Showing posts with label prefabrication. Show all posts
Showing posts with label prefabrication. Show all posts

Saturday 14 August 2021

Industrialized Building and the Failure of Katerra

Why Modern Methods of Construction Don't Work


Offsite manufacturing, modular and prefabricated building have been transforming construction like nuclear fusion has been transforming energy: they have both been twenty years away from working at scale for the last 60 years. These ‘modern methods of construction’ have a dismal track record. The brutal economies of scale and scope in a project-based, geographically dispersed industry subject to extreme swings in demand have always bought previous periods of their growth and development to an end. 

 

While the history of prefabrication features major projects like the Great Exhibition in 1855 and more recently the Oresund Bridge in 2000, the reality is that prefabrication has only been successful in specific niche markets such as institutional buildings, or house manufacturers like the Japanese and Scandinavian firms Sekisui and Ikea. Failures like Katerra in mid-2021 and the mail order houses sold by Sears Roebuck a hundred years ago in the US are common. In the UK 2017 Industrial Strategy Construction was one of the four Sector Deals along with AI, the car industry and life sciences, with the aim to change the way buildings are created with a manufacturing hub for offsite and modular construction. By 2021 the focus had moved on, to the energy efficiency of buildings and new design standards. 

 

The up-front capital requirements of prefabrication make it a capital-intensive form of production, which brings high fixed costs in a cyclic industry characterised by demand volatility over the cycle. This means macroeconomic events often determine the success or failure of the underpinning business model and the success or the eventual failure of the investment. A batch of new US prefab housing firms failed during the GFC after 2007, for example, demonstrating the importance of the relationship between economic and business conditions and the viability of the business model for industrialised building.

 

Manufactured housing in the US also provides an insight into the institutional barriers to industrialisation in construction that exist in many countries and cities. Although the Department of Housing and Urban Development hasa national code, US cities discriminate against manufactured housing as local and county governments use a variety of land use planning devices to restrict or ban their use, and often place them in locations far from amenities such as schools, transportation, doctors and jobs. Despite these barriers, in 2021 there were 33 firms with 136 factories that produced nearly 95,000 homes. 

 

An ambitious attempt at offsite manufacturing (OSM) and industrialized building was made by Katerra, a US firm that was reinventing construction but has now gone into receivership. The manufacture of building elements and components somewhere other than the construction site has been variously called prefabrication, pre-cast and pre-assembly construction. Types of offsite construction are panelised systems erected onsite, volumetric systems that involve partial assembly of units or pods offsite, and factory built modular components or pods. The degree of OSM and preassembly varies from basic sub-assemblies to entire modules. Katerra manufactured prefabricated cross laminated timber (CLT) structures.  

 

 

Katerra

 

Katerra was a Californian start-up, founded in 2015. In 2017 it reached a $1 billion valuation, The company’s goal was complete vertical integration of design and construction, from concept sketches of a building to installing CLT panels and the bolting it together. On their projects the company wanted to be architect, offsite manufacturer and onsite contractor. This led to issues with the developers and contractors the company dealt with most of whom, it turned out, didn’t want the complete end-to-end service Katerra offered. 

 

The company started by developing software to manage an extensive supply chain for fixtures and fittings from around the world, but particularly China, and then added a US factory making roof trusses, cabinets, wall panels, and other elements. In 2016 the business model changed because architects weren’t specifying Katerra’s products. Katerra would design its own buildings and specify its own products. In 2017 it built a CLT factory that increased US output by 50 percent. The factory shut in 2019. Dissatisfied with design software that didn’t meet its needs, it developed a custom suite called Apollo. This was to be a platform for project development and delivery, well beyond the document control and communication of then available software from Oracle Aconex, Trimble Connect, Procore and SAP Connect. Apollo integrated six functions: 

1.      Report: use an address to find site information, zoning, and crime rates etc.; 

2.      Insight: design with the two building platforms; 

3.      Direct: a library of components used in the building; 

4.      Compose: for coordination between the different groups working on a project;

5.      Construct: for construction management (similar to Procore and Bluebeam):

6.      Connect: for managing the workforce on a project, with a database of subcontractors.

 

One of the company’s three founders was a property developer, and his projects provided the initial pipeline of work that made the company viable. Initially, buildings were designed by outside architects, but in 2016 the company started a design division. A second founder had a tech venture capital fund, the third and CEO did a stint at Tesla. Their ambition was to leverage new technologies to transform building by linking design and production through software, designing buildings in Revit and converting the files to a different format for machines in the factory. 

