There is a national shortage of affordable housing. More than 10 million American renter households spend more than 50% of their income on housing. Many developers have long considered off-site construction, including modular and prefabricated multifamily developments, to be a one-size-fits-all solution to boost cost-effectiveness and productivity. But it’s not that easy; there are numerous barriers to bringing off-site construction to scale. Before jumping on the off-site construction bandwagon, developers should consider where off-site construction will be most strategic to enable cost savings with the ultimate goal of tackling the national housing affordability challenge and expanding the supply of well-designed affordable homes.
The Enterprise Policy Development & Research team recently released its new report on Overcoming Barriers to Bringing Off-Site Construction to Scale at Enterprise’s 10th annual Affordable Housing Design Leadership Institute in Cleveland. Based on a series of interviews with developers, architects, fabricators, and policy-makers, our research identifies scale-constraining challenges and explores solutions to scale off-site construction to create more affordable multifamily housing.
Funding off-site construction can be difficult to come by; innovative financing solutions are needed.
Compared with traditional builds, off-site construction is often perceived to be risky for lenders due to the location and timeline of construction. While lending for traditional construction follows a monthly draw schedule with equal installments released as construction milestones are accomplished and verified, off-site construction requires higher levels of up-front lending or higher equity. Fabricators can require as much as 50% of the total construction cost up front to purchase raw materials and cover labor and overhead costs, and generally require the remaining fabrication costs within a short period of time because at-factory fabrication occurs on an accelerated timeline.
These hurdles can create challenges for developers. A lack of sufficient private capital can make it difficult to finance off-site construction. However, the industry has been able to identify innovative solutions that can offset perceived financing risks. These include hiring third-party inspectors by lenders to ensure the fabrication process adheres to the agreed upon timeline and specifications and establishing agreements on the transfer of ownership of modules or prefabricated elements to the second party during the fabrication stage. This can help address lenders’ concerns around ownership of prefabricated elements in the event of default.
Accomplishing cost savings in off-site construction is possible, but not guaranteed.
The cost-effectiveness of off-site construction has long been a source of debate. While modular and prefabricated construction hold the potential to reduce development costs, they do not always translate to substantial cost reductions. Off-site construction can expedite timelines by enabling site and foundation work to happen concurrently with factory fabrication. This can reduce soft (development) costs, without impacting hard (construction) costs. Off-site construction can also help developers avoid weather-related delays as most of the construction work occurs in a climate-controlled indoor facility.
However, off-site construction has transportation costs and coordination requirements that on-site construction does not face. Many factors must align for this strategy to work; accomplishing cost savings relies heavily on expedited or streamlined permitting and inspection processes and minimal on-site technical issues. Currently, there are no regional and marketwide datasets that capture the cost of off-site construction developments, so it is difficult to determine the exact cost savings of off-site construction or compare the cost of off-site versus on-site construction.
Off-site construction requires higher levels of precision and coordination.
Unlike traditional on-site construction, modular and prefabricated construction requires architects and engineers to finalize the project’s design well ahead of the fabrication process. Off-site construction can achieve high levels of precision during construction and minimize construction waste, which is extremely important. But, because design decisions and detailing need to be finalized quickly and are often limited by technical and logistical standards, designers and developers often opt for simple forms. When alterations do need to happen on site, the efficiency offered by off-site construction can be lost as modules are cut open, fixed, and reassembled.
Approval for off-site construction can be slow; jurisdictions should consider strategies to expedite.
The regulatory frameworks governing the design, fabrication, and assembly of modular and prefabricated developments vary from one jurisdiction to the next. Most states have statewide codes or programs that regulate permission, at-factory inspection, and approval of off-site construction methods, and local jurisdictions typically regulate the assembly process to ensure compliance with local building codes. These inspections are essential to ensuring the quality and safety of the structures. However, they can be time-consuming and delay the project’s timeline.
In addition, when modules are fabricated in a city or state other than the one in which they’ll reside, additional levels of review and inspection are triggered, meaning a need for more consultants and ultimately increased costs and delayed timelines. Since accomplishing time-related cost savings is tied to accelerating construction timelines, and both are contingent on obtaining approvals and passing inspections within a short period of time, developers should partner with affordable housing advocates to push jurisdictions to adopt innovative ways to accelerate permission, inspection, and approval processes for off-site construction developments.
Ultimately, developers must take many factors into consideration when deciding if off-site construction is a viable tool for their next project. In addition to building type, timeline, and geotechnical concerns, they also need to address issues that may not be as familiar, like availability of local fabricators, local and state requirements, and transportation logistics like public infrastructure and road dimensions.
Off-site construction is becoming a more feasible way to build affordable housing faster. But it demands savvy developers who have access to capital early in the development process and are supported by organized project managers who are able to handle complicated logistics on both the project site and in the fabrication facility. Bringing more affordable housing to market quickly is crucial to addressing the housing shortfall we face in the United States. However, time savings should not come at the cost of developers addressing residents’ and communities’ goals through the design and development of their projects, which is critical to every development’s success, regardless of whether it was built on site or elsewhere.
