Industrialized Offsite Construction: A Solution to the Housing Affordability Crisis

America's housing crisis demands innovative solutions like Industrialized Offsite Construction (IOC), which shifts construction to a product-based manufacturing model, delivering faster, cheaper, and more sustainable buildings. This allows subsidies to be applied directly to pre-engineered components, incentivizing wider IOC adoption and unlocking system-wide cost savings.

ADL Ventures, alongside its partners in the ABC Collaborative, RMI, and the Department of Energy, are convening industry leaders to unlock the transformative potential of Industrialized Offsite Construction. Through online workshops, we bring together experienced and emerging housing developers, municipalities, and financiers (investors, lenders, and philanthropists) to discuss how we can accelerate the creation of resilient communities across the U.S. and the world. In a recent workshop, industry leaders Rick Holliday, Caleb Roope, Jake Levitas, and Bali Kumar participated in a virtual panel discussion moderated by Jennifer Castenson, and we are happy to share some highlights here.

Due to the great feedback we have received, we will be organizing more of these events. Join us to learn from industry experts, share your experiences, and forge powerful collaborations that will turn the dream of increased housing affordability into reality. If you would like to receive invitations to future events, let us know here.

– Colby Swanson, ADL Ventures

Lessons Learned from Navigating Historic Housing Factors

The 20th century brought a myriad of changes to the United States’ through policy, economic development, industry paradigm shifts, and housing. While modern construction technologies and methodologies are increasingly innovative, the concept of industrialization and component manufacturing of goods are not. The fundamental premise behind industrialization and its benefits of economies of scale, higher productivity and efficiency, improved labor conditions, equity, and affordability are borrowed from proven industries ranging from aerospace, automotive, and shipbuilding.

We will break down and analyze lessons learned from national investments, both public and private, to solve the confluence of construction, housing, and innovation challenges in a future article. Today, we acknowledge that the US housing market and policies are cyclical: we’ve faced severe shortages and attempted market transformation in the past. Equipped with a deep understanding of the industry, lessons learned, and insights from other industries and countries, the US is ripe for the next big change in housing: industrialized offsite construction for more affordable and healthier homes.

Introduction

The United States faces a severe shortage of over 4 million affordable housing units. Conventional construction methods are increasingly slow, expensive, and volatile. Industrialized Offsite Construction (IOC) offers a scalable, efficient solution by allowing for faster, more cost-effective building processes. IOC can transform how we build more housing, increasing supply to drive down demand-response costs, and reach greenhouse gas emission reduction goals.

The Housing Affordability Crisis

Without innovative solutions, the gap between housing supply and demand will continue to widen, increasing demand-driven cost spikes and adding pressure on cash-strapped municipalities seeking solutions and the low-income families they serve.

The housing affordability crisis is exacerbated by the confluence of:

The construction industry’s aging and declining workforce which has created a costly labor shortage and increased project delays.
Increasing material costs and capital constraints that further complicate the issue as developers struggle to secure financing for attainable housing projects, with banks often hesitant to lend due to a lack of understanding of innovative construction methods like IOC.
Restrictive land use policies, such as zoning regulations that favor single-family homes, limit multifamily housing development, exacerbating the shortage of high-density developments, missing middle housing, and starter home units.

The Potential of Industrialized Offsite Construction

IOC leverages advanced manufacturing techniques, productization, and higher levels of automation to construct volumetric modules, panels, and building pod components to be delivered and installed onsite.

IOC can directly lower upfront construction costs by managing supply chains, reducing project variability and delays, and reaching economies of scale to further reduce costs.
Indoor construction allows for progress to occur simultaneously, year-round, and protect building materials against weather conditions to reduce waste and costs.
Cities can rapidly increase their housing supply to meet urgent demands, significantly reducing the time and money required to build new homes.

IOC leverages advanced manufacturing techniques to produce building components with greater precision and consistency.

Controlled construction conditions enable tighter building envelopes, saving operational costs for homeowners and developers in the long term.
IOC manufacturers are also more likely to be early adopters of next-generation technologies to enable great efficiency and decarbonization solutions.

The IOC Advantage for Housing Affordability

IOC is a construction methodology that can improve construction productivity and labor conditions, while reducing costs and minimizing the operational and embodied emissions associated with new construction.

Economic Impact

IOC has proven to compress construction timelines by 35 - 50%, leading to cost savings potential of up to 20%. Construction cost savings are accrued by IOC’s ability to avoid weather delays, lower A&E efforts, automate workflows, and prefabricate nearly 50% of the project offsite . For developers, the reduced construction time means quicker returns on investment, making projects more financially viable.

