Building Better, Piece by Piece

Over the last 50 years, the United States has experienced a steep decline in construction productivity.

While manufacturing has seen productivity growth aided by new technology, amazingly, we are somehow worse at building homes today than we were during the post-World War II era, when developers like Levitt & Sons adopted assembly-line techniques to mass produce affordable communities.

In the last decade, software-trained investors in Silicon Valley — the country’s most expensive housing market — have poured millions into startups aiming to fix how the U.S. builds, by upgrading Levitt’s approach for the digital age. Insiders now prefer the term “off-site” or “industrialized” construction to describe the brimming field, to dodge the stigma of “modular,” a word that, for many Americans, conjures images ranging from Soviet-era housing blocks to the flimsy trailer homes of the 1970s. (I will continue to use the term “modular” here for simplicity.)

Whatever the label, the sector now encompasses a wide range of building types and techniques, spanning skilled tradesmen assembling a building from Ikea-like 2D panels, to the delivery of full 3D rooms, which are then “stacked” like Lego bricks. The common thread that unites and defines modular development approaches is that most of their construction work is done in a factory.

Yet for all the buzz about modular’s potential, few startups in the U.S. have made it past their first building. Infamously, Softbank-backed Katerra went bankrupt shortly after achieving a $4 billion valuation, leaving projects abandoned across the country. The companies that survived the latest hype cycle have been sold for pennies or shifted to the Middle East, chasing demand from new-city projects like NEOM as a temporary reprieve.

I lived this hype cycle as an employee at several U.S.-based modular companies. I also began my career in Scandinavia, where a more mature, economically rational modular sector is thriving. In the United States, approximately 4% of new construction is manufactured off-site — mostly single-story buildings. In Scandinavia, by contrast, that number sits at 45% and includes mid- and high-rise apartments, of the type the U.S. desperately needs to confront its worst housing crisis in a century.

There is a range of theories about why the U.S. has failed to keep pace with other developed countries. Economists have posited that increasingly restrictive land-use regulations fragmented the construction market into small companies, which underspend on R & D. In my experience, the United States’ decision to federate the development of building code to 20,000+ local jurisdictions, each with its own byzantine requirements, made it impossible to develop a standard product that can be sold at scale across state lines. (The exception is single-family homes delivered on a steel chassis, for which the U.S. Department of Housing and Urban Development does have a national building code; in this piece, I am focused on mid- and high-rise buildings.) Add NIMBY-coded land-use policies and antiquated permitting regimes, and the government can look like a head-banging obstacle to growth rather than an ally.

An obvious solution is to relax land-use regulations. But I also think that — perhaps counterintuitively — the government should get a lot more involved in the modular industry. Specifically, it should follow the lead of countries with robust public housing programs, where the government has played a catalytic role for the sector by placing up-front bulk orders — the type of advanced market commitment that provides builders with the scale and predictability they need to invest in their factories.

The stabilizing presence of a big and patient buyer, like the government, helps overcome the “valley of death” that tends to afflict early-stage manufacturers.

Ford didn’t get his car right on the first try, and the same is true for most modular builders. In fact, first projects often go quite wrong. That was the story with 461 Dean Street, New York City’s first off-site high-rise development. A closely watched part of Atlantic Yards in Brooklyn, it ended up taking twice as long as initially projected. Even under the best circumstances, first modular builds are rarely cheaper than traditional construction, given the extra up-front costs of design and engineering. Economies of scale and associated cost savings typically emerge only after the third or fourth building.

To make modular economics work, you need a buyer willing to order multiple, similar-enough buildings. Those buyers do exist in the private sector, but they are rare: For example, Marriott, which has a 263,000-room pipeline in North America, has invested in modularizing some of its hotel brands. Greystar, the largest U.S. apartment owner, purchased a modular factory in Pennsylvania to act as a supplier for its development pipeline.

But some of the strongest examples come from national governments in other countries. A program run by Sveriges Allmännytta — which roughly translates to Public Housing Sweden (PHS) — offers a clear road map for the United States.

