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:

https://youtu.be/2DPp2NcnTb0

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.

Two Reports on the Future of Construction

Construction Scenarios: AI and Technological Opportunity

In one of those interesting accidents of timing, reports from the two leading management consultancies on the future of construction were released within days of each other. These are briefly summarised below. Also, some quotes from interviews with people on new technology and their projects, with some comments and observations to close.

From management consultants McKinsey comes the latest in their series of reports on technology and construction, this one titled Artificial Intelligence: Construction Technology’s Next Frontier, the first major publication specifically on the industry-wide implications of AI that I know of. This is one of a series of recent papers on AI, automation and infrastructure.

The World Economic Forum and the Boston Consulting Group released their Shaping the Future of Construction report in 2016, with some interesting examples of frontier firms. They have published a scenario analysis as the second, final step in their Future of Construction project, which has involved people from industry and researchers from a wide range of organizations. The three Future Scenarios they describe make technological context central to the future form of the industry.

As an adjunct to these two reports, the views and comments by the managers in their interviews in Infrastructure Intelligence’s Toward Digital Transformation provide a nice counterpoint to the somewhat stilted language found in management consultese. All three were published simulaneously and contain a lot of boilerplate about change management, agility, recruitment and talent management but, despite the importance of organizational structure and the development of skills if you want to compete for the future, this is not discussed here.

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McKinsey identifies five AI-powered applications, and use cases that have already arrived in other industries, that can be applied to construction. This is a practical approach that seems to target major contractors, and is a different approach to previous reports that could have been primarily intended for public sector clients. McKinsey has been seriously developing their infrastructure practice for some years now, positioning themselves for the global infrastructure boom they forecast over the next few decades. The five industry applications are:

Transportation route optimization algorithms for project planning optimization;

Pharmaceutical outcomes prediction for constructability issues;

Retail supply chain optimization for materials and inventory management;

Robotics for modular or prefabrication construction and 3-D printing;

Healthcare image recognition for risk and safety management.

Each of these has a short discussion with some nice examples of crossover potential. They are all plausible extensions of current technology, and in robotics, 3-D printing and drones leading construction firms are already well advanced. Using AI for optimization is obvious, but it is just as likely construction contractors will be using logistics firms to manage transport and inventory as they are to invest in the hardware and software development needed. The question is whether this makes a convincing case for using AI in construction, or whether these are the pathways into construction for AI, or the only ones.

McKinsey also looks at some machine learning algorithms that are more relevant to contractors, and briefly assesses their potential engineering and construction applications. Despite their extensive reporting on BIM elsewhere there is no discussion of the potential use of AI in design and engineering, or in restructuring processes. They do have a good, generic framework for types of machine learning, and they suggest algorithms will be useful for:

Refining quality control and claims management

Increasing talent retention and development

Boosting project monitoring and risk management

Constant design optimization

And then there’s this:

industry insiders need to look beyond sector borders to understand where incumbents are becoming more vulnerable and to identify white space for growth. Both owners and E&C firms can explore nontraditional partnerships with organizations outside the industry to pool advanced R&D efforts that have multiple applications across industries.

Not coincidentally, McKinsey might be able to arrange introductions and facilitate ‘exploration’ and, like many McKinsey papers, this one reads a bit like a catalogue. However, where the previous reports in this series have emphasised industry problems, using consolidated industry data from their client base, this one is full of solutions. While some of these may be solutions looking for problems there are, nonetheless, many acute observations in this paper on the range of possibilities AI will offer in the near future. They have put out a stream of reports on AI over the last few years.

This is a short paper and light on detail. If McKinsey has a more interesting story to tell on pathways for AI into construction it might look something like the scenarios depicted in the WEF/BCG paper. They use the term Infrastructure and Urban Development Industry (IU) to describe what I call the Built Environment Sector:

The scenarios depict three extreme yet plausible versions of the future. In Building in a virtual world, virtual reality touches all aspects of life, and intelligent systems and robots run the construction industry. In Factories run the world, a corporate-dominated society uses prefabrication and modularization to create cost-efficient structures. In A green reboot, a world addressing scarce natural resources and climate change rebuilds using eco-friendly construction methods and sustainable materials. It is important to keep in mind that the scenarios are not predictions of the future. Rather, they demonstrate a broad spectrum of possible futures. In the real future, the IU industry will most probably include elements of all three.

