Publications

- July 1, 2021: Vol. 8, Number 7

Factory-built real estate to the rescue

by Kristi Waterworth

Since the real estate market collapsed in 2008, sending ripples across global markets, the construction industry has struggled, along with landlords, investors and other property owners. An initial surplus of empty units wiped out jobs at all levels, sending tradespeople and real estate experts alike scrambling to create new opportunities for themselves, which seemed to balance the equation for a while.

But, as the real estate market began to normalize, one phrase rang out over and over: inventory shortages. Like in a bad dream, shortages caused by a mass exodus of labor from all levels of the sector and lack of suitable inventory pushed real estate prices higher and higher, as businesses fought for limited spaces and homebuyers squabbled over what few homes could be had.

Then there was a pandemic. And even though we’re on the way out, lumber prices are still sky-high, builders are under increasing pressure to do more with a limited workforce, and demand is out of control. There’s a deep need for change in how buildings are created in order to keep up with demand in an increasingly tight market.

STICK BUILDING VERSUS FACTORY-BUILT CONSTRUCTION

Traditional on-site construction, commonly referred to as “stick building” (even though no sticks are involved), is a timely process that requires a variety of tradespeople to fight weather, a lack of daylight and irregular work schedules to meet grueling deadlines. Materials delivery, equipment rentals and additional on-site inspections often further delay the process, making something as simple as a house take anywhere from nine to 12 months to complete.

This significant time investment, plus the very real fact that the construction industry continues to face a worker shortage of anywhere from 200,000 (according to the Home Builders Institute) to 430,000 workers (the figure Associated Builders and Contractors predicts will be additionally needed in 2021) means that contractors have to do so much more with so much less at this unprecedented time.

Unlike stick building, factory-based construction means no weather delays, no waiting for materials to come from far-away warehouses, no groping for specialized labor that doesn’t exist. Rather than a nine- to 12-month time frame, that same house can be completed in a factory setting in just six weeks. Once it arrives on the destination site, it only takes a few days to set up the structure.

FACTORY-BUILT REAL ESTATE FOR INVESTORS AND DEVELOPERS

Factory-built real estate is rapidly gaining in popularity for a variety of reasons. First, there’s labor costs, which are lower since a large portion of the work can be performed by builders who are trained on the job instead of workers who have to be poached from other homebuilders or brought in as subcontractors due to the short labor supply in the industry.

Second, the speed at which new structures can be completed in an indoor environment is remarkable, even with the most detailed building plans. Having the option to run more than one shift throughout the building process speeds up construction remarkably, saving costs associated with interest payments, and preventing loss of income due to building delays.

Third, because materials have never been exposed to the elements, nor have workers been put in harm’s way to complete necessary components like roofing, pretty much everything about a factory-built structure limits liability for both jobsite injuries (saving insurance costs) and later issues that may arise with hidden mold or dry rot that has managed to creep in after raw materials are exposed to months of wet and dry cycles in outdoor conditions.

A POTENTIAL PATH FORWARD

For investors, developers and, yes, even homebuyers, factory-built real estate may be the path forward in a market that’s too short on everything it takes to make stick-built property possible. Not only do these structures use the same quality of materials as their stick-built counterparts, but they can be assembled quickly and with dramatic cost savings by comparison. And, because you can very easily customize the modules that go into your structure, the fact that they were constructed off-site is going to be a secret kept between you and the factory that did the building. It’s a total win-win.

For builders, the story is a different one. The near term may turn stick-built properties into luxury buys, and this alone could work to take some of the pressure off of them for now, anyway. In the longer run, stick-building as a high-end buy may result in more structures coming from factories, reducing opportunities for the tradespeople to come. Considering the massive labor crunch in the trades, however, this might be the adjustment that’s needed — and one that would propel construction technology into a safer, cleaner and cheaper future.

Kristi Waterworth wrote this article for Millionacres, a Motley Fool service. Read the original article at this link: https://bit.ly/3ge0uzA

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