 

In 2018, after raising $865 million in venture capital led by SoftBank’s Vision Fund, Katerra acquired Michael Green Architecture, a leading advocate of CLT, and over a dozen other architects and contractors. In 2020 the business model changed again, by taking equity stakes in developments to boost demand. Katerra struggled to complete the projects. Accumulating losses and cost overruns during the Covid pandemic overwhelmed the company and in June 2021 Katerra Construction filed for Chapter 11 bankruptcy. 

 

In six years Katerra had grown to a 7,500 person company. That growth cost both money and focus, of the total US$2.2bn raised, SoftBank invested $2bn between 2018 and 2020. Without a clear focus, Katerra didn’t have a target customer base and got distracted by software and developing internet-of-things technology. The executive team was dominated by industry outsiders, but Katerra hired architects and engineers from traditional firms. Tension was inevitable. The fatal problem was execution, Katerra didn’t vertically integrate acquisitions into a company that did everything. It was fragmented and didn’t have a product platform or Apollo ready in time.   

 

With Apollo, Katerra was actually behind other companies developing platforms that manage design and construction in various ways. These platforms are at the technological frontier, a fourth industrial revolution technology for OSM with automated production of components. Other firms have developed different approaches to digital manufacturing and restructuring of firm boundaries to Katerra, integrating design and construction through development of digital platforms that provide design, component specification and manufacturing, delivery and on-site assembly. 

 

For example, in 2018 Project Frog released KitConnect, bringing together a decade of development into prefabrication and component design, and integrating BIM with DfMa and logistics. US start-ups in the wake of Katerra like Junoand Generate also don’t build factories but outsource assembly. Outfit offers homeowners a DIY renovation from its website, then orders and ships the materials and provides step-by-step instructions for completing the work (the Sears model again). Also in 2021, the IPO for PM software company Procore raised $635 at a valuation near $10bn, a record for construction tech. Rival Aconex was bought by Oracle in 2017 for $1.2bn. Platforms are in the process of becoming a basic part of construction tech. In the UK Pagabo launched a procurement platform in 2021, mainly for the public sector, using framework agreements for building work valued between £250k to £10m. Australian 2021 procurement IPO Felix had local start-ups Buildxact, SiteMate, Mastt, Portt and VenderPanel with competing platforms.  

 

 

Conclusion

 

The idea of construction as production was based on OSM, but after decades of development has yet to become a viable business model. There have been successes in manufactured housing, but often macroeconomic factors undermined their viability. Niche markets exist in institutional building, or wherever it is the most effective or efficient piece of technology available. This manufacturing-centric view of progress in construction, endorsed by numerous government and industry reports, is the end point of the development trajectory from the first to the third industrial revolutions.

 

The technological base of OSM is a mix of those from the first industrial revolution, like concrete, with second and third revolution technologies like factories and lean production. Despite all efforts this has not become a system of production because OSM does not deliver a decisive advantage over onsite production for the great majority of projects. Instead, construction has a deep, diverse and specialised value chain that resists integration because it is flexible and adapted to economic variability. Policy makers may neither like nor appreciate this brute fact, but economies of scale are the economic equivalent of gravity and OSM has not delivered. 


The constraints of OSM have outweighed the drivers and benefits. At this stage the market share of OSM remains small and niche, estimates are low single digits of total construction work in the UK, US and Australia. Success elsewhere is restricted to a few specific markets and project types. The problem is not the technology, which can be made to work, but the expected economies of scale are difficult to achieve because of a range of factors. Some of these factors are internal to construction, but others are external. In particular, macroeconomic events like financial crises or energy and commodity price changes can quickly undermine a business model. 


Norman Foster said in an interview ‘A building is only as good as its client’. With industrialized building the client is the producer, which is not necessarily a bad thing, however this has restricted its use to niche markets. How to apply the technologies of the fourth industrial revolution so they work with the economies of scale for onsite production in construction, beyond the OSM paradigm that has been followed for years without success, is the challenge

 

 

 

 

Sunday 21 October 2018

Prefabricated Housing Rising Again

New entrants with new strategies: Amazon, L&G and Katerra


Off-site manufacturing, modular and prefabricated building have been transforming construction like nuclear fusion has been transforming energy: they have both been twenty years away from working at scale for the last 60 years. The brutal economies of scale and scope in a project-based, geographically dispersed industry subject to extreme demand swings have bought previous periods of success to an end, one reason the history of prefabrication features major projects like the Great Exhibition in 1855 and more recently the Oresund Bridge and Crossrail’s tunnels and stations. At an industry level, prefabrication has been successful in specific niche markets, like institutional building in the UK, or house manufacturers like the Japanese and Scandinavian firms Sekisui and Ikea. The other problem at an industry level is the lack of standardisation, although some countries such as the Netherlands try to address this through their building codes.