Each scenario is used to extrapolate implications for the industry, identifying potential winners from technological transformation, and the range of examples and ideas shows the value of such a widespread collaboration between industry, government and academia. The WEF does not say how far into the future they are looking, although it seems a fair bet that it is a lot further than McKinsey.  

Building in a virtual world

Interconnected intelligent systems and robots run IU

Software players will gain power

New businesses will emerge around data and services

Factories run the world

The entire IU value chain adopts prefabrication, lean processes and mass customization

Suppliers benefit the most from the transition

New business opportunities through integrated system offerings and logistics requirements

A green reboot

Innovative technologies, new materials and sensor-based surveillance ensure low environmental impacts

Players with deep knowledge of materials and local brownfield portfolios thrive

New business opportunities around environmental-focused services and material recycling

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What to make of all this? Scenarios can be useful thought experiments, but by their nature are limited because the futures they depict are typically extensions of the present. Tomorrow will be like today, only more so. And saying AI will be important in the near future is not particularly insightful, although for some construction managers may be necessary. Some, however, are already working with digital-twin projects and restructuring around technological opportunity, as the quotes from Infrastructure Intelligence’s Digital Transformation interviews below indicate:

London’s Crossrail and Malaysia’s Mass Rapid Transit Corporation are two examples that show how “visionary transportation owners and supply chains are embracing digital technology”, ”moving beyond 3D modelling and 2D deliverables to enable handover of digital as-built information to operations.” Steve Cockerell – Bentley Systems

“BIM Wednesdays, where each Wednesday we got together in a location or had people Skype call in and view models on smartboards. This meant that when we got to the point of submission we had collectively resolved all the issues”. Mert Yesugey – Mott MacDonald

“Not knowing where to start is something we hear often. Just being so overwhelmed with all the technology that’s available and all the workflow processes. The lessons that we’ve learned are you must start small with tangible pilots and attack one part of the workflow at a time, implement technology, create a feedback loop and be able to measure what’s working and what’s not.” Sasha Reed – Blackbeam

David Waboso of Network Rail on procurement based on whole of asset life and outcome based contracts, focusing on in-service performance and outputs. An example is Resonate’s “Luminate” digital train management system, “a novel form of contracting that needs only a small upfront investment and is based a shared benefits agreement whereby the supplier will be rewarded if the new system delivers performance improvements and a corresponding reduction in delay compensation payments.”

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So where is the industry at in regard to technology take-up, now that there is widespread recognition of the reality of a digital future? Will construction industry development over the next decades absorb the impacts of new technology and be gradual, changing industry practice over time without significantly affecting industry structure or dynamics? Given the entanglement of economic, social, political, and legal factors in the construction technological system this might be the case, however there are good reasons to think this may be wrong. Machine learning, AI, automation and robotics are an interconnected set of technologies that are evolving quickly, enabled by expanding connectivity and the massively scaleable hardware available today.

If we think of the structure of the industry as a pyramid, there is a broad base of tradesmen and small firms at the bottom, followed by a deep layer of medium sized firms, and a small top section with a few large firms. Those large firms and some of their clients are clearly on the technological frontier, and their investment in capability and capacity should deliver significant increases in efficiency and productivity, and probably scale. Some medium-size firms are also making these investments, and also have access to technologies like algorithmic optimisation, platform-based project management, robotic, VR and AR applications and so on. The WEF/BCG Shaping the Future of Construction report, which is now nearly two years old, included many snapshots of what a range of firms at the frontier were doing, and some are in the table below. These sort of examples are missing from McKinsey’s high level analysis, and reflect the diversity of the industry beyond McKinsey’s potential client base.  

