It’s expensive to build housing. California lawmakers say factory-built is the future

As the cost of living continues to pinch Californians, state lawmakers have a new focus: bringing down the cost of housing construction to get more homes built quickly.

Their solution, so far, is to industrialize the building process by facilitating prefab, modular and manufactured housing. Earlier this year, a group of California lawmakers held a series of hearings as part of the Select Committee on Housing Construction Innovation to understand what barriers stand in the way of scaling up factory-built construction.

It comes after lawmakers last year passed a series of bills that streamlined environmental reviews for housing developments and transformed the way housing is built near transit.

“A key piece of making housing more affordable is bringing down the cost of construction,” Committee Chair and Assemblymember Buffy Wicks (D-Berkeley) said in a statement to KQED. “Factory-built housing is not a silver bullet, but it can be part of the solution to our housing crisis.”

A report, published Monday, from UC Berkeley’s Terner Center for Housing Innovation, found factory-built housing, also known as prefab and manufactured housing, could cut costs by up to 20% and slash building timelines in half — a key innovation needed to ramp up construction and meet the state’s goal of building 2.5 million homes by 2030.

A Factory OS employee work on the assembly process of modular homes at the Vallejo warehouse on August 6, 2020.

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Beth LaBerge

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KQED

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But, these projects face big hurdles in securing financing and overcoming a patchwork of regulatory approvals that can vary by jurisdiction. Following the committee’s Construction Innovation hearings, state lawmakers now plan to introduce their own package of bills aiming to streamline the process.

Those efforts will dovetail with legislation at the federal level, where lawmakers are also trying to solve the nation’s growing housing affordability crisis, caused in part by a construction slump. Federal legislators are currently working on two separate bill packages taking aim at red tape and outdated safety standards which lawmakers on both sides of the aisle argue have prevented factories from churning out housing for decades.

And while there has historically been resistance from unions to factory-built housing, there is a growing recognition of the benefits to workers. Jeremy Smith, deputy legislative director for the State Building and Construction Trades Council of California, said during a committee hearing that while the trades prefer on-site construction methods, modular-built housing “provides a solution to building — to actually building — more housing for people of all income levels.”

He pointed to Fullstack Modular, a construction company with a factory in Carson, Ca., which employs about 200 unionized workers to construct modular homes. He said working in a factory, as opposed to commuting long hours to job sites, benefits employees.

“Because of the consistent work hours and the factory location within the community, trades workers and more crafts people are able to consider the trades and still accommodate childcare and other life needs,” he said. “Workers who have not secured reliable transportation, for example, can more easily get to the stationary location of the Carson factory, making their transition into the building trades easier.”

Factory-built housing is not necessarily new in California. For years, a number of construction firms have offered modular housing or prefabricated units, which can be manufactured miles away and assembled on site. But many of those firms have failed to scale up and have shuttered their factories.

Michelle Boyd, chief strategy officer for Terner Labs, a nonprofit incubator program connected to the Terner Center, said the construction industry hasn’t changed in decades and neither have the laws or financing systems surrounding it.

“The construction industry has worked the way it’s worked for 100 years,” she said. “And there are many different silos. Every player has their own little piece of the puzzle on how you put a house together or an apartment together.”

But industrialized construction consolidates that system into one factory, and that, in turn, runs up against regulatory and financing norms, which makes it difficult for new types of construction to successfully enter — and stay — in the market.

When it comes to regulations, the Terner Center’s report details inconsistencies between local governments’ building codes as one barrier to be removed. Although the state has adopted a set of standards for housing built in factories, local governments still require certain plan reviews and inspections, which can change a standardized product into a bespoke project for each city.

On the finance side, banks and insurance agencies have funded traditional site-built housing for decades, so they understand the risks involved. But factory-built construction has yet to meet mainstream adoption, which means financial institutions have less data and experience to gauge risk. That makes it harder to access capital needed to get projects off the ground.

Boyd said that because developers sometimes have trouble finding financing, it means deals can fall through, resulting in holes in the factories’ production pipeline. When that happens, she said, “They can’t sustain that because they have to pay the wages, and so they close.”

But she argues, the state could work to assume some of the risk of the transaction and stabilize the pipeline so those holes don’t exist.

“One of the main policy areas that we uncovered is a role potentially for the state in helping hold some of that risk, so we’re not really asking these developers to risk losing a lot of money or having the deal go upside down halfway through,” she said.

Taken together, Boyd said, these proposed reforms, if implemented, could have the potential to jumpstart the industry, bringing down the cost of construction for builders, and hopefully, for homeowners too.