Pre-built housing is green while saving time and costs, observes Vantem Founder & CEO Chris Anderson.
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By Chris Anderson
The U.S. housing crisis is a multifaceted mess. Exclusionary zoning, skyrocketing home prices, stagnant wages, and lackluster public investment in affordable housing are just the tip of the iceberg. These issues are in plain sight. Yet, a less obvious but equally critical obstacle lies in the difficulties housing developers face in securing profitable project financing in today’s volatile economic climate.
It’s time to unveil the hidden struggles within the real estate industry and highlight innovative strategies developers can leverage to break through these barriers. By embracing green, factory-built homes, we can pave the way for a revolutionary solution to the housing deficit, bringing affordable, sustainable housing to communities nationwide.
Rising costs and a squeeze on funding
The two most significant financial impacts on housing developers are a labor shortage, which drives up the cost of construction, and the shrinking pool of financing options. These challenges impact developers of all kinds: single and multifamily residences.
Let’s unpack the topic of labor. The United States construction industry is facing an extreme shortage, with far fewer workers than are needed to drive the completion of critical residential and infrastructure projects across the country. The root cause of this shortage is multifaceted—but is driven mainly by an aging work population and a lack of interest from young talent. The result is a sharp increase in labor costs and longer construction times. U.S. developers spent an extra $30 billion to $40 billion in 2022, drastically impacting bottom lines and the ability to get new projects financed. And the problem is only getting worse.
Developers are also dealing with new financing challenges: the lack of bank financing for projects, higher interest rates, and investors’ reluctance to pick up the slack. The market has changed dramatically for these developers, who’ve been accustomed to borrowing up to 80 percent of a project’s cost. However, in today’s economic environment, only 50 to 60 percent of a project is likely to be financed, leaving a significant funding gap, and a much less attractive investment. Simply put, financially unattractive projects don’t get built.
More efficient building & green financing
Developers should rethink traditional, onsite construction to address the rising building costs and the financing gap. Factory building can drive cost efficiencies and savings while also unlocking new funding sources. But unfortunately, this type of building is severely underleveraged today.
Factory-based construction reduces labor costs by making work more efficient and tapping into labor pools that traditional construction can’t access. Traditional construction requires workers to move from house to house and project to project—and less time actually building. And the itinerant nature of the work makes it unattractive to a large part of the workforce.
On the other hand, good factory builders operate like car production lines, where the structure moves to the workers who are specialized and stationary. Those workers produce more per labor hour, which means less labor cost per square foot of structures built. And, because the work is done in one place and in more pleasant and controlled factory conditions, it is easier to attract talent, particularly people who might not usually consider construction as a profession, such as women and younger workers.
Time is also money. Factory building doesn’t just give a developer confidence in delivery timelines by avoiding inclement weather or scheduling delays. It can also cut build times and skilled labor hours by up to 50 percent, according to McKinsey. Shortening the build time means less project overhead and less interest carry. Those are savings that go straight to a developer’s returns.
Factory-building can also open up new sources of funding. There are innovative factory builders who use materials and assembly methods that allow for significant energy savings that will endure for the life of the home or building. The energy efficiency of this type of construction makes it eligible for “green” financing. Green bonds, for example, are earmarked to raise money for climate and environmental projects, and it is less difficult to raise equity for projects from sustainably-minded investors to fill the gap that traditional investors have left.
The U.S. housing market’s current challenges underscore the necessity for innovative building methods to meet the critical need for housing. Green, factory-built homes present a compelling solution for developers hindered by labor shortages, rising costs, and financing gaps. As the industry adapts to these new methods, there is real potential to address the housing crisis.
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As founder & CEO of Vantem, Chris Anderson led the team that developed the Vantem System and pioneered its implementation.
Originally published on August 28, 2024
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