Shaping the Future: Technology, materials and tools in 2016

Company	Example
Fluor (US)	has built up an internal team of experts on concrete to advise the client at an early planning stage, to develop a foundation of data based on experience and to create a convincing business case for greater use of innovations (such as 50%-faster-curing concrete) in the market.
BASF and Arup (Europe)	have jointly developed an app for architects, engineers and project owners to calculate the energy savings achievable from the latent-heat storage system Micronal.
Skanska (Swedish)	has developed a new construction concept known as “Flying Factories”, which are temporary factories set up close to construction sites; they apply “lean” manufacturing techniques and employ local semi-skilled labour. The advantages include a reduction in construction time of up to 65%, a halving of labour costs and a 44% improvement in productivity.
Broad Group (China) with ArcelorMittal (India)	is using a system of modular building components that enables very speedy construction: a 57-storey building was built in 19 days by moving 90% of the construction work to the factory.
Komatsu (Japan)	is developing automated bulldozers incorporating various digital systems. Drones, 3D scanners and stereo cameras gather terrain data, which is then transmitted to the bulldozers; these are equipped with intelligent machine-control systems that enable them to carry out their work autonomously and thereby speed up the pre-foundation work on construction sites, while human operators monitor the process. On mining sites, autonomous haul trucks are already in common use.
Win Sun (China)	has been building 10 houses a day by using 3D-printed building components, and has concluded a deal with the Egyptian government for 20,000 single-storey dwellings leveraging this technology.
Skanska	and its partners are pioneering the wireless monitoring of buildings, using sensors to record data (such as temperature and vibration), and wireless equipment to store and transmit this data. Data analytics are applied to determine the implications of any changes in the sensor readings. These smart-equipment technologies have the potential to reduce unexpected failure by 50%, improve building-management productivity by 20-30% thanks to less need for inspections, and improve the building’s energy performance by 10% over its lifetime.
Atkins	has implemented advanced parametric design techniques for detailed design “optioneering” in the water infrastructure industry. That has made it possible to provide 22 design options in one day, a 95% time improvement on traditional design methods for similar results.
Arup	combines various data-collection methods, including mobile surveys, security-camera footage and traffic-flow reports, for improved decision-making in the design of residential projects.
Skanska	is developing a Tag & Tack system, pioneering the use of radio frequency identification (RFID) tags and barcodes on products and components in construction projects for real-time monitoring of delivery, storage and installation, the new system is achieving reductions of up to 10% in construction costs.

Source; WEF

Based on these examples, the level of technology use in construction, compared to advanced manufacturing techniques in 2016, is well behind. Companies in the aerospace or automotive industries have developed their automated factories, integration capabilities and use of new materials like carbon fibre. Adidas makes 300 million shoes a year and in 2017 opened a fully automated factory in Germany. There are many examples. The lag is primarily due to the dynamic of a project-based industry, where it is hard for contractors and consultants to spread costs incurred with innovation across projects. Consequently, the manufacturers and suppliers of building and construction products, machinery and equipment do most of the research and innovation because they, like car companies, can spread the development costs over many clients. The role of contractors is to seek efficiencies in delivery, as the examples show. What these examples also show is that the gap between the industry’s larger, leading edge firms and SMEs is growing, and can be expected to increase because the great majority of smaller firms cannot innovate as fast or as effectively as larger firms.

A period of technology-driven restructuring of the building and construction industry may be about to start, similar to the second half of the 1800s when the new materials of glass, steel and reinforced concrete arrived, which led to new methods of production, organization and management. There are many implications of such a restructuring. Some firms are rethinking their processes in response to developments in AI, robotics and automation as capabilities improve quickly and the range of new products using these technologies expands. Many firms, however, are not. Meanwhile, frontier firms are exploring new tech and pushing the boundaries of what is possible, and are inventing new processes.

Other relevant posts:

Construction’s three pathways to the future here

WEF Shaping the future of construction here

BIM is essential but not transformational here

Technological diffusion takes time here

Disruptive change in construction here

Frontier firms in construction here