Bigger Better Box

Site-built housing is still the U.S. standard by a long shot and an institution modular advocates can't even conceive to overthrow. Yet modular housing continues to make inroads because of its technological advantages and shrinking pools of qualified labor. In fact, the variety of styles and sizes modular companies now offer rivals what a stick builder can do on-site. A huge selling point modular makers push with clients is that modular is indistinguishable from anything built conventionally.

Modular is thought by many to be the next step in the trend to use prefabricated and panelized materials made off-site to cut costs and speed construction time. Still, industry veteran Kevin Flaherty, vice president of sales with Auburn Hills, Mich.-based Champion Homes, admits a misconception exists among builders and home buyers that modular homes are architecturally inferior to their site-built counterparts. "That perception is changing daily" as consumers understand that modular differs from what they imagine as no-style HUD homes also built in factories, he says.

"In today's modular, our company and certainly many other companies are capable of buildings that architecturally are undifferentiated from an on-site builder," Flaherty says.

"It's come a long way, but I also say that we still have a long way to go," says David Endy, chairman of the NAHB's Modular Building Systems Councils. "We still have folks that misunderstand it. There is still the connotation out there that modular is a double-wide."

Overzealous lending practices in the 1990s led the HUD industry into a slump late in the decade and forced makers to rethink their business strategies. Acquisitions and mergers helped some of the big players like Champion — which had $1.2 billion in net sales last year — Maryville, Tenn.'s Clayton Homes and Palm Harbor Homes get the needed retail presence and technology.

Addison, Texas-based Palm Harbor Homes did high-end HUD homes and realized it could also do nice modular construction. The company, which had $710.6 million in revenue last fiscal year, further boosted its menu by buying Nationwide Custom Homes out of Martinsville, Va., four years ago.

Today, 27 percent of Palm Harbor's revenues come from modular building and 70 percent from HUD homes. "Our modular business is growing at about 20 to 25 percent a year, so it's a real growth part of our business," CEO Larry Keener says. "We are positioning ourselves to sell to just about any customer in any code on any lot."

Design, production and engineering capabilities have presented new growth opportunities. "There's an awful lot of housing starts every year that are most likely better suited to being predominantly built in factories. The modular industry — up to this point — has not been very aggressive about going out and seeking out those opportunities," Keener says.

Last year, 43,100 modular homes were built in the United States. Modular's market share ranges from a high of about 8.7 percent in six New England states to a low of ¼ percent in three Pacific states, says Fred Hallahan, whose Baltimore-based company Hallahan Associates analyzes the modular industry.

Geographically, the U.S. is not a one-size-fits-all for modular conquest. Modular's strength and origins lie in the Northeast, where it has been readily accepted as an option in an expensive housing market with harsh winters that hamper on-site building. Central Pennsylvania, with its relatively lower labor and materials prices, has been a key manufacturing spot. Further south, the Carolinas are another hotbed, as former HUD plants have been converted into modular factories. Modular housing is picking up steam in Florida, and other parts of the South Atlantic region are expected to follow because modular will be a popular solution to rebuild homes destroyed by Hurricane Katrina. The Midwest market, which had been catching on, is cooling, likely because of the downturn in automobile-related industries.

The dearth comes west of the Mississippi, where modular development has not caught on quite like it has on the other side of the country due to sparser populations in mountain areas and plentiful, sophisticated HUD homes in the California region. Slowly though, prospects are stepping forward.

Lad Dawson bought Guerdon Homes, a Boise, Idaho, HUD plant, and converted it to Guerdon Enterprises modular-home maker two years ago so it could serve nine states. He targets resort areas and mountain areas where labor is scarce and building seasons short.

"It gives us an opportunity to develop a position of real leadership in a market where there are not a lot of accomplished players, particularly capable of larger volumes," he says.

Thayer Long, executive director of the National Modular Housing Council, notes that nationally many factories are running at full capacity with backlogs anywhere from six weeks to three months.

The increase in the number of factories has been modest. Hallahan estimates 25 new plants have opened in the U.S. — mainly in the South — over the last five years for a total of 220 factories. However, he adds, that number might be a bit low because at least 10 HUD plants have also been converted to assemble modular homes.

"What's really holding us back here? It's not demand; it's the capacity constraints in the industry. So if we actually do the investment in building new modular facilities, then the demand is already going to be there," Long says.

