Thinking of Building Modular? Remember These 7 Tips

If you want to know where developers are going, one good place to look is where Rick Holliday already has been.

More specifically, begin at Building 680 on Mare Island in Vallejo, Calif., atop San Francisco Bay, where this developer and his partner, Larry Pace, started Factory_OS, a company that builds modular units, starting with Holliday Development’s apartment projects. Then drive 40 minutes south to the corner of Union and 5th streets in Oakland, where it took just 7 1/2 days to stack 110 apartment modules into a new Holliday Development building dubbed The Union.

After that, follow Holliday to several more sites for modular-built apartment complexes, each of which he estimates he’s erecting at 20% less cost than conventional stick-built techniques and in 40% less time. He has been accelerating this modular momentum for close to seven years now, propelled by a housing shortage in a Bay Area that he says was creating 700,000 new jobs over the years but building only 50,000 new homes.

“Five years before it became a crisis, I was telling colleagues, ‘We need to find different means and methods,’ ” he says. “Unless we build differently, we won’t have an industry.” Even colleagues in New York City gasped when they heard it was costing $850 to $900 per square foot to build a 1,000-square-foot apartment in San Francisco.

Today, even in places where developers aren’t getting quite so squeezed by rising construction costs and an ever-shrinking labor pool, Holliday says he’s getting calls asking what it takes to build modular. He has several tips.

1. Adjust Your Mental Clock

Modular projects save time because construction of the apartment units takes place at the same time as the site is being prepared. This means developers have to decide much earlier on what layouts they’ll have and which amenities they’ll want—and then they need to be willing to stick with those decisions. “It’s less of an evolutionary process,” Holliday says. “I used to walk projects and say, ‘This closet is too small. Let’s do a change order.’ You don’t do that any more (with modular). You have to make decisions faster.”

2. Payouts Come Faster, Too

Once you finished paying for the dinner to celebrate launching of a traditional stick-built project, you didn’t have to pay out much else for quite a while. But modular construction’s compressed schedule means you need to put in an order right away at the factory, perhaps paying for your place in line. Materials also must be ordered earlier. As a result, stick-built construction’s bell-curve spending graph morphs into one that’s more like the start of a roller-coaster ride, in which there’s an early, steep climb in outlays at the start.

3. Expand Your Team

While it’s growing fast, modular construction remains a mystery for many developers’ partners. Architects, contractors, subcontractors, and particularly code officials all need to learn what makes modular different. Holiday’s general contractor, Pace, was on board from the start. And architect David Baker was a logical partner given his work in affordable housing and his welcoming of new ideas; his firm even has an in-house lab.

But beyond that usual trio, Holliday also enlisted Carol Galante, a former nonprofit developer and assistant secretary at the Department of Housing and Urban Development and now faculty director of the University of California’s Terner Center for Housing Innovation. Galante was important, Holliday says, because “if you don’t change some of the politics and educate lenders, you’re never going to get there.” She helped explain why modular was a safe way to build more affordably. “[For modular], you have a developer, a contractor, somebody who understands governing and finance, and an architect. Those people need to understand the different needs. Building that into our DNA on day one, I think made a difference. (For more on funding issues, see “Are Nervous Bankers Holding Back Modular Construction’s Growth?”)

4. Be Willing to Change … and Endure

Holliday says he looked at and then rejected the idea of modular construction three or four times before he decided to hire a Sacramento company, Zeta Communities, to produce modules for a 135-apartment development. Zeta struggled to meet Holliday’s needs, and he says it took a huge effort by Pace to pull the project over the finish line before Zeta collapsed. Even with those past rejections and troubles with Zeta, Holliday says the building was set in 30 days, was completed eight to nine months faster than a stick-built project, and cost $31 million to build versus $37 million for a comparable stick-built job.

“That turned on a lightbulb,” he says.

Keeping the lightbulb on wasn’t easy. Holliday wooed a modular builder in Idaho to buy Zeta but failed. He concluded that if he was going to keep building modular, he might have to launch a factory himself. But the idea remained just an idea until a friend who works at Google liked what he heard. Soon after in June 2017, Google committed to buying 300 modular units from what is now Factory_OS.

5. Watch Your Storage Space

Modular construction may assemble faster at the jobsite than site-built projects, but it’s not exactly just-in-time delivery. You need to create a backlog of modules so the cranes will stay busy, and that in turn means you need a place to store modules before they are deployed. Factory_OS is located at an old military base less than an hour’s drive from the modules’ ultimate resting place, so they can be kept at the factory until it’s time to load them onto trucks and bring them to the jobsite. Developers who are getting their modules from much farther away might need to rent a vacant lot near the jobsite to serve as a temporary home.

6. Unions Can Be Your Ally

While some developers can be weary of a union badge, Holliday credits the local carpenters’ union as an important partner in helping Factory_OS go from zero to 250 employees and then helping train them.

“The unions were great in doing outreach,” Holliday says. “Larry and I would go to job fairs. If you’re a startup, it’s harder to engage people. We had to hire more than 500 to get the 250 we have. Now we get one or two people coming in and applying daily, and the quality of applications is up. … These people are coming in from minimum-wage jobs, and now they are up to $25 per hour.”

Holliday even built The Union with nothing but organized labor, in part as a way to say thanks to organized labor’s support. Even with those higher costs, the project penciled out. “The building is looking nice, and it’s market rate,” he says. “It’ll photograph well.”

7. Profit from Turbulence

“The thing that was less of a problem than I thought it would be was building the pipeline,” Holliday says. “A lot of my friends who are developers say, ‘You let us know after you build four of them.’ You’ve got to crack the code—I get it. But now we’ve done our fourth building.

“I think that [what we’ve done] is a byproduct of the industry being so broken and people thinking, ‘I’ve got to figure out how to do things less expensive and faster.’ Right now, it’s too expensive and too slow. I found a lot of my developer friends with big projects now want to get booked. I’ve already started a second factory.”