Editor’s Note: This is the second of a two-part series examining offsite construction systems. You can find Part 1 here.
The housing market is the one dead spot in an otherwise strong U.S. economy, and the reasons are no mystery:
Home sales are sluggish because prices are too high. Prices are high because inventory is too low. Inventory is low because we’re not building enough new homes, and we’re not building enough homes because we don’t have enough framers.
But the cavalry is presumably on its way.
Ever since Henry Ford pioneered the assembly line, experts have been arguing that home builders need to take a page from automakers and adopt modern manufacturing methods.
Now a new breed of supplier is raising hopes that the industry is about to do just that.
Integrated offsite construction systems have their roots in Europe and Japan, and are gaining ground in Australia and New Zealand. The common thread is a shortage of skilled carpenters. Offsite systems are widely hailed as the solution.
“Off-Site Construction Methods Absolutely Pre-Fabulous,” gushes the Australian Financial Review. “The Very Model of a Modern Method of Construction,” opines the U.K.’s Planning & Building Control Today.
“A game-changing construction model,” says Builder magazine’s John McManus, who calls offsite construction systems a prime example of “disruptive innovation (that) occurs when innovation creates a new market and value network and eventually disrupts an existing market and value network, displacing established market leading firms, products, and alliances.”
Yeah, that’s you he’s talking about.
The LBM channel has heard this many times before, of course. But we are in a situation where something’s got to give. Productivity in the construction industry has been dead flat since the 1930s. Output in the framing trade has actually been falling for 20 years and maybe longer. That should be no surprise; real wages are half of what they were 40 years ago.
Journeymen who got laid off in the Great Recession haven’t come back and apparently aren’t going to. Young workers who might replace them can make more money selling cell phones at the mall. Unless all this takes a 180-degree turn, we’ll eventually need to learn to build homes without framers.
That’s what offsite systems providers do. It’d be good to figure out how before they start eating everyone’s lunch.
Shallow End of the Labor Pool
Offsite construction systems include both modular and panelized methods, but panelization is more likely to affect the existing supply chain.
You’ll see modular on multifamily and commercial projects where there are a lot of repeatable assemblies. But modular has never caught on in the single-family market.
That’s not to say it isn’t a good way to build. Jobsite logistics can be an issue, but the structures are every bit as sturdy as site-built—and sometimes more so because they’re built to be transported.
The obstacle is that home buyers perceive modular as lesser quality. That was true at one time, but by all accounts it’s a bad rap today.
Nevertheless, the industry struggles for market acceptance. In an April press release, the Modular Building Institute announced that its 2018 World of Modular Conference “attracted nearly 900 attendees from 26 different countries, shattering previous records in both categories.”
900 people? At IBS, that’s the line at Starbucks.
Modular holds less than 2% market share in U.S. residential construction overall. By comparison, estimates are that more than 30% of multifamily projects and roughly 20% of single-family homes are panelized.
So if the LBM channel is about to be disrupted and displaced, odds are it’ll be panelization that inflicts the damage. According to McManus and others, it’ll be done by companies like Menlo Park, Calif.-based Katerra, Ripon, Calif-based Entekra, or Baltimore-based Blueprint Robotics.
Among the major players, Entekra is the one to watch. It has something no other offsite systems provider has: a track record.
CEO Gerry McCaughey and his partners launched Ireland’s Century Homes in the 1990s and built it into the leading offsite systems provider in Europe. They sold the company to Kingspan in 2005, moved to northern California, and launched Entekra in 2015.
Entekra calls its method FIOSS™, or a fully integrated off-site solution. That’s catchy and techy and kind of cute, but no one’s making fun. LBM dealers and component manufacturers often forget about marketing. Entekra hasn’t.
Still, it’d be nice to know what that means in the real world. Let’s have Margaret Whelan explain.
Last year McCaughey led a group of American execs on a field trip to Ireland, the U.K., and Germany to see FIOSS in its natural habitat. The group included Whelan, a prominent strategic and financial advisor to many of the largest home builders in the U.S. She described her experience in a 2017 Builder article titled Offsite, On-Site Insight From the Other Side of the Pond:
“Starting with a design and engineering focus, Entekra’s experienced team uses sophisticated software to rationalize the existing floor plans of its home builder clients. From there, state of the art German machines and equipment by Weinmann will be used on automated production lines to manufacture a core kit that includes wall and floor panels, stairs, roof trusses, and wall studs, with ancillary products from prehung doors to sheetrock and insulation also being offered.”
