Material costs for residential home builders, one of the largest consumers of softwood lumber, have steadily risen following tariffs imposed by the US Department of Commerce in late 2017. Rising material expenses have boosted the cost of constructing new housing, leading home prices to appreciate, while taking a toll on the domestic residential construction subsector. Modular building, which refers to manufacturing prefabricated building components in factories and transporting them to the construction site, has gained renewed interest across residential construction industries in recent years, as a means to address challenges related to rising material costs and qualified labor shortages. Modular building processes have been supported by innovative technologies such as building information modeling software and computer-aided design systems, which have enabled modular building to expand to include multifamily residential units.
Softwood Lumber Dispute and Rising Materials Costs
Following petitions filed by the US Lumber Coalition, the US Department of Commerce (US DOC) began antidumping duty and countervailing duty investigations of softwood lumber imports from Canada in December 2016. The following November, the US DOC concluded that imports of Canadian softwood lumber are being unfairly subsidized, with total tariffs for most Canadian softwood lumber producers at 20.8%. The US DOC argued that subsidies of Canadian softwood lumber products by provincial governments enable Canadian producers to dump softwood into the United States, below market value, placing the domestic forestry market at a disadvantage.
Softwood lumber is a major building material used in residential construction, with US home builders requiring approximately 15,000 board feet to construct a typical single-family home. Additionally, in 2017, over 95.0% of lumber imports to the United States were sourced from Canada. As a result, these tariffs imposed on the largest exporter of softwood lumber to the United States have led domestic softwood lumber prices to soar in recent months, which has translated directly to increased materials costs for builders. According to the latest Producer Price Index (PPI) released by the Bureau of Labor Statistics in June 2018, softwood lumber prices have risen 35.1% since December 2016 when the US DOC investigation began. As reported by the National Association of Home Builders (NAHB), softwood lumber tariffs have added approximately $9,000 to the cost of single-family homes and as much as $3,000 to the price of a multifamily unit.
These tariffs are predominantly affecting housing starts of lower-priced homes, which simply cannot absorb the higher input costs without sacrificing margins. Rising input costs not only affect contractors’ bottom lines, but could further diminish demand for construction services overall, which has already been evidenced by US Census data on housing starts and permits. According to the latest US Census release, housing starts declined sharply nationwide in June 2018, falling 12.3% since May and declining 4.2% each year. While monthly data is volatile and subject to significant margins of error and revisions, this change represented the largest monthly percentage drop in housing starts in approximately a year and a half. Meanwhile, single-family residential building permits, which signal how much construction is in the pipeline, fell 2.2% since May, representing an expected decline in the level of home building activity moving forward.
Modular Building Picking Up Steam
Prefabricated and modular building components and other alternative construction methods are gaining renewed interest among contractors. These forms of offsite construction, which enable various building elements to be built in a factory and transported to a construction site, help address challenges related to rising material costs, skilled labor, job site safety and delivery times. While the concept of modular building has been around for decades, particularly in regards to single-family modular homes, modular construction methods and prefabricated components are beginning to appeal to developers across other areas of residential construction. Companies like Blokable Inc. (Blokable), Katerra Inc. (Katerra) and OneBuild Inc. (OneBuild) manufacture prefabricated housing products from a single framework, presenting a general business model in which much of the production process is off-site, so modular building can help developers reduce the costs and delivery times associated with traditional housing construction. By applying the concept of single-family modular building to multifamily units, prefabricated construction can help address housing affordability issues in the nation’s core urban areas.
“Modular building is gaining market acceptance in light of rising softwood lumber prices.”
Modular housing minimizes the layers involved in the traditional construction process, which typically involves several specialized subcontractor companies along with a property developer and general contractor. Modular building company Blokable manufactures entire apartments that can be combined and stacked into a multifamily unit, while modular home builder Katerra produces discrete prefabricated components that can be quickly assembled together on site. Meanwhile, modular builder OneBuild collaborates with multifamily property builders and developers using a prefabricated, steel frame modular approach. Regardless of the methodologies used, modular building processes aid in cost-saving measures that can improve the affordability of single-family and multifamily homes, providing opportunities for builders in both markets. In particular, the reduced construction costs resulting from using modular building can help slow the ongoing losses of federal and state funding for subsidized low-income housing units, prompting nonprofit developers to move forward with multifamily projects despite less public financial backing.
The advancement of alternative construction methods has been supported by innovative technologies such as building information modeling (BIM), which enables construction managers to view every aspect of a construction project, fully realized and in 3D, prior to beginning construction. BIM software can determine how a proposed change will affect subcontractor costs and scheduling, which enables general contractors to create more accurate budgets. In regards to modular building, BIM software can help builders overcome challenges related to mechanical, electrical and plumbing systems within prefabricated components by aiding in planning for the location and clearances required for a comprehensive and successful project.
Additionally, computer-aided design (CAD), which refers to software used to create precision drawings of new structures as 2D designs or 3D models, has largely improved the efficiency of construction operations for both traditional and alternative construction. In regards to prefabricated building processes, CAD systems enable modular builders to showcase the home layout and floor plans to customers, allowing prospective homebuyers to preview their modular home before beginning construction. CAD systems have also aided the development of fast-track construction, in which the engineering and construction of a project proceed concurrently. This mainly has applications in commercial and heavy engineering construction, but is being explored for residential purposes.
Modular building and other forms of offsite construction are expected to continue to rise to prominence in single-family and multifamily construction markets. Furthermore, modular building processes are also being increasingly explored in nonresidential construction, particularly in the commercial and healthcare markets. According to the latest estimates by the Modular Building Institute, permanent modular construction units increased 2.1% in 2017 to reach 23,286 units, while the value of modular building construction projects rose nearly 20.0% in 2017 to total $7.2 billion. As offsite production continues to appeal to builders struggling with escalating material prices and a shortage of qualified workers, prefabrication is expected to gain a foothold within the construction sector and achieve market acceptance.
Edited and designed by Emily Forster.
Industry Impact: Home Builders; Heavy Engineering Construction; Commercial Building Construction
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