Episode 2: Half-priced Hamptons

Predicting Our Future

Modern homebuilders have taken the art of prefabrication to new heights where they can construct entire rooms complete with insulation, plumbing, and electric wiring all within a factory. These rooms, called “modules,” are then transported from the factory to the building site and stacked to form a home in mere days. In the Hamptons, Seattle, San Francisco, Los Angeles, and a number of other major cities, it’s now possible to build a beautiful modern home modularly for dramatically less than the cost of building with local contractors.

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Interviewees

Episode Excerpt

Modular Homebuilding

When it comes to homes built in factories, people use the term “prefabricated” to mean a number of different things. In a history spanning hundreds of years, which I briefly covered in the last podcast episode, people have long assembled house components off-site and then shipped those components to sites along with instruction manuals for assembly. Prefabrication has been used for everything from sending houses from England to Australia via ship in the 1800’s to rapid construction of suburban home developments in post-World War II America.

In modern times, home pieces are precisely cut to size in a factory, so a finished building made primarily from these pieces can be accurately called “factory-built.” Once you’ve constructed all the pieces for the home, it’s usually a relatively straightforward proposition to ship them, as they’re designed to fit inside of a container that goes on the back of a flatbed truck. While this prefabricated kit-based approach to homebuilding can provide virtually unlimited flexibility in design, it can still take a while to assemble once the pieces arrive at the building site, especially if the construction crew doesn’t have experience building with that particular type of kit.

In the world of factory-built housing, the alternative to a kit build is a modular approach where a box, in the form of four walls, a floor, and a ceiling, also known as a “module,” is constructed inside of a factory and then shipped to the site. There are varying degrees of completion of these boxes in the factory. In some instances, the walls are complete and the plumbing and electrical wiring are already in the walls. These homes can go up in a matter of days, instead of weeks or months. Outside of the United States, this type of construction is called a “volumetric build.”

Bill Haney & Blu Homes

The most high-profile modular builder in America with venture backing is Blu Homes, the company I spoke with in the last episode that Forbes once described as “The Apple Of Green Prefab Homes.” At one point, Blu Homes was selling nationally, but the company found that it was necessary to work very closely with subcontractors in the field who could pour the foundation and set the home. Bill Haney, the Founder and CEO, made clear that the expansion of those relationships would be a slow and painstaking process.

Bill Haney: “In California, we’re building enough concentration at present that we know the local subcontractors who dig the foundation or put in the driveway or do the electrical hookups. And in the great state of New York, we know them in some places some of the time, and when we don’t know them, the customer or we get hurt. So we just feel like the right answer, the prudent answer, is to grow in stages, and the reality is that the great state of California is going to build 40,000 new houses this year.”

Building near your corporate headquarters has advantages, but with California in particular, there’s a sense that Bill is facing the toughest building code of any state in the country for green building standards. So his perspective was also a little bit of, “If I can build this right in California, I can make it work anywhere.”

I live in New York, so Blu Homes is not an option for me – at least not if I want to put up a home in the state of New York. To the best of my knowledge, there have been no East Coast venture firms rushing to fill the void by putting $200 million into an East Coast Blu Homes equivalent. But that hasn’t stopped other companies from trying to seize the modular home building opportunities available on the East Coast.

The Tipping Point

I started these interviews in search of a tipping point: some changed circumstance that would cause most people who were entertaining building a new house to consider it crazy not to buy a prefabricated or modular one. The tipping point I thought would most profoundly drive the industry was price. If we could reduce the cost of a build by 90% without sacrificing quality or aesthetics, then everyone would move to factory-built housing.

So how do we get there? You would think that to produce modular homes at scale, we would need lots of people to buy them. Generally, this would require a large investment in a factory that can produce at scale, resulting in massive savings. But with the exception of Blu Homes, we haven’t really seen that type of investment… yet. So instead of waking up one day with a blockbuster modular product, what we’ve seen over the past 20 years is companies demonstrating in small numbers that price reductions in homebuilding are possible.

The companies we’ve spoken with all promise significant price reductions in the cost to build compared to a traditional build. Collectively, these prefab and modular companies have proven that as much as a 50% cost savings is achievable. Many of the companies I spoke with are in the process of raising venture capital to build their own factories. If they are able to achieve scale, prices are sure to drop further.

Image courtesy of Resolution: 4 Architecture