IOC fosters economic growth and resilience by creating jobs and supporting a network of regional manufacturers and suppliers.
The localized approach helps build a robust supply chain, reducing dependence on distant suppliers and mitigating the risks associated with global supply chain disruptions.
Additionally, the increased demand for prefabricated components can drive innovation and investment in manufacturing technologies, helping modernize regional facilities and further enhancing the economic impact of IOC.

By manufacturing standardized units in a controlled environment with steady-state manufacturing, IOC allows modules to be built year-round, supporting bulk purchasing and supply chain optimization, further reducing costs on the materials side. In much of the US, where winter weather limits year-round construction, IOC can significantly increase output. These factors further improve cost-effectiveness for housing authorities, efficient returns on investment, and shorter payback periods.

Industrialized Offsite Construction: A solution to the Housing Affordability Crisis — **Environmental Impact**

Buildings are responsible for 39% of global energy-related carbon emissions: 28% from operational emissions and 11% from materials and construction. IOC and controlled factory settings can improve energy efficiency and performance, streamline code-compliance, and reduce emissions by 30% compared to conventional construction. Modules can achieve tighter building envelopes due to less weather exposure and more precision in a factory environment, leading to an estimated 15% energy savings and long-term reductions in operational emissions by reducing air leakage, lowering ongoing energy costs. IOC consolidates construction processes, offering better opportunities for sustainability and innovation by making it easier to prototype new materials, technologies, and processes compared to conventional construction, where rigid timelines limit innovation.

Workforce Opportunities

The construction sector faces significant labor challenges. As experienced workers retire, the industry loses valuable skills, leading to poor productivity, skilled labor shortages, and unsatisfactory project performance. IOC moves operations indoors, which means that previously strenuous and labor-intensive outdoor sites translate into a safer working environment, thus extending the average retirement age and significantly widening the potential labor pool. IOC processes often involve enhanced robotics and software integration, which, though potentially displacing certain job roles, create opportunities for workforce upskilling and the expansion of technical skills training. With the demand for additional manufacturing skills, consistent work schedules and locations, and increased prospects for career progression, IOC offers a solution.

Case Study: Factory_OS

In 2019, a group of Non-profit developers partnered with Factory OS, an industrialized offsite construction company, to win a portion of LA’s Proposition HHH Housing Challenge Funds. The group, comprised of Factory_OS, Abode Communities, LA Family Housing, and Mercy Housing won $40MM to deliver 360 prefabricated Supportive Housing (SH) units.

The initiative aimed to reduce the time and cost associated with supportive housing production. The Collaborative standardized site selection, created replicable unit designs, and streamlined construction financing with a $5 million revolving loan fund administered by the California Community Foundation.

Six development sites, each approximately 20,000 square feet, were chosen for their By-Right eligibility (California regulations AB2162 or AB1197) and proximity to public transit. The use of innovative off-site modular construction and standardized 325 square foot studio designs, along with the exclusion of residential parking, ensured significant cost and time savings.

All of these projects have been completed or are close to completion as of July 2024.

Quality, Safety, and Efficiency

Factory-built components undergo strict quality control, resulting in higher energy efficiency and durability.

Technologies such as continuous air barriers and high-performance insulation are more easily integrated into prefabricated units, enhancing overall building performance.

This high level of quality control ensures that buildings meet stringent energy standards, reducing long-term maintenance costs and improving living conditions for residents.

By prefabricating building components in a factory and limiting onsite activities mostly to foundation work and assembly of the prefabricated components, IOC minimizes disruption to the local community at the construction site.

This makes IOC a particularly well-suited approach to enable construction at sites that are constrained by limited space, noise ordinances, or work hours.

The standardized aspect of IOC is very well suited to markets where repeatability can minimize construction times and increase profitability, and modularly built buildings often look the same as site-built structures.

In the United States, 69% of conventionally constructed projects exceed their budget by 10% or more. By utilizing a controlled factory, industrialized construction mitigates material damage caused by weather exposure. IOC optimizes materials, minimizes waste, and streamlines supply chains by reducing the need to purchase excessive resources. As the number of IOC buildings produced in one factory rises, fixed costs are spread over a larger quantity, standardization reduces variation, and experience leads to efficiency gains. Employing precise manufacturing can reduce development costs by up to 20% and allow for cheaper construction of low-carbon houses.