The story across modular factories is much the same: mass production and carpentry combine to create large sections of homes, complete with many exterior and interior amenities such as cabinets, gables, wiring and even ceramic tile. Then, they are trucked out to their final destination, where builders erect and set them together on foundations by crane. Finishing details such as porches or painting are often done on-site.

Hallahan says industry growth will come from converting builders who do 10 to 50 homes a year who will be lured by exterior and interior design choices modular housing now offers. Many builders operate full design centers for clients to peruse.

"The option list is exponentially exploding to where we will put just about anything available in a house," says Gary Ames, marketing director for Ritz-Craft Corp., a custom builder based in Mifflinburg, Penn., that operates five modular factories and a cabinet company.

Several factors have combined to take modular building out of the box.

Sophisticated automated CAD systems enable manufacturers to pull off almost any design.

Innovations in roof trusses have made different roof lines, elevations and larger homes a reality. Makers have figured out how to create deeper rooms by stacking modular boxes; three sections deep and two stories high yield some pretty large houses.

"The average square footage has jumped every year. Multiple boxes are the norm — houses that are six, seven, eight, nine boxes to create," Ames says.

And larger, modern factories are configured so work keeps flowing. "We set up a station where we used to build the roof in one area, and if the roof could not get set in the house, the whole plant stopped. Now we can build eight roofs at one time and the line keeps moving," Ames says.

Steve Snyder, executive director of the Modular Building Systems Association, says breaking out of the methods used for generations of builder families may be yet another reason why modular is growing.

"I think we just needed another generation coming into the industry — another generation of sons who are college educated where maybe their father wasn't and the dad built houses like the grandfather, and he built houses like his father. Now we have this new generation of builders coming in who are younger and more technologically savvy and more willing to accept other possible ways," he says.

Traditionally, modular housing has been popular in outlying areas where labor is scarce and materials not easily accessed. However, new market locations and production processes are broadening modular housing's reach — and multi-family housing is the next frontier.

Townhouses, duplexes, row homes, even apartment buildings — though not as prevalent — are being built. Hallahan says that although more than 80 percent of modular market caters to single-family housing, the amount of government contracts for multi-family housing has been growing, particularly in Midwestern and Northeastern urban infill sites.

"There is an enormous need for workforce housing and the only way it's going to get built and get built affordably would be some high-density, multi-story townhome-type product," Keener says. "That's an issue that we feel that, in the next four to five years, modular could be a principle solution to that problem."

The factory process suits multi-family housing because the typically narrow, deep units are well-suited to assembly-line production. Similar to single-family housing, multi-family is made by stacking box sections horizontally or vertically. Elevator shafts are built before the sections are delivered, and sprinklers are often installed in the factory and connected between sections on site. Balconies can be built on-site to reduce the width of the load to be transported.

Modular housing has slowly accumulated in urban areas to the point where Hallahan estimates 40 percent of the country's modular housing lies in metropolitan markets. In pricey markets like the Northeast or Cincinnati or Tampa, for instance, a modular home costs less than site-built.

"There is a lot of promise in the markets we serve," says Harold Woodside, director of multi-family and commercial for R-Anell Homes in Denver, N.C. "From a developer's standpoint, he is just turning his dollars so much more quicker if the right team is in place."

R-Anell has recently worked in downtowns. Metropolitan areas make great modular infill locations because a locked unit under construction also minimizes vandalism. With 20 to 30 modules per building, on-site construction time lasts four to five months. And neighbors are a little happier because there is less construction noise.

Although at the cost of disaster, modular housing experts believe the industry will receive a boost as the South recovers from Hurricane Katrina. With hundreds of thousands of homes to rebuild, FEMA and others realized there is not enough labor to resurrect entire communities of stick-built homes. Prior to Katrina, FEMA had pitted modular against stick-built housing in a 1993 post-Hurricane Andrew simulated stress test. Modular won, and now, 13 years later, it just might be the salvation for the Gulf Coast.

With so many builders wanting a piece of the action, doing business in Mississippi and Louisiana will boil down to connections and learning how to wade through bureaucracy. A huge opportunity looms for the industry to convert large numbers of builders.

Duane Graham, president of Designer Homes Group in Petoskey, Mich., is positioning himself for the onslaught. Graham, a modular builder, plans to market around D'Iberville, Miss., where he has been working with local building officials. Homes would be transported about 1,200 miles south from his modular suppliers in Wisconsin and Michigan, a stretch double the distance his homes are already shipped when he builds up North.

