Rising Construction Costs Making Modular A Less Risky Bet

Modular construction — a type of pre-fabricated building that happens mainly off-site and is then pieced together — is still considered a new and risky concept. But in an environment of sky-high building costs and a widening affordability gap in New York City, some builders believe the potential gains are worth the leap of faith.

Nationally, modular construction accounts for just about 5% of all commercial construction, per the Modular Building Institute. But it is gathering strength, and market value for modular in new real estate construction could hit $130B in Europe and the U.S. in the next decade, according to McKinsey & Co.

In New York City, where real estate and construction is famously slow to adapt, the method is still rare — though there are some notable recent modular projects in the city.

Forest City, before it was acquired by Brookfield, developed 461 Dean St. in Brooklyn, one of the tallest modular buildings in the world at 32 stories. The 19-story citizenM hotel at 189 Bowery is said to be the world’s largest modular construction hotel. The AC Hotel by Marriott at 842 Sixth Ave. is aiming to overtake it and reach 26 stories.

New York City itself, under Mayor Bill de Blasio, has thrown its weight behind the idea, announcing plans last year to use modular construction for a 176-unit affordable housing complex at 581 Grant Ave. in the East New York section of Brooklyn.

“If not for the city's involvement, we probably wouldn't have done this project,” Thorobird Cos. founder Thomas Campbell said. "It's a risk for us, but we think we think it's worth the risk."

Thorobird is partnering with Bangladeshi American Community Development & Youth Services on the development. FullStack Modular will build the units at the Brooklyn Navy Yard factory it bought from Forest City.

The city provided the land at below-market value, lessening the risk for developers, which frees them to try to build modular, Campbell said. He will be speaking on a panel about construction innovation at Bisnow’s NYC Construction & Development Summit Jan. 30 at Studio Gather in 45 Rockefeller Plaza.

Campbell said there are three major challenges when it comes to using modular.

Firstly, the technology means any mistake can have dire consequences because it will be re-created throughout the entire building. Secondly, the concept hasn't been fully embraced by lenders, making it hard to finance. Finally, there is serious effort required in the design phase, which soaks up more money on pre-development than in traditional construction environments.

But Campbell said the construction timeline will be cut back significantly at the Grant Avenue project when it has the most value — after the project is racing against the clock with the pressure of a construction loan.

“We're financing this product out of our pockets right now, [but] once we have third-party lenders and investors involved, that's when it is important to really go fast,” he said, adding that developers are reluctant to stick their necks out and experiment on something like modular. “Real estate development is such a capital-intensive business, that taking risks on alternative construction methods is a tall task.”

But rising costs of construction is making experimentation — expensive though it may be — crucial. New York City remains the priciest place to build in the country. Costs have gone up up every year since 2010, with material cost increases a key drive. Meanwhile, the industry’s spending on research, development and technological innovations has been scant.

"People are looking for strategies to be able to do buildings more economically,” said Think! Architect + Design Principal Martin Kapell, whose company is working on three modular condominium projects in Manhattan and an affordable housing project in Brooklyn.

Kapell said the industry has become much more sophisticated, but some developers of higher-end products are reluctant to use modular because they worry about how it will look.

“I think people are somewhat afraid … that the modular projects cause a certain ‘sameness’ and [have a] repetitive nature in the design,” he said. "But you know, if you look at our designs for these higher-end [buildings], you can't really tell the difference between them and site-built projects."

The reputation of modular construction may have taken something of a hit in the creation of 461 Dean St. at Pacific Park in Brooklyn.

Though it ultimately became the tallest prefabricated steel structure in the world, the project was mired with delays, and construction on the project dragged on for four years, longer and more expensive than it would have been via traditional methods. It was one of the longest construction schedules for one building in the city’s history, according to the New York Times.

Kapell said that while the whole process seemed like a bit of a disaster, it pushed the entire industry forward.

“Even though that doesn't seem to be a shining success, I think it did point a way for larger projects — or much more sophisticated and complicated projects — to be done,” he said.

Mitch Lund, a project manager at construction consultant Fulcrum, believes New York City’s limited space and high cost of labor gives modular development tremendous upside. His company recently worked on Home2 Suites by Hilton San Francisco Airport North, the first modular-built hotel in the Bay Area.

Lund said the project was completed eight months earlier because of the use of the technology, which saved the developer $2M in hard construction costs.

“Everything that a developer would say they needed that they lacked in a city like New York, modular provides,” he said, pointing to a reduction in noise, traffic, costs and time spent. “But it's not without its risks, so developing modular with a savvy team and with effective, experienced and capable risk management, that's the key.”