Barriers to Adoption and Solutions

Market Education

Problem: Knowledge gaps across stakeholders hinder the wider adoption of IOC. Developers accustomed to conventional methods might lack familiarity with IOC's processes and financing needs. Similarly, the construction workforce may require retraining for factory-based techniques. Municipalities could also benefit from education on adapting permitting processes for IOC construction.

Solution: To bridge this gap, clear communication about IOC's benefits and successful case studies can derisk investment. Additionally, collaboration on pilot projects and streamlined permitting processes with national standards can showcase IOC’s viability and gain support from policymakers and regulators. By fostering knowledge and collaboration, we can unlock the potential of IOC for housing affordability.

**Financing**

**Problem:** Current lending models struggle with IOC's upfront costs, hindering wider adoption. Conventional methods release funds progressively, clashing with IOC's factory production expenses. Recognizing IOC's benefits is key for lenders.
**Solution:** To address this, clear communication highlighting successful IOC projects' financial advantages (cost savings, faster timelines) is crucial to attract investment. Additionally, government incentives, permitting support, and grant programs can mitigate initial risks for developers, encouraging broader IOC use.

Regulatory Challenges

Problem: Existing building codes and zoning are designed for conventional construction. Stringent local regulations and a lack of standardized compliance processes for IOC lead to delays and unnecessary risk.

Solution: Solutions include educating local officials and streamlining permitting. Updating building codes and training inspectors on IOC standards are key. Additionally, adopting national standards like ICC/MBI codes provides a clear framework for IOC projects, reducing uncertainty and expediting approvals. Pilot projects, public-private partnerships, and permitting modifications can showcase IOC's viability and garner support from policymakers.

Case Study: Clarendon Hill, Somerville, MA

The Clarendon Hill redevelopment project is a collaborative effort between Preservation of Affordable Housing (POAH), Somerville Community Corporation, and Somerville Housing Authority (SHA) to replace 216 existing affordable public housing units with 591 new units: 216 affordable housing, 80 new moderate-income, and 295 new market-rate units.

Clarendon Hill is being constructed on land owned by the SHA and subject to state-mandated wage regulations for construction labor. Initially, plans were in place for POAH to sell a land parcel for $16 million, with the expectation that this would cover the affordable housing segment of the project by circumventing the Davis-Bacon prevailing wage regulations. However, these plans did not receive approval, resulting in an unforeseen $30 million increase in construction costs. Furthermore, Clarendon Hill was set to be above seven stories, requiring compliance with high-rise building codes and increased material expenses. To account for cost increases, POAH turned to modular construction and worked with Lab 9 Modular.

One of the major pain points of this project was getting lenders comfortable with the project as a secure investment, given that the modular company is a startup. Bank of America played a pivotal role in facilitating the financing for this project. From the project's inception, Bank of America was aware of the modular construction approach, allowing for greater flexibility as the lender. The combination of reputation, partnerships, experts, and manufacturers all played a vital role in building the necessary trust to secure the project's financing.

By utilizing modular construction, the Clarendon Hill project lowered costs significantly. It leveraged its well-established reputation and relationships to garner trust from a lender, securing the necessary project financing. Compared to a similar project in Boston built conventionally, the Clarendon Hill project cut down the construction timeline by 12 months and reduced costs by $200k per unit. This time-saving aspect was critical, particularly considering that POAH was covering the relocation expenses of previous Clarendon Hill residents and faced delays in obtaining loan approval. The common development circumstances surrounding the Clarendon Hill project made modular construction a highly cost-effective solution.

Moving Forward

IOC offers a scalable concept for a path to create sustainable and cost-efficient housing at scale and we can achieve this by addressing key regulatory and financing barriers.

In the face of a growing affordable housing crisis and an urgent need to decarbonize the built environment, IOC is the pathway forward. IOC has consistently demonstrated its ability to reduce conventional construction timelines and costs while fortifying the skilled construction workforce and promoting the adoption of decarbonized building practices.

While the regulatory landscape and lack of familiarity with the industry makes financing extremely difficult, targeted incentive programs and increased lender familiarity have demonstrated potential to spark further growth of this industry beyond its already rapid expansion.

States across the country are utilizing incentive programs to jumpstart modular construction, and the results have been a profound uptake in IOC as a solution for housing affordability.

With effective execution, IOC can be used to establish a steady-state production model, adopting manufacturing principles to make construction more efficient, affordable, and environmentally responsible.

Learn more about how you can benefit from IOC. Visit us at ADL Ventures or ABC Collaborative.