Modular construction accelerates penetration into the multifamily housing market: developers embrace faster delivery and standardization advantages

More and more multifamily housing projects are incorporating offsite construction, and developers are leveraging its faster timeline advantages. According tothe 2022 Modular Building Institute (MBI) report, this trend is accelerating.

The multifamily housing market is currently the fastest-growing segment in the modular construction industry. According to the MBI report, this sector accounted for about 23% of commercial modular output last year.

This higher adoption rate contrasts with the overall trend in modular construction—modular penetration across all building types is only 5.52%. From a multifamily perspective, keeping modular design simple—using a single design for each apartment type, employing small modules as "pods within pods," and adopting standardized building layouts—is key to its success.

Developers also favor offsite construction techniques because projects can proceed almost uninterrupted during winter months, when on-site construction is difficult in most parts of the United States. This view comes from Anirban Basu, chief economist at the Associated Builders and Contractors.

One of the main advantages of modular projects is rapid time-to-market, says Derrick Seitz, senior project manager and modular specialist at Windover, a construction firm headquartered in Beverly, Massachusetts. The company provides modular solutions for multifamily housing to its clients.

Contractors also say modular construction brings environmental and safety benefits. For example, it reduces construction waste and eliminates the risk of falls on site—falls being the leading cause of death in the construction industry.

Saving Time, Not Cost

Although contractors and developers see many advantages in modular apartment buildings, a lower price is not one of them.

"At the outset of our engagement with clients considering modular, we always make it clear: the construction cost is the same as traditional methods," says Seitz. "Modular allows you to deliver the product earlier than traditional methods... That's usually the selling point."

Ernesto Lopes, CEO and president of Miami-based developer Resia, also agrees that fast delivery is the main appeal of modular construction in the apartment sector. Resia uses prefabrication technology to buildaffordable new housing in South Florida, Atlanta, and Texas, without relying on government subsidies.

"Time is very important in our financial equation," says Lopes. "Our modules actually cost more than exterior construction, but they save us an average of two and a half months of construction time. That's significant, and it makes sense for us to do it."

Lopes says that currently, using prefabricated modules costs about 3% to 5% more than traditional construction, but he expects this cost to decrease as new factories come online. These modules are fully fitted with fixtures and MEP systems in the factory, then transported to the site for installation. The modules include prefabricated bathrooms, kitchens, and utility rooms.

Resia plans to build a 200,000-square-foot module manufacturing plant in Panama City Beach, Florida, producing about 20,000 modules per year, says Lopes. He expects the plant to be operational in 2024 and plans to deliver 8,000 new apartments annually in the Sun Belt by 2025.

Greystar, the largest multifamily developer in the U.S., also plans to open anoffsite manufacturing plantin Knox, Pennsylvania. Modern Living Solutions, a wholly owned subsidiary of Greystar, purchased this 256,000-square-foot industrial facility in 2020 to prefabricatemodular bathrooms。

Even the Biden administration ispromoting modular construction, as part of an initiative aimed at narrowing the housing supply gap over five years. The plan provides funding for affordable housing production and increases federal financing options for such projects.

Overcoming Obstacles

However, traditional contractors reportobstacleswith offsite construction techniques. These issues include: new modular-specific processes that may bypass existing industry partnerships, on-site errors that consume expected cost savings, and high transportation costs.

However, builders specializing in modular construction have found ways to address these challenges.

Windover's multifamily division accounts for about 60% of its annual portfolio, with about 15% being modular projects, says Seitz. The company has developed databases and matrices to show subcontractors what needs to be done after module boxes are installed. It does not own its own factory but partners with different modular manufacturers.

"It's definitely a learning curve," says Seitz. "Windover has invested in self-education over the years, learning how to skillfully set expectations for our trade partners."

Seitz adds that being involved in the design phase from the very beginning of a project is also helpful, allowing MEP system design to be guided toward more modular-friendly installation.

"Most of our volume construction comes from New England or northern Canada," says Seitz. "The farther the factory is from the project site, the more cost-effectiveness begins to decline due to transportation and logistics."

Transportation Barriers

This is largely because states have different parameters regarding transportation regulations, says Dafna Kaplan, founder and CEO of Cassette, a Los Angeles-based modular construction company focused on multifamily and hospitality. For example, in California, any trailer wider than 15 feet requires a police escort, while other neighboring states may only require it for widths over 20 feet.

"Consider the origin and destination of volume modules; this is an important part of evaluating project economics," says Kaplan. "This is also one reason why modular projects are difficult to bid hard, because they are not like-for-like comparisons."

Cassette's approach is to eliminate this complexity by offering fixed-price products, including installation at each location it serves, says Kaplan. In other words, Cassette handles supply chain strategy, logistics, and just-in-time delivery, so "the general contractor doesn't have to become a logistics expert to succeed," she says.

Lopes addresses transportation challenges by shipping prefabricated modules such as bathrooms, kitchens, and utility rooms. These modules are transported by tractor-trailers and require minimal storage space at the construction site.

Design Limitations

To achieve this, the core of Resia's buildings is completely identical. Its one-bedroom, two-bedroom, and three-bedroom apartment layouts remain consistent across all its developments.

"If a developer has three or four different unit types, modular construction becomes very inefficient," says Lopes. "I don't think modular construction can efficiently replace traditional construction. It's only efficient when you have standardized products, small modules manufactured offsite, and then immediately installed on site. This makes sense for us, but I'm not sure it does for other companies."

Kaplan also agrees that, at least in the early stages of adoption, a single product offering remains the best approach for modular builders.

"If we're going to shift to a manufacturing process and disrupt how buildings are constructed, then doing it with 16 different products and trying to educate the subcontractor community and general contractors would be too heavy a burden," says Kaplan. "Therefore, we believe in our approach—simplifying it to one product—because we believe the industry must first learn this process, and we will adopt a similar process for each subsequent product."

As more builders increase modular adoption, this should open the door to greater design flexibility, she adds.

"If enough clients invest in purchasing Cassette's designed one-bedroom product, we will certainly launch another product, and then another," says Kaplan. "That's our hope."

However, the distance from factory to site is only part of the mechanism determining total cost, says Vaughan Buckley, CEO of Volumetric Building Cos., a modular construction company headquartered in Philadelphia. He adds that the ultimate determining factor is more nuanced.

"Whether modular construction is viable at a specific location is a relatively simple equation involving two factors: how high the labor costs are in the market where the building is located, and how available the labor is," says Buckley. "The answers to these questions will determine the maximum distance modules can be transported and whether the project is feasible."

Labor Shortage Accelerates Modular Adoption

Experts say the labor shortage—the number one challenge facing most contractors—should continue to drive interest in modular construction.

Tom Hardiman, executive director of MBI, says that according to the MBI report, modular's market share is expected to grow from 5.52% in 2021 to 10% over the next five years.

"We do expect volume construction and offsite construction to increase because the number of skilled tradespeople on site is decreasing," says Seitz. "Although factories also face a shortage of skilled workers, they are slightly more successful in recruiting and retaining skilled tradespeople because the work environment is controlled and conditioned."

Lopes also believes that the widespread labor shortage is increasing construction companies' interest in modular construction.

"There's a ticking time bomb in skilled labor. We don't have an immigration policy, and without one, you can't replenish these tradespeople," says Lopes. "Skilled labor is increasingly hard to obtain, and it's going to get worse. We see this as the biggest threat to our growth."