PHS represents 310 municipally owned housing companies managing over one million rentals. In 2011, Sweden saw an acute need for more affordable rental housing — in part a reflection of its relatively friendly immigration policies — but most of PHS’ members had limited experience constructing new buildings. PHS, which had historically played a role more akin to advisor and auditor of its subsidiaries, jumped into development.

PHS launched an open call, asking regional builders to put forth a Kombohus — or “concept” housing design — that they would be willing to deliver at a fixed price per unit. It selected three vendors, each with distinct designs and with factories that provided coverage across the length of the country. (While Sweden’s population is only slightly larger than New York City’s, its land mass spans the distance from New York City to Jacksonville.) Member housing companies were given the opportunity to purchase a “Kombohus” off PHS’ master agreement at the prenegotiated price.

The response was immediate, and PHS quickly expanded into a full catalog of options: a basic mid-rise apartment building (“bas”), an urban tower (“plus”), a small-unit model for students and seniors (“mini”) and row houses for peri-urban areas (“småhus”). Every six years, PHS runs a new public procurement to add developers to its master contract. During its first six-year term, PHS delivered over 10,000 units. Houses ordered on contract were delivered five months faster and 18% cheaper than houses off contract.

A similar, cross-jurisdiction procurement strategy is possible in the U.S. — and it could simultaneously lower costs and bolster domestic industry.

The most obvious place to start is the military, which has a nearly $20 billion annual construction budget and a robust housing pipeline. Hundreds of thousands of people live in barracks or other military housing, much of which has fallen into disrepair. At a congressional hearing earlier this year, lawmakers on both sides of the aisle pressed leadership to incorporate industrialized construction techniques as it creates its next capital plan. Perhaps unsurprisingly, people across the spectrum can all get behind the goal of better, cheaper housing for the enlisted and their families. (Disclosure: I have advised the Department of Defense on its modular efforts.)

The next step, though more contentious, is for HUD to lead its own initiative. Like Public Housing Sweden, HUD could establish master contracts that local housing authorities tap through cooperative purchasing. The U.S. tried a watered-down version of this approach before: In the late 1960s, HUD ran a national modular program known as Operation Breakthrough, which lost momentum in the 1970s as private market housing starts shot up.

In 2023, HUD commissioned research on a possible Operation Breakthrough revamp. Seemingly not much has happened since the administration changed in January. But a Breakthrough-esque program could be a way for the Trump administration to give new direction to the beleaguered agency while providing a much-needed lift to a struggling domestic industry. Call it the Made in America Homes program or the National Industrialized Construction Strategy. 

Other countries are already moving. In June, Canada’s new prime minister, Mark Carney, launched Build Canada Homes, a government agency with $25 billion in debt financing and $1 billion in equity dedicated to modular-home builders. Crucially, the agency has authority to place bulk orders. It plans to encourage the use of Canadian materials like timber, a staple of the modular industry.

Rather than wait for federal action, some state and local agencies in high-cost areas of the U.S. are taking matters into their own hands. Cal Poly, for example — part of the California State University system, the largest public university system in the country — has set up a factory to deliver 4,200 units of off-site student housing over the next decade. Sitting in San Luis Obispo, a small town located in the middle of California, its factory will be positioned to provide dorms across the state.

Meanwhile, in New York, the governor’s 2025 budget includes $50 million for a modular “starter home” initiative, though few details have been released. And one could imagine the New York City Housing Authority’s surprisingly sophisticated procurement department playing a similar role to Public Housing Sweden, using its market power to set a modular room rate scheme accessible to housing authorities across the state. The key is to structure procurement around a comprehensive program and pipeline — not just one building — using the State’s market power to get better pricing.

Venture capital won’t inaugurate the next great era of modular building. But government demand might. If Washington is serious about solving the housing crisis, it should stop passively waiting for the next Katerra and start acting like the customer the industry needs.