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It’s abundantly clear in the coming years that the United States will face a massive shortfall of affordable, quality housing. Some reports have documented that this amounts to a rapidly increasing shortfall of several millions of units each year. Behind this massive shortfall lies an equally challenging and growing supply side crisis. Where the cost and time to build makes the economics of housing affordability unattainable. Therefore massive innovation in construction is necessary.
The Housing Innovation Alliance has the primary goal of ensuring that this innovation becomes a reality and that high quality and high value housing is attainable for all middle income households. In this post we sit down with Housing Innovation Alliance President, Dennis Steigerwalt to discuss the role offsite construction will play in driving construction innovation to solve the affordable housing crisis and what he and his organization are doing to advance adoption.
Q: Dennis: The lack of housing supply and high costs keep housing ownership out of reach for many middle income families. Some of this is driven by regulatory hurdles but better methods of construction can reduce costs and increase affordability. How do you see offsite construction helping to overcome these construction related issues?
Over the next several years, we believe single-family residential construction will experience a period of rapid growth, adaption, and innovation impacting the way the industry operates and evolves to deliver both for sale and for rent products. From a cost reduction perspective, it’s about process optimization at the office, in the field, and in the factory, yielding a spectrum of approaches which will ultimately get us where we need to go as it relates to achieving housing attainability for the middle market.
As a key response to the increasing focus on productivity improvements, we expect factory built solutions to be highly leveraged in the years to come. Gains will be achieved in the form of prefabricated wall and floor panels and roof systems; the use of volumetric modules for bathrooms, kitchens, and whole homes; as well as increasing efficiency and scale in factories.
When executed correctly, factory built solutions naturally enhance collaboration between labor and information management. By doing the design/engineering with trade partners up front, waste and inefficiency are significantly addressed before deploying materials and labor. We can’t ignore the labor challenges that burden our industry, but I think we can also view this as an opportunity to reshape how we want the industry to look, feel, and act for generations to come. And the digital transformation we’re undergoing is a big part of it. Connecting the right people and information at the right time to make better decisions and improve efficiencies fits right into the offsite model enabling you to provide a full solution.
We need to make sure we’re all speaking the same language and have access to true total installation cost data so we accurately assess business impact and properly manage expectations. The integration of purchasing and financial analysis at the builder level is important to ensure a holistic organizational approach as we move beyond a line by line comparison of inputs to include the impact of new methods on other non-construction costs, leading to more informed strategic financial decisions.
One thing I want to touch on quickly, is the Build For Rent market linked to factory built solutions and its impact on the broader homebuilding industry. Although BFR makes up small portion of residential construction today, with established industry leaders and emerging players quickly taking strong positions and billions in new capital allocations announced almost monthly, there is an implied need for speed, quality, and performance with a long-term investment horizon which creates a game-changing opportunity for wide-scale adoption of innovation. With labor and supply chain constraints across the industry, the simplicity and predictability of the BFR business has the ability to drive quicker adoption of factory built solutions as well as the testing of new material options and building systems. The capital and developers behind BFR have longer investment horizons, quickly taking to the benefits of off-site construction to meet the product’s inherently higher absorption rates, production rates, and simpler and more consistent design. As a tipping point for innovation, there will be a spillover from BFR to single family for sale products so we believe this segment has the potential to play a key role in improving productivity of the overall housing industry and will be an important driver to expand housing availability and attainability.
Q: Dennis: Your team has compiled a very detailed Offsite Heat Map including offsite factories, suppliers and installers by geography. What is the goal of this map? Are you planning to match housing developers/owners in specific geographies with viable factories and suppliers?
At the Housing Innovation Alliance we look at current and emerging trends to enable our Community to adapt to how the industry will evolve over the next 3 years, while positioning the major changes on the horizon for the next 10. We look through the eyes of the builder from the four perspectives: what does this mean for my business, the people we serve (internally & externally), the products we create, and the processes we deploy to deliver homes. In doing so we aim to create tools and resources that enable better strategic decision-making.
Our Community of production homebuilders and developers are becoming increasingly interested in partnering with off-site solution providers to construct and deliver housing. Our goal was to provide a deeper level of intelligence to homebuilders and industry stakeholders on the availability of factory built solutions. We coordinated with a number industry associations and Alliance project champions to help us identify nearly 1,000 locations of providers including components, panels, and mods. What resulted is our Offsite Heatmap as a central aggregate of crowd sourced factory built capability data tailored to production homebuilding. This tool has become a one-stop-shop to find solution providers, as well as identify opportunities for investment in new capacity and capabilities. To the best of my knowledge, this is first of its kind publicly available data set and this would not be possible without collaboration from a great set of industry partners including SBCA, NAHB, MBI, SIPA, DuPont, IBACOS, and Whelan Advisory to mention a few.
Q: Dennis: Given your strong partnerships with many suppliers who provide a variety of parts and components to builders. What advice would you have for these suppliers who are trying to market to offsite factories? Would they need to adapt their product, pricing or approach? Is there a benefit to adopting some factory based or prefabrication practices themselves, even if they’re earlier in the supply chain?
Through our Community-wide working groups, we’re spending a lot of time rethinking where and how products and services are sourced, and how value is measured and compensated. Builder expectations are evolving and with it forcing a changing of roles for traditional product and materials distributors. The ability to leverage integrated supply chain data to dynamically source products online at the best price and schedule dovetails with the factory built business model.
There is a desired simplification of procurement relationships answered through factory built components, kits, and mods. Building product manufacturers, distributors, or new ventures will tackle the opportunity to reduce waste and inefficiencies in the current supply chain. Building product manufacturers will start moving the supply chain, allowing them to create new, more efficient, and more integrated channels that are not as dependent on price alone. We expect to see more innovation in this area, with more complete systems being delivered from suppliers direct to the factory, and a continued streamlining of the delivery model through M&A, strategic partnerships, and cross functional offerings, as evidenced by a series of new relationships formed over the past 18 months between ICG and Pulte, Rainey and BFS, BFS and BMC.