This story was originally published in Builder.
Some of us don't have the rather exclusive privilege of living inside Entekra founder, ceo, and force-field of physics Gerry McCaughey's skin right now. So, we can think of good, sound reasons a very low single digit percentage of homes is built off-site in factories rather than on the job site, where most of home building builds in North America after, lo, these many, many decades.
Economists, academics, consultants, and analysts talk a good game about disruption, innovation, and transformation. Real estate investors, developers, and builders live and die based on where their bets lie, and have learned, over time, to beware the undertow of hype.
We happen to find ourselves on the side of believing this year--and especially the next few years that will serve as a proof-case for what happens to offsite during an almost inevitable downturn--off-site is not hype. If you take a look at Whelan Advisory, LLC, founder and ceo Margaret Whelan's presentation from the recent Bloomberg Intelligence/MetroStudy 2018 Homebuilding Investor Summit in New York, you'll see why we're thinking the off-site economic, investment, business, and operational case is so strong.
It's also understandable why builders are constitutionally so hesitant to fully embrace it.
Economics, academics, consultants, and analysts point to crystal clear and compelling data on site-build residential construction's lagging economic productivity rates, its intensifying human skilled labor capacity constraint, its propensity to lose--or waste--time, materials, money, inventory-turn opportunity, its compromised quality in outdoor working conditions, its less-precise and therefore more-error prone measures and construction details, its more dangerous construction process, and its, by and large, poorer performing house.
Real estate investors, developers, and builders live these realities, every day, and their business models solve for them, and their guts still tell them, "don't get sucked into the hype cycle."
Outsiders, experts from overseas markets, insurgents, Silicon Valley-style tech upstarts, and a few tiny niched endemic players--and a strategically poised, precisely positioned giant, Clayton Homes--are raising a ruckus right now about off-site, modular, automation, robotics, 3D-printing, all amounting to a profound, convulsive, shocking change to the way residential property goes vertical.
Half to 60% of the cost and price of single-family homes is in construction, materials, products, labor, time, and management.
And what's No. 1 on the minds of most of America's biggest home building enterprise strategists right now, especially as it-could-go-either-way signals are flashing across the 2019 horizon?
Land. Yes, real estate. That's because most builders, at heart--and in their pocketbooks--are in the business of land investment.
Automation and factories and pre-fab and panelization and modularity and componentization and modernization have come and gone, and come again and gone again, and now, to so many wizened, time-tested, understandably skeptical builders, the re-emergence of talk about whiz-bang techniques and practices off the job site sounds like deja-vu all over again.
Just like Big Data and Artificial Intelligence keep on sounding like a Siren's Song to businesses and scientists and policymakers everywhere, offsite construction processes and solutions sound, to most builders, like all they need to do is wait for one little downturn in the housing cycle for it all to go away, leaving them to do things the way they've always done them. The ways that work, through down cycles, up cycles, and in-between cycles.
Clearly, the physical and geographical infrastructure, the capital investment flow, a greater propensity among channel players to strategically venture with builders, the experience and know-how, the operational workflows to simplify and streamline materials procurement, the labor cost, and start-to-completion cycles, as well as the construction-as-a-service value stream business models now dot the U.S. map.
What's more, an irreversibly shrinking human construction workforce, highly volatile input materials pricing, and ever-higher hurdles of building code, energy-, and water-performance compliance are all widening the gap between what legacy building practices can accomplish and sustainable business performance.
We've begun to see two of the nation's biggest builders--Lennar and D.R. Horton--take huge strides towards rewiring themselves from the inside out. They're trying--successfully--to reroute core capital outlays from real estate bets into consumer value wins. What that means is that they understand that their own resilience as organizations depends on commitment, investment, and improvement in making connections, the user experience, and value-building with home buyers the be-all and end-all of their capital, operational, and marketing models.
One of the most important "lessons learned" from the early-stages of off-site's business validation period during the past 24 months is that it's not a bolt-on workflow component. Intuitively, it may seem like it is, but unless a business backs up to the earliest stages of its business model strategy--from capital deployment and land strategy to development, design, etc., the off-site factory part of operations will never make financial or operational sense.
We're fortunate to have Margaret Whelan as part of our Hive line-up of speakers, and by coming to hear her take on how capital investment need for yield is driving changes in how the building, development, and construction management value stream will work, you'll get a whole new, fresh sense of technology's role in the present and future of housing.
This story was originally published in Builder.