Once the components are built, “FIOSS providers typically deliver their house kits by huge trucks early on Monday mornings, with a seasoned crane operator and a framing team on hand to complete the installation. The installation process was truly fascinating to watch, and almost unbelievable until you see it in person. One person in our group commented that it was like watching synchronized swimming. I thought it was like watching a professional hockey team play, but in a much smaller physical space, working deliberately but with ease and efficiency toward a common goal. The precision cut, pre-fabricated components seem to snap together like Lego pieces, with accuracy that allows for the quick installation of windows and pre-hung doors to follow, while roofs are typically built on the ground and craned into place.”
All this may sound familiar to you. Whelan wonders “why this methodology has yet to be embraced in the U.S., if that trend is going to turn, and if so who or what will drive it, will builders commit human and financial capital to ramp up dedicated offsite wood framing supply, or will third parties such as Entekra lead the way?”
The answers: “builders,” “yes,” “suppliers,” “no,” and “they already are.”
The Prefab Four
The value proposition behind panelization is that you’ll spend more money using them, but you’ll make it back—plus some—in reduced cycle time days, less waste, and fewer mistakes.
Presumably the input costs of designing, building, and setting panels make the in-place cost higher. But that isn’t as clear-cut as it seems. Square foot rates don’t easily translate into hourly rates, so it’s difficult to figure out how much you’re gaining (or losing) on labor. Altering the plan to make manufacturing more efficient muddies direct comparisons, and the situation can flip in a heartbeat if a framer decides to bid aggressively.
But the initial cost is always higher, and as a result, most builders opt for panels only when they can’t find framers. When labor is plentiful and cheap, you can talk cycle time and waste until you’re blue in the face and most builders will still choose a bird in the hand over two in the bush.
If offsite systems are in fact going to be a game changer, the game is simple: Deliver enough value to keep builders from switching back to stick framing the moment the market goes soft and framers get cheap.
So the big question is, What do offsite providers do differently than conventional component manufacturers that might accomplish that?
The differences between the two can be roughly divvied up into four categories. The first is design and engineering services. Whelan notes that “Entekra’s experienced team uses sophisticated software to rationalize the existing floor plans of its home builder clients.” Actually, everyone does that.
Most of the time they have no choice. As one panel manufacturer so eloquently explains it, “The plans suck.” You have to rework them to make the structure buildable.
Obviously there are exceptions. But when the plans are in good shape to begin with, there’s no need to redraw them and as a result, no value in redesign services.
Some offsite players take design services a step further. Katerra has been buying up architectural practices and promotes itself as a one-stop shop that will draw your plans from scratch, with an eye toward the assembly line. This is common stuff in the manufacturing sector; it’s called DFMA, or design for manufacture and assembly.
But Katerra builds multifamily and commercial structures. Entekra and Baltimore-based Blueprint Robotics build mostly single-family homes and approach design much like a conventional CM: The client provides the initial plan and they rework it to make manufacturing panels more efficient, but they do it without making major aesthetic changes.
The LBM channel calls that value engineering. It doesn’t yield the same efficiencies as DFMA because it happens after the design is already set. But most single-family builders are sensitive about the aesthetics of their designs. That’s how they differentiate themselves from competitors. Offsite providers may be more proactive about the changes they suggest, but anyone could do that.
All in all, it’s hard to see how design and engineering services are a game changer, especially in single-family construction. If offsite providers have an advantage over conventional CMs, it’s because they promote their services as something special. As a rule, CMs don’t. They quietly fix the plan, then make fun of architects.
The second area where offsite providers differ from conventional CMs is in the technology they use. Offsite providers all have the latest and greatest software to manage design, manufacturing, and logistics. Some CMs do, too; most don’t.
“Construction tech is the new investment darling for VC funds,” says Building Design + Construction. According to BD+C, venture capital firms poured a record $1.05 billion into construction tech startups in just the first half of 2018.
All the major offsite systems providers are also investor-backed. If your pitch to VCs is that you can drag construction into the 21st century, you have to spend big on technology.
Bank-financed CMs are naturally more conservative. They buy when they see a payback, not just to have the latest and greatest. Right now many are investing in production software to manage their assembly lines more effectively. Most don’t use building information modeling (BIM) software unless they do commercial work and need to tie into a builder’s BIM system.
At this point very few residential builders use BIM, especially in single-family. The prevailing view seems to be that single-family projects are simple enough that the benefits of BIM don’t justify the (considerable) cost.
The prevailing view might be wrong, of course. If so, offsite providers will demonstrate how and why, and everyone will jump on the bandwagon. Offsite systems providers do have a step on CMs in their use of technology, but it’s an early adopter advantage that won’t last long when the time comes.
