Piece By Piece, Modular Construction Inching Closer To Mainstream

Last year, modular construction startup Assembly OSM completed its first one-bedroom apartment development using a digital manufacturing method it calls "post-modular" construction. 

This week, the 3-year-old company announced a $38M funding round that will grow its business, making modular construction parts that it compares to Ikea furniture components.

"What we're doing is we're looking at the best pieces of advanced manufacturing, the way that Boeing builds airplanes or Toyota builds cars," Assembly OSM CEO Andrew Staniforth said.

The modular construction industry has thrived for decades overseas and is often touted as a way to cut time, cost and waste from projects, three factors that have increased significantly in importance in the last few years, but it is not without its challenges or its downsides.

If there was ever a moment for modular construction to make it big in North America, now would seem to be the time. Construction costs have skyrocketed, materials are often hard to find, residential properties are in short supply and the pressure is on to improve sustainability in the construction industry.

From 2015 to 2020, the share of North American developments using modular construction techniques grew steadily, according to the Modular Building Institute, though it remained a relatively small fraction of the total.

In 2015, construction projects using modular represented 2.14% of the total, the organization reported. By 2020 — which saw construction bounce back fairly quickly after the pandemic’s onset — the share was up to 4.39%, or more than double.

Companies like Assembly are working on new approaches to modular, using startup funding to bridge the often sizable gap that exists for modular manufacturers and trying new methods to outsmart existing flaws in the process.

"We're at that moment, because of high costs and sustainability and other challenges, that we can't build the way we've been building for the last few decades," Staniforth told Bisnow.

Assembly doesn't act as a full manufacturer, he said, but rather as an assembler — hence the name.

"We leverage a network of different components," Staniforth said. "So in our world, we have people who make bathrooms and kitchens and the overall structure and they ship those to us. We assemble them and then stack them on-site."

What enables that process are the digital tools of advanced manufacturing, rather than architecture, he said.

"Everything — down to the eight screws in a hinge — gets assigned a part number, and is tracked throughout the process in the same way as in manufacturing," Staniforth said.

The process further involves the use of digital twins to physical structures to create collections of customizable subassemblies, in which every item is tracked, assembled and placed based on predetermined specifications.

Investors have taken note of Assembly's ideas. Including this week’s announcement, the company has raised more than $60M, with Fifth Wall and Bessemer Venture Partners leading the latest round.

But in spite of all the promises of modular as an answer to the industry’s many concerns, and millions of dollars poured into the industry by investors of all kinds, the method has its limitations.

"There's been a legacy of overpromising about modular," KTGY Architecture + Planning principal Mark Oberholzer said, noting that before the pandemic, there were a lot of modular startups promising that projects would be half the cost and half the time — which was never the case.

"Modular wasn't, and isn't, a panacea," Oberholzer said. "If your project doesn't pencil, modular isn't going to make it pencil."

After all, while Assembly is in the midst of a growth spurt, it has only been one year since the bankruptcy of Katerra, another VC-backed construction startup that focused in part on off-site construction. Staniforth calls his company “the exact opposite” of Katerra, according to The Real Deal.

Even so, modular is slowly finding its place, Oberholzer said, particularly in residential development, and in high-cost markets like California metros.

Working with the design-build team Hope Street Development Group, KTGY has designed a series of modular developments now underway with a goal of providing housing for people experiencing chronic homelessness in Los Angeles. The system leverages the dimensions and material of shipping containers for more efficient transporting and construction. 

Once developers learn the techniques and there is a dependable source of modular materials, the technique can and does help contractors, Oberholzer said.

Residential developments and hotels are particularly adaptable to modular techniques because of the repetitive nature of their construction.

Build-to-rent developers, which have grown in recent years, are using modular techniques. In two new build-for-rent developments totaling 134 units in western North Carolina, homebuilder Quartz Properties is constructing the communities at an off-site factory and then putting them in place with its construction and transportation subsidiaries.

"Our hope is that these rental units will ease the housing shortage and fill a gap for area residents,” Quartz CEO Joanna Schwartz said, adding that the demand for three- and four-bedroom rentals, which the company will be able to complete next year, is especially strong.

"Projects with structured parking are often where you find modular playing out," Oberholzer said. "Suburban hotel development is taking it up in a big way, for example. Marriott does a lot of wood-frame modular. Not the JW Marriotts, but rather their exurban properties."

And at the end of the year, Dutch hotel company citizenM will have opened five new U.S. properties, all using modular construction. 

“Modular construction has a wide range of benefits in a hospitality context," citizenM U.S. Managing Director of Development Menno Hilberts said. "Because hotel rooms can be easily standardized, a modular approach increases efficiencies and brings immediate and sustainability benefits."

One longstanding headwind for modular is the fact that, as a new industry, supply hasn't always been consistent. According to the 2020 Dodge Data & Analytics Prefabrication and Modular Construction report, the top obstacle in the U.S. for the adoption of modular was strong concerns about the availability of components.

These challenges have tripped up more than one off-site construction company, and even in countries where modular is more commonly used in construction, not all has been smooth sailing for the industry. 

In addition to Katerra’s abrupt closure, UK-based Urban Splash House Holdings Group dealt with defects in the modular building process that caused investors to lose confidence in the operation. That prevented the business from acquiring the new sites it needed to maintain work volumes at the factory, and eventually put the company out of business.

The closure came shortly after the unrelated collapse earlier in 2022 of Caledonian Modular.

Even so, investors are betting that as the tech improves, and manufacturers and developers have more experience, modular will have its day, and soon. Vantem, a manufacturer of modular units for residential projects, plans to expand its operations in the U.S. market, fueled by a Series A investment led by Breakthrough Energy Ventures, Quadrant Management and TEM Capital. 

The company plans to build 15 factories in the U.S. over the next seven years — or maybe more — each capable of producing 1M SF of homes each year, according to Vantem CEO Chris Anderson. Vantem currently has factories up and running in Latin America.

"What we're looking to address is the need for affordable housing," Anderson said. "That's a critical need everywhere. We're also producing a highly energy-efficient product, which is also a critical need everywhere."

Factories are also moving closer to demand, which is typically in larger, housing-starved parts of the country. Modular specialist Volumetric Building Cos. is planning to move its factory from North Carolina to the northeastern U.S. 

"This move allows VBC to leverage resources more effectively [and] in closer proximity to our primary East Coast markets," VBC Chief Operating Officer Sam Tikriti said.

A little more than a year ago, investor Warren Buffett acquired MiTek, a Missouri modular specialist. MiTek declined to comment for this article about any progress it might be making in expanding its market.

Last year, however, the company partnered with Danny Forster & Architecture to kick off the Modular Initiative, the core of which will be to develop a platform to simplify constructing modular buildings, even for those who have no previous experience with modular. 

“This will democratize modular,” DF&A principal Danny Forster said in a statement. “Modular has such clear advantages, but for your average commercial builder, the risks are too high and the learning curve is too steep. Our activation platform will change that.”

Oberholzer, who isn't involved with MiTek, noted that perhaps the company learned something from Katerra's problems — namely not to overpromise when it comes to modular construction, and to take things steadily.

As the post-pandemic economy wears on, the construction industry seems to face new challenges at nearly every turn. Rising costs, slower supply chains, scarcer labor and demands for greener building are all converging.

The market is inspiring refinements of the manufacturing process. Necessity — that is, the current tight squeeze on the construction industry — is driving the change.