going to keep intensifying. There are less people performing the work. We have to do more with less people. There is not a throng of young people ready to fill the ranks. It’s now about creating higher productivity per person. Modular construction is one method that allows that to happen.”
Jeffrey Schoeneck, principal and executive director in the Minneapolis office of design firm Cuningham, agreed that the number of experienced construction professionals leaving the industry makes it more important for developers to seek alternative means of construction, including modular.
“We are losing people in the trades to retirement on a pretty steady basis,” Schoeneck said. “That has led to several challenges for all parties involved. It’s a weaker link in the overall construction process to have more junior staff and less experienced senior veterans in the field. That creates hiccups in the entire construction process.”
But it’s more than just veteran professionals leaving the business. Finding any labor, even construction professionals with fewer years of experience, is a challenge today, Schoeneck said. And again, that makes modular construction a viable alternative for construction firms looking to do more with less.
At the same time, the technology behind modular construction is improving, Schoeneck said. That gives developers more confidence that they can turn to modular construction and receive quality products.
“The growth in modular construction is being fueled by tech dollars, not by construction dollars,” Schoeneck said. “There has been an influx of investment in construction techniques outside of what would typically be considered the real estate industry.”
Speed matters
Speed is a major factor in the growth of modular construction, too, Schoeneck said. By relying on modular technology, developers can bring their projects to the market faster.
That is a key benefit in the competitive world of commercial construction, Schoeneck said.
“This industry has never been as competitive as it is now,” Schoeneck said. “Every day that you are waiting for a building to be built, you are not earning that rent or making that sale. Speed to market is so important today. Clients and end users want faster delivery. Owners and investors want their return on investment to come faster.”
Dovolis said that modular construction doesn’t typically bring big cost savings up front. But the reduction in construction time adds up to big savings, he said.
“Time is money,” Dovolis said. “That has become a critical factor with interest rate issues and the cost of money today. Speed to market is so important. You can cut construction time in half with modular construction. That is a big deal when interest rates are double what they once were. If you can reduce your carrying costs and cut them in half, that makes a project go from infeasible to feasible.”
Modular construction works particularly well for multifamily housing, with many developers already relying on his approach to build new apartment buildings.
The United States needs more multifamily housing to meet demand. And the shortage isn’t a small one: The National Multifamily Housing Council has said that the country needs more than 4 million new apartment units to meet the current demand for them.
Modular construction, in which apartment buildings can be built more quickly, can help developers provide more multifamily housing in less time.
“I don’t see modular construction as an optional thing. I see it as inevitable,” Schoeneck said. “It might not be tomorrow that this industry truly converts to modular. But it is an inevitable necessity. We continue to have a huge demand for multifamily housing in the world. That demand won’t get met through a construction industry that is losing senior, experienced professionals. Modular will become a staple as we need to build more housing to meet the ever-growing demand.”
Fighting a bad reputation
Dovolis said that the modular construction industry is still saddled with a bad reputation. Much of this is because people often think of trailer parks when they picture modular construction.
“When you think of manufactured homes, do you get a good feeling?” Dovolis asks. “Probably not. That’s something that we have to overcome.”
This means educating the public about how modular construction technology has changed. Modular projects today, or developments that rely on some modular construction, don’t look boxy or cheap. They look little different, in fact, from any other form of commercial construction.
Dovolis said that developers and the public will accept modular construction over time. They’ll do this after seeing a steady stream of successful, and aesthetically pleasing, modular projects pop up across the country, Dovolis said.
“Buildings are being built this way,” he said. “They are successfully being built. People can touch and feel them. Seeing these examples will make a difference.”
Developers can turn to modular construction for a wide variety of building types. It’s a natural fit for multifamily, of course, but this construction technique works well for hotels, office buildings, educational facilities, healthcare properties and restaurants.
In fact, modular construction can work for just about any type of commercial project.
“The easiest low-hanging fruit is housing,” Dovolis said. “But major hotel chains do modular, too. Marriott is building modular now. You are beginning to see modular with educational facilities. Franchises are starting to use modular construction, starting to experiment with this technology.”
An example of a current modular project taking place in the Midwest is the Pentagon Village Apartments, a six-story, 202-unit apartment project planned for the Twin Cities suburb of Edina, Minnesota. Rise Modular, based in Minneapolis, is the co-developer, general contractor and module manufacturer on the project. Partners are Solomon Real Estate Group and Cuningham.
The apartments will be part of the master-planned Pentagon Village development. The apartment building will be constructed with five stories of RISE-manufactured modules over a one-story concrete podium. Units will be a mix of studio, alcove, one- and two-bedroom units. A 142-stall parking garage will be attached to the development.
“Are more developers embracing modular construction? That might be too strong,” Schoeneck said. “It does have everyone’s attention today, though. Modular is very evident in the conversation. Developers might not be ready to move forward yet, but they do want to learn about it. I have had very few conversations with developers in which they don’t have one eye on this technology coming down the pipe.”
Interested in learning more about modular construction and the impact it might have on the commercial real estate industry. Sign up for REjournals’ Midwest Construction Doubleheader event today.