These Are the Droids You’re Looking For
The third key difference is automation. Offsite providers are all highly automated. Many have top-of-the-line European equipment from Randek or Weinmann. Most CMs have American equipment from MiTek or Alpine/ITW. They may or may not be automated.
No question that automation boosts efficiency. MiTek recently built a state-of-the-art automated roof truss plant for BMC/Stock in Atlanta and Mike McGaugh, BMC’s COO, offered numbers in the company’s 2Q stock analyst meeting:
“Once we’ve fully ramped up production,” says McGaugh, “we expect to achieve at least a 50% improvement in productivity rates as compared to our traditional truss facility while using a third less labor.”
Yes, that is a forward-looking statement. Whether the plant will actually hit those numbers remains to be seen. But if those are reasonable benchmarks for a fully-automated plant, BMC/Stock may wind up with the most profitable truss operation in Atlanta.
But automation doesn’t affect the end product. Components “snap together like Lego pieces” whether they’re built by people or robots. If not, they were either designed wrong or built wrong.
It is true that automation eliminates human error on the production line. How much that matters depends on how many errors your humans make. If the answer is “not many,” the benefits are minimal.
Automation also has its scary side. A fully-automated component plant costs a lot more than a manual line, and any manufacturing plant is a monster. Once you build it you have to feed it, and the bigger the monster, the bigger the appetite.
That’s not a problem when demand outstrips supply and you’re running at full capacity. But as everyone knows, the housing market can go off a cliff without advance warning.
That’s why builders are unlikely to “commit human and financial capital to ramp up dedicated offsite wood framing supply.” They deliberately keep fixed assets to a minimum so they can scale up or down as quickly as possible and as far as necessary.
There are exceptions, of course. You can find builders who own and operate their own component plants, including major players like NVR and Toll Brothers.
But they’re exceptions that prove the rule. Builders don’t want to sink money into a capital-intensive venture that could hang them out to dry the next time the market goes south. They want you to do that.
It’s a safe bet that automation is coming to the component business. The question is the timing. Again, we appear to be in an early adopter phase. Investor-backed companies are blazing the trail as they always do. Once the bugs are worked out, everyone else will follow.
While no one knows when the next downturn will hit, this housing cycle has been running a long time and we’re closer to the end than the beginning. That suggests that now is not a good time to make a big bet on automation unless you can do it with other people’s money.
Better to keep your powder dry and ride out the next downturn, then do it. By then you’ll be able to pick up used robots cheap.
A Deep Dive
Most lumberyards and CMs consider their job done once they drop materials on the jobsite. Offsite systems providers install the components they build and deliver a complete, dried-in shell.
That’s the fourth major difference between the two. The channel calls it turnkey. McCaughey calls it a holistic approach. As he sees it, his job is “to help that builder build as quickly and efficiently as possible.”
It’d be hard to find a CM or an LBM dealer who wouldn’t agree with that philosophy. But not many follow it through to its logical conclusion.
Among the top 100 LBM dealers ranked by ProSales, just 24 offer turnkey framing. Chances are most of them do it primarily on multifamily and commercial projects, where turnkey labor and material is usually a prerequisite.
Turnkey framing services are gaining ground in single-family construction, too—and not just in the production home market. In some metro markets, LBM dealers are framing homes for locally-based, high-end custom home builders—which is to say they’re working with some experienced and highly-skilled framers.
That’s one key difference between turnkey as practiced by LBM dealers and CMs vs. turnkey from an offsite systems provider. Offsite providers employ their own crews while conventional construction suppliers partner with independent framing subs.Partnering complicates life a little bit. You can’t dictate to a partner like you can to an employee, and many framing subs still resist working with panels.
But turnkey projects are nearly always done on a guaranteed bid basis. When subs and suppliers are responsible for cost overruns, both have an incentive to build as quickly and efficiently as possible.
For now, the majority of single-family turnkey projects are still stick-framed. But if panels make the job more profitable for everyone involved, it’s a safe bet resistance to them will ultimately disappear. That’s how panels move from 20% market share to 80%.
The point here is not to argue for or against turnkey framing. Every market is different. Some are ripe for it, some will do it but not for years, and some will never do it. You can’t force the situation—the opportunity is either there or it isn’t.
The point is that it’s worth keeping a close eye on it because turnkey appears to have a greater impact on how the shell gets built—and, by extension, construction costs—than any other difference between conventional CMs and offsite systems providers.
If offsite systems do in fact turn out to be a game changer, chances are turnkey will be the playing field. That’s a good thing for the existing channel because anyone can do the same thing.
The only question is whether they will.