Along the supply chain, however, many firms have integrated the various technologies needed to produce building components and elements with the barrier to entry, particularly for SMEs, the level of investment required. The up-front capital requirements of prefabrication make it a capital-intensive form of production, which brings high fixed costs in a cyclic industry characterised by demand volatility over the cycle. This means the success or failure of the underpinning business model can determine the success or (typically) the eventual failure of the investment. A batch of new US prefab housing firms went down after the GFC in 2007, for example, demonstrating the importance of the relationship between the business model and the viability of prefabricated building.

Another interesting characteristic of prefabricated building has been the entry by large firms, sometimes from outside the industry, who have had the capital to invest and an appetite for risk, given that history. The recent news that Amazon has invested in a Californian prefabricated housing manufacturer is therefore, possibly, important. Amazon is investing heavily in smart home technology. This post also looks at two other firms that are recent entrants into prefabricated and manufactured housing, UK insurance company L&G, and vertically integrated US builder Katerra. Of particular interest is the way these two companies are building volume, by developing a pipeline of projects for their factories to supply. It concludes with a look at the business model used for the mail order houses sold by Sears Roebuck a hundred years ago in the US. By coincidence, this week Sears Roebuck missed a debt payment and filed for bankruptcy, a reminder that no business model lasts forever, no matter how successful.


Amazon

All the large tech firms have venture capital subsidiaries that invest in early stage start-ups. For Amazon it is the Alexa Fund, which provides funding for voice technology innovation and ways to improve the way people use the technology. In September, US start-up Plant Prefab had a $6.7 million Series A funding round which included Obvious Ventures and the Alexa Fund. While this is Amazon’s first investment in prefab construction, it has been selling tiny modular houses made by MODS since last year.

Plant Prefab manufactures custom single and multi-family homes in Rialto, California, using a patented building system. According to founder and CEO Steve Glenn, “Most existing prefabrication companies in the US focus on standard, low quality, non-sustainable mobile and modular homes -- for suburban communities. Plant Prefab is unique in that we’re focused on custom, high quality, very sustainable homes and we have a special facility and a patented building system optimized for this. We build based on client’s architects or clients can select from a growing number of homes we offer from world-class architects, all of which can be customized for specific lots and client needs. By building in an all-weather facility with lower cost and staff labour, we offer clients a more reliable, time and cost-effective alternative to local, urban general contractors.”

Amazon’s investment in Plant Prefab comes with a new line of smart home devices, suggesting the company sees a potential new market driven by smart home technology. Amazon already has a deal with Lennar, the largest homebuilder in the US, to pre-install Alexa in all their new homes. There is an obvious business model here, but also many possibilities. Amazon typically offers a combination of fee for service and subscription services, which could be adapted for mortgage or rental markets for example. As connectedness deepens and extends, Amazon might potentially become a major player in the future residential building industry, in some form.


Plant Prefab’s factory in Rialto, California.


Legal and General

Legal and General is a 180 year old British insurance company, today one of the largest investment management firms in the world. In 2016 they announced plans to manufacture homes, however the opening of L&G’s offsite housebuilding factory near Leeds has seen, and is seeing, many delays. Although the first units were delivered in mid-2017, regular production is only now being achieved and the factory is expanding. L&G is targeting affordable housing, and set up a subsidiary called Legal and General Modular Homes:

Our Vision is ambitious and is underpinned by our mission statement; “We deliver desirable homes through the industrialisation of volume housing supply”. Legal & General has a long heritage in providing housing in the UK and sees modular construction as a natural evolution and extension of its position in this market. Modular construction is set to revolutionise the house building sector bringing new materials along with methods and processes used in other industries, such as automotive and aerospace, to raise productivity and help to address the UK’s chronic shortfall of new homes. Our investment in Europe's largest modular homes factory demonstrates our ambition to inject capital into the Housing sector alongside the creation of our Build to Rent, Later Living and Housebuilding businesses. Located in Sherburn in Elmet, near Leeds, our 550,000 sq ft factory produces a range of typologies with the capacity to produce up to 3,000 homes per year, employing several hundred local people. 