Most likely, these homes won't be elaborate or finished with garages or porches due to the labor scarcity, but the homes will be a start of something permanent for many residents. On the production side, he will initially pull crews from the Midwest until he can gather labor in the South. Between his two suppliers, he expects to have 300 to 600 modular homes available a year.

"We are going to put lots of folks in Michigan to work and lots of folks in Wisconsin to work, and I think that's huge," Graham says. "There are people living in tents down there and these little FEMA trailers. We can go in and we can turn their lives right side up again and get them back into a beautiful home."

NAHB's Endy, who is president of Stratford Building Corporation, a custom modular manufacturer in Rathdrum, Idaho, says one big challenge modular makers have is creating a builder network to set foundations and set-up homes, a network process that will take time because most builders there are already spoken for. "Over the next year or two, I think our industry will have an established presence down there," he says.

In the midst of the fray comes an ongoing education campaign by the industry to teach public officials, realtors, builders and home buyers about modular building. The biggest hurdle, Snyder from the MBSA says, has been teaching them that modular and mobile homes are different.

Factories located within several hundred miles of the Gulf Coast could also speed things up.

Apex Homes, headquartered in Middleburg, Penn., bought a modular plant in March and is expanding to 128,000 square feet. The purchase was long in the works, but Katrina's devastation makes the buy even timelier, opening Apex up to territory in Tennessee, Florida, Georgia, Mississippi and Louisiana, says vice president Lynn Cuhns. He adds that Apex is not marketing only to demolished coastal areas but is targeting Florida and the rest of the South. "There's 1,000 people a day moving into it (Florida and the South). The business model showed that there was a very positive potential for custom modular homes," Cuhns says.

Some may cringe at the mention of it, but government sponsored Katrina Cottages are nearly there. When and if they come, they will present another product opportunity. Early concepts make the cottage a 14- by 22-foot one-story box with an 8-foot-deep porch. At around 300 square feet, the home compares in size to a FEMA trailer but is permanent housing that can accommodate additions. Homes have a wooden frame with a living/dining area, small kitchen, full bath, closet, a bedroom that sleeps four, central air and heat. It won't compare to the homes residents lost, but it will offer something more permanent.

Federal approval for mass production of the cottage homes was approved in June.

Although the modular housing industry does have building construction methods to boast, there are still many barriers to break down.

"What our industry does is it solves many of the problems that confront stick builders," Snyder says. Speedy delivery is the resounding advantage. Typically, a modular home can be finished in about 45 days from the time it is set on the foundation. That means shorter durations of construction loans and reduced interest payments.

Stick-built homes get inspected once on-site by the local building authority, but modular homes are inspected multiple times. In the factory, the production supervisor and third-party independent inspector hover over the homes as they travel down the line. On site, the local building inspector also does the final check. Modular advocates argue that multiple inspections mean tighter quality control.

Because the home is built primarily indoors, rain and the elements have little chance of pelting the frame during construction. And because it will have to travel several hundred miles to its final destination, about 10 percent more lumber than a traditional home is added so the home can withstand the rigors of transportation.

Modular manufacturers buy materials in bulk and are not hit as hard by price fluctuations in items like lumber. Scraps can be remilled so there is less waste and construction debris. The factory process can translate into lower home prices for consumers or builders, but that depends on many factors, including location.

"This is always the most difficult question to address as there is no simple answer," Champion's Flaherty says. "Generally, if a builder is operating in a market where labor is short or expensive, where the building season is restricted due to weather and where the foundation type is basement or crawl space, modular construction can save 15 percent for the builder."

Associations such as NAHB, MBSA and the National Multi-Housing Council have pinpointed a few key changes to spur modular home development. Trade groups want the same treatment as stick-built homes when it comes to sales tax; they argue it's unfair stick builders only pay tax on materials, not materials and labor as modular builders do.

Transport issues are always at the forefront as well. Long says the industry works to standardize acceptable transport times across all states so homes can be transported non-stop. In another action last year, the industry won a clarification argument that state governments can issue load permits. Those are key, Long says, because they could reduce transit costs.

Another consistent problem: deed restrictions, which Endy says are becoming pervasive in some regions because of the confusion between HUD homes and modular homes.

Attorneys and public officials with input into contracts often don't know the difference and simply lop them all together, although their actual intent is to ban temporary structures. Long says deed restrictions are hard to overcome and in some cases are tackled on a case-by-case basis.

More education is needed so modular homes aren't shunned, particularly because they appreciate the same as traditional homes, builders say. Long agrees: "Whether a home is built on site or off site — it should not make a difference."