Episode 4: NYC Goes Modular

In the summer of 2016, the world’s tallest modular building at 32 stories high was completed at 461 Dean Street in Brooklyn, NY. Once the building’s apartment modules were completed at a factory located in the Brooklyn Navy Yard, they were transported to the development site and essentially stacked one on top of another into a high-rise building. To the dismay of its original backers, the building was delivered years late, riddled with construction problems, and the subject of a costly litigation. Still, excitement about modular construction in New York abounds with new projects under development.

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Episode Excerpt

U.S. Multi-Family Building

If you were paying any attention to the 2016 U.S. presidential election, you would think that just about every factory in the United States has either left for China or is about to leave. But when it comes to factories that are currently building apartments, or will soon be building apartments, we’re probably just getting started with constructing these factories in the United States.S hipping costs make transporting building modules from overseas to the United States expensive. And while one Polish company has managed to successfully transport modules here, the transportation expense is likely to make this a predominantly local industry. That, along with undeniable demographic shifts afoot in the United States that will be pushing the demand much higher for multi-family buildings in urban areas, suggest that we may very well witness the transformation of American factory-built construction into a multi-billion dollar industry.

Based on what world populations and growth rates suggest, you might think that the urgent need for urban housing over the next 30 years will largely be an African and Asian phenomenon. But the truth is that the migration to cities is also expected to happen right here at home. The United States Census Bureau provides statistics on the number of permits issued for new construction starts each year throughout the entire country. In 2015, 41% of permits were issued for structures that consisted of two or more units (referred to as a “multi-family residence”). Not exactly a screaming validation of my argument that you should be building modular multi-family buildings in cities when 59% of permits were for single-family residences.

But let’s look at the trend line towards multi-family construction over the past 25 years. Again, from the United States Census Bureau’s website:

In 1991, 21% of permits were for multi-family residences;
In 2000, 25% of permits were for multi-family residences;
In 2007, 30% of permits were for multi-family residences;
And again, in 2015, 41% of permits were for multi-family residences.

The rising trend of multi-family starts, as a percentage of total building starts, is unmistakeable. Here’s another interesting set of facts. The U.S. Census Bureau breaks down the multi-family residence into three categories: two units; three and four units; and five units and up:

In 1991, 79% of the multi-family category permits were for buildings with five plus units; By 2015, 93% of permits in the multi-family category were for buildings with five plus units. As it turns out, if you’re an entrepreneur and thinking about factory-built housing in the United States, the biggest market to go after today is single-family homes. But if the trend towards urban development continues, the biggest market to attack will soon be for multi-family homes. In New York City, two companies began with a modular approach, meaning they were building boxes inside of factories that would be stacked one on top of another once they arrived on the jobsite.

Brooklyn

New York City’s population is growing. In 2014, the city was home to just under 8.5 million people. By 2030, we’re expected to surpass 9 million people. In 2016 alone, New York City will add a total of 24,575 new apartments. My home in Brooklyn will lead all the other boroughs with over 6,000 new units.

At the end of this podcast series on factory-built housing, I’ll make some predictions about what the future will look like and who will be the winners in this space. Without giving it all away, I can tell you who I don’t expect to be the agents of massive change: billionaire New York real estate developers. And that’s because, in the last century, transformations within big industries usually came from entrepreneurs outside of an industry, unburdened in their thinking by that industry’s old way of doing business.

So you can imagine my surprise when I learned that the largest New York City developers have not just thought about this space, but one in particular — Bruce Ratner, and his company, Forest City Ratner — made a considerable effort to get into factory-built modular housing.

In 2012, there were already several modular buildings constructed in factories in Brooklyn. The first factory was owned by FCS Modular. And the second was owned by Capsys. Neither of their stories has a good ending. At least, so far.

When you think about sheer ambition, the scope of FCS Modular’s first project was breathtaking. There are rare opportunities in New York City to develop 21 acres from scratch, but that’s what the Pacific Park project in the heart of Brooklyn represented. With the help of eminent domain, Forest City Ratner acquired the 21 acres and planned development of a new stadium, which was to become the Barclays Center, as well as 6,430 apartments. To give you an idea of the scale of 6,430 apartments, think about the Freedom Tower in lower Manhattan. The Freedom Tower is 104 stories tall. If it were an apartment building, and each floor had 20 apartments, that would mean there were roughly 2,000 apartments in the building. You would need to build over three Freedom Towers to match the number of apartments that were planned for this project.

SHoP Architects & Chris Sharples

Chris Sharples is one of the founders of New York City architecture firm SHoP Architects, which was hired to design 461 Dean Street, the first multi-family building in Pacific Park. He talked with me about how the idea for building these apartments inside of a factory came about.

Chris Sharples: “When we first started the Dean Street project . . . we actually designed it as a conventional building, and Forest City came back and said, ‘Could you take that design and translate it into a modular construction type?’ . . . We analyzed the whole way you would go about translating a building that was going to be built in concrete into a modular frame construction. And it was quite successful.”

They expected cost savings from producing the apartment modules inside of a factory.

Chris Sharples: “We were looking at 15 to 20 percent savings. And this is the other important thing to understand. We were also looking for a time impact here, maybe saving three to four months on construction time, which has a huge impact on your carrying costs. So obviously, we’re thinking, your first building, maybe you break even. Your second building, you get a little quicker. Maybe by your tenth building, you’re doing it in half the time. That is a huge savings in interest on the financing.”

“The other thing is, what happens with buildings, because it typically takes 18 months to two years for a building of this size to be completed . . . You can sort of have stages of occupancy, like maybe you get people moved in on the first six floors. With the modular building, it’s done. . . . People can move in very quickly.”

Forest City

In 2013, Forest City sold 70% of the Pacific Park project to Greenland Holdings, a Chinese state-owned real estate developer, and hired Skanska, the Swedish multinational construction company, to oversee development. Forest City and Skanska partnered to set up FCS Modular to put into effect the plan that Chris had discussed with me. The first goal of the Pacific Park project was to build a 32-story building with 363 apartments where each apartment, or module, was constructed in their jointly owned factory in the Brooklyn Navy Yard. When the modules were completed in the factory, they were to be transferred to the site and then assembled by Skanska, who was responsible for essentially stacking the modules on top of one another.

Trying to figure out where things went wrong has been like trying to put together a puzzle where the total number of pieces seems to expand with each new piece that I put into place.