CRE Outlook on Modular Construction
September 30, 2019
Modular construction is taking the commercial real estate world by storm. Valbridge shares what you need to know about the modularization of CRE.
As we look ahead with growing trends in commercial real estate, forecasters are particularly taking note of the increasing demand for modular construction – the off-site creation of a building that is then transported to a stationary location after manufacturing – across the healthcare, education, industrial, and multifamily sectors.
According to the Modular Building Institute, a nonprofit trade association serving modular property construction, the commercial modular fabrication business has doubled in size across the U.S. to $8 billion over the last five years. At this point, CRE modularization is mostly for constructing buildings’ exterior walls, superstructures, and fulfilling mechanical, electrical, and plumbing requirements. Statistics say there are about 225 modular manufacturers in North America right now, including the companies that do single family modular homes.
So, why is the CRE modular construction trend booming? Below, we’ve listed a number of the advantages to modularization in commercial real estate.
Benefits to Modular CRE Construction
It’s Quick & Cost-Effective
Believe it or not, modular construction can accelerate construction timelines by up to 50 percent. Because various parts of a project are undertaken simultaneously, more work is able to be completed in a window of time. As the parts of the building are being prepped for construction, for example, the actual building (the site the real estate will stand on once it is complete) and inspections can take place offsite.
Cost advantages vary depending on a number of factors. In a recent study, for example, most general contracting firms reported an expectancy to save 5 to 10 percent of field labor costs by switching to modular. In reality, the most common savings level reported was 0 to 5 percent, demonstrating the inherent challenge in adopting new technology. As we look ahead to 2020 and beyond, though, there is great potential for that adoption only to continue.
The rise of modular construction is impacting the practice of commercial real estate in a number of ways. More and more, price-conscious buyers, investors, and those who have specific budgetary limitations are able to gain access to commercial properties in locations that otherwise might have been beyond their reach thanks to modular fabrication.
Modular construction is ideal for commercial sectors and outlets where uniformity is the norm, such as chain hotels; student, senior and affordable housing; hospitals and office buildings. It is simpler, more convenient and more productive to manufacture a number of uniform pieces for the same layout (even if for different properties/locations) than to attack each project on a stand-alone basis.
Hotel companies in particular have found benefits to working in such a way, taking advantage of the quality control aspect of modularization. Modular firms and factories know how to build to a hotel brand’s standards, and that saves training a new crew of field people every time construction is needed.
Challenges to Modular CRE Construction
Securing loans for modular construction is challenging for developers. First, modular construction requires a significant upfront deposit for building materials. This totals around 25 percent of total construction cost. Second, the lender will have to wrap their head around the idea that they will be fronting investment money to have a commercial property be created offsite, therefore, it might be more challenging for them to monitor the process or grasp their ROI before the project is finished.
From a lender’s perspective, it might seem uncomfortable to invest in materials and fabrication that is not done at a construction site. The whole process could make the lender feel a lot more exposed financially than they would on a traditional construction project.
Shipping completed modules from the factory to the job site can be a nuisance, and it is a job that needs to be done carefully, as you would not want parts and pieces of the whole to arrive damaged. For a hotel, for example, countless truck trips are needed to deliver all the pieces to the site for assembly. This process is usually outsourced, and its one that requires time, precision and patience.
Appraising Modular Construction
Overall, the process of appraising modular real estate does not differ too much from the valuation steps of other properties. However, understanding the unique factors that these type of structures introduce is crucial for appraisers to be able to provide proper valuation.
Is CRE Modular Construction Here to Stay?
Aside from seriously impacting CRE industry cash flow for the better, it’s also worth noting that the modular construction phenomenon has been impacting the commercial real estate industry from coast to coast. It is a phenomenon and new-construction trend that is sweeping the nation.
Brokers who keep an eye on construction trends will not only be in good stead with their existing clients but will also be better positioned to bring more to the table when they begin considering modular construction. For family offices, high-net-worth individuals, and other investors, the time may be right to consider taking a look at projects that feature modular construction.
If you are interested in learning more, buying or investing into modular commercial real estate, enlist the help of a Valbridge Property Advisors professional. Our appraisers provide independent appraisal services consistent with the highest industry standards of practice – and we are more than willing and capable to help you navigate the emerging world of commercial real estate. For more information, get in touch with us today.