The business model is this: “Legal & General Capital is building a more natural and sustainable model – one in which institutional investors are the long-term holders of the assets working alongside the best-in-class affordable housing operators who will provide the highest-quality housing management."

L&G has been investing heavily in the UK housing market over the last few years, and aims to become the leading private affordable housing provider in the country, with Legal & General Affordable Homes delivering 3,000 homes a year by 2022. They have a current pipeline of around 2,000 build-to-rent homes. And in April 2018 L&G's investment arm bought the half share it didn’t own in Cala, for £315mn, a property developer with a pipeline of 3,000 homes. L&G also run retirement villages, they have 7 with 1,100 homes. By one estimate, L&G’s total investment in build-to-rent currently stands at £1.5bn, with the aim to have 6,000 homes in planning, development or operation by the end of 2019.



Katerra

Katerra is another Californian start-up, founded in 2015. In 2017 it raised $130 million in a Series C funding round, reaching a $1 billion valuation, The company’s goal is complete vertical integration of design and construction, from concept sketches of a building to installing the bolts that hold it together. On its projects the company is typically the architect, off-site manufacturer and on-site contractor, and usually contracts directly with owners.

The company started by developing the software to manage an extensive supply chain for fixtures and fittings from around the world, but particularly China, and then added a factory in Phoenix making roof trusses, cabinets, wall panels, and other elements. In September2017 it announced plans to build a  factory that will make panels of cross-laminated timber, a high-tech structural wood, and later said it planned to open up to seven more plants and warehouses around the US as the business model gets rolled out.

One of the company’s three founders is a multi-family developer, and his projects provided the initial pipeline of work that made the company viable. Initially, buildings were designed by outside architects, but in 2016 the company started a design division. In 2018, five months after raising another $865 million in venture capital from funders led by SoftBank’s Vision Fund, Katerra acquired Michael Green Architecture and architects Lord Aeck Sargent. The latter brings a healthy order book across a wider range of buildings, the former is a leading advocate of CLT and high-rise buildings.

Katerra is essentially a technology play. A second founder has a tech venture capital fund, the third and CEO did a stint at Tesla. Their ambition is to leverage new technologies to transform building by linking design and production through software. It designs buildings in Revit and then converts the files to a different format for machines in the factory. Also, SAP HANA, a real-time data processing application, and the Internet of Things are used to achieve “deep integration and newfound efficiencies.” A nice time lapse of one of their buildings is here:


Mail Order Houses

A bit over a century before Ikea sold their first Boklok house, one fifth of Americans were subscribers to the Sears and Roebuck Mail Order Catalogue. Anyone anywhere in the country could order a copy for free, look through it, order something, and have it delivered to their door. At its peak the Sears catalogue offered over 100,000 items on 1,400 pages, and in 1908 they began offering houses. While not the first company to sell kit homes by mail order, Sears came to dominate the mail-order market. Between 1908 and 1940 it delivered 75,000 homes.

The Sears Modern Homes Program offered complete houses, what would now be called ‘kit homes’. Customers selected from dozens of different models, then they could order blueprints, send in a check, and a few weeks later a train car would arrive with the door secured by a small red wax seal. The new owner would open up the boxcar to find over 10,000 pieces of framing lumber, 20,000 cedar shakes, and everything else needed to build the home. The lumber came precut with an instruction booklet, and Sears promised that, without a carpenter, a person could finish their mail order home in less than 90 days.

Then, in 1911, Sears began offering mortgages to their customers. The Sears home mortgage program became one of the keys to success (all those homes, and their new, mostly young homeowners, needed furnishing and decorating and so on). In lowering the barrier to entry, it allowed Sears to sell more kit homes faster than any of its competitors. But when the Great Depression came things got ugly, over the 1930s the company ended up foreclosing on tens of thousands of its customers. It was a public relations disaster.

After years of declining sales, Sears finally closed its Modern Homes department in 1940. A few kit home manufacturers that hadn’t sold mortgages survived, but the Sears boom was over. The next housing boom was the rise of the suburbs and the prefab home. As demand surged in the postwar years, US companies such as Lustron and the National Homes Corporation factory built homes by the thousands.