Unknown, but often (and incorrectly) attributed to Albert Einstein
In November of 2016, in a “By George!” article “Home Building's Elephant in the Room”, I put forth the thesis that the homebuilding industry was reaching the point of severe labor constraint and that new thinking and business models were needed.
Even worse, the constraint was occurring at a level of production equivalent to only 2/3 of the average production level of housing achieved regularly between 1950 and 2010. If we were going to produce enough housing to alleviate the growing housing shortage and affordability crisis, we were going to have to figure out how to create more housing than the current industry was doing.
The obvious past solution to such an issue would be to open the immigration gates to fill the need. It is what America had done to fill labor needs for nearly two centuries.
But, these are different times and the immigration “relief valve” now has a “closed” sign on it.
The next logical solution is to evolve to automation in the production of homes. It was what Europe had done over the past couple of decades as they faced a similar labor problem: build all or pieces of homes in factories and using new technologies.
The industry had done this previously. After World War II and up until the early 1970s, there was a vibrant factory-built housing business in the United States as defense plants, tooling, and skills rotated from building tanks, planes, and munitions to building homes. Companies such as National Homes built homes and communities that last to this day.
The recession of the early 1970s and the subsequent reorganization of the mortgage and construction financing businesses left us with an industry with over 93% of production performed stick-built from scratch on site.
There has been a price to remaining in this stick-built, on site method, however.
Currently available data by industry since 1945 reported in February 2017 by the McKinsey Global Institute demonstrated that most other industries had achieved a 1500% improvement in productivity over that 70-year period.
However, the construction industry showed a 0% improvement in the same period.
McKinsey noted a tremendous opportunity for productivity improvement through the creation of factory environments and the adoption of technologies and automation that all the other industries, save construction, had gravitated toward.
In the past six to twelve months, we are now seeing movement in this direction, finally.
Prescient materials suppliers, such as LP and CertainTeed have made investments in and with factory-built entities Entekra (CA) and Unity Homes (NH), respectively. Both entities focus on high collaboration and the adoption of BIM modeling up front, so that all quantities, measurements, and tolerances are known, and value engineering is done prior to the creation of the house pieces and parts.
California-based Katerra has taken this model further with the sourcing of supplies in their own supply chain.
Other fully integrated modular manufacturers such as Kasita, BluHomes, Blokable, Blueprint Robotics, Plant Prefab, and Proto have received varying levels of institutional interest and/or financing recently.
Japanese industrial giants involved with factory-built housing solutions, such as Daiwa House and Sekisui House, have purchased US homebuilders in the past two years. Although they have yet to bring their factory-built expertise to bear yet, most analysts believe this is the inevitable direction.
Manufactured housing behemoth, Clayton Homes (owned by Berkshire Hathaway and owning a 50% market share of the US manufactured housing market) has purchased several site-built builders over the past two years, also, including Oakwood Homes in Denver, which is known for building efficiently.
The foundation of the factory-built revolution has begun.
Interestingly, most of the public builders are still on the sidelines in this game. Only Toll Brothers and NVR have factory-built component capabilities in-house; both for several decades.
This may start to change, however.
Steve Kim from ISI Evercore, a long term and leading analyst in the sector, has recently started to focus on the off-site solutions opportunity through his recent thoughtful series on eBuilders.
So, one piece of the Elephant in the Room (labor shortage limiting housing production) appears to be in the early innings of a potential solution and that solution has initial outlines of the way housing is successfully produced in the UK, Europe and Japan.
As Gerry McCaughey, the CEO of Entekra, has noted, we don’t really have a labor problem, we have a process problem. By solving the process problem, we can get more out of the labor that is there.
My belief is that we are going to need both for a while: better processes and more labor. During the transition, as the factory-built business spools up, we will still need more labor, both in factories and out on the jobsite, using the current model for production.
However, there is another Elephant in the Room that the industry has ignored for too long when it comes to labor availability.
When we have all spoken of a trade labor shortage, we have actually meant a male trade labor shortage. The facts indicate that the industry has artificially limited the number of available workers to build homes: female participation in construction, particularly at the trade level, is not even discussed as a potential source or solution.
Here are some relevant facts:
- 47% of the active US labor force is women. After climbing for the past four decades, this has leveled off or slightly declined.
- 29% of manufacturing jobs are filled by women.
- 4% of construction and trade labor is filled by women (ranging from 1% for masons and bricklayers to 5.7% for painters).
With current site-built construction techniques, brute force labor is still the norm and, face it, we tolerate a sex exclusion culture on the jobsite, just as the military did until recently, even when brute force is not required for all of the work to be done.
It is not easy to change cultural norms. At least in the military, there is a command structure that can set policy and enforce it. However, builders do not fully control their subcontractor and supply chains.
Factory-built solutions offer a new and more inclusive opportunity for the industry and is not without precedent.
During World War II, women assembled tanks, ships, planes, guns and munitions in factories when the need was necessary, and the result was highly successful.
Go to manufacturing environments today and women on the shop floor and in production management are not rare.
I was on a panel at ULI last week with Margaret Whelan of Whelan Advisory. She noted that Buddy Raney of RCI Construction in Orlando employs more women than she’s ever seen on a factory floor, as they deliver their Vertically Integrated Total Solution (VITS) to the national builders in their markets. Raney estimates that VITS reduces the typical framing cycle by 10 days; allowing for their builder customers to close 10% more homes as a result.
If more of housing production is able to move to factory environments, that data seems to indicate that there is about a 7 times higher probability of attracting female labor into the industry than currently exists. That could swell the number of people available to build homes and, most likely, the total number of homes produced.
How many homes per year might that mean?
What would it mean in terms of new thinking, new management, and new blood into a stale industry?
By changing the methods that we use to create housing AND the gender composition of those doing the creation, might we get better results than we do currently?
It is time that we all recognize the next Elephant in the Room: how women have been excluded from the construction labor force, whether purposefully or not, for too long and that a change is needed.
The shift toward factory-built houses and housing components offers a tipping-point opportunity to begin the correction of this situation for the benefit of many.
Let’s take the opportunity and do it! It will be one of the best things we will have ever done.