Piece by piece, a factory-made answer for California's housing squeeze

Vallejo, California

CALIFORNIA is in the middle of an affordable-housing crisis that cities across the state are struggling to solve. Rick Holliday, a longtime Bay Area real estate developer, thinks one answer lies in an old shipyard in Vallejo, about 40 minutes northeast of San Francisco. Here, in a football-field-size warehouse where workers used to make submarines, Mr Holliday recently opened Factory OS, a factory that manufactures homes.

In one end go wood, pipes, tile, sinks and toilets; out another come individual apartments that can be trucked to a construction site and bolted together in months. "If we don't build housing differently, then no one can have any housing," Mr Holliday said during a recent tour as he passed assembly-line workstations and stacks of raw materials like windows, pipes and rolls of pink insulation.

Almost a decade after the recession flattened the housing industry, causing waves of contractors to go bankrupt and laid-off construction workers to leave the business for other jobs, builders have yet to regain their previous form. Today the pace of new apartment and housing construction sits at a little over half the 2006 peak. The United States needs new housing, but its building industry isn't big enough to provide it.

The number of residential construction workers is 23 per cent lower than in 2006, while higher-skill trades like plumbers, carpenters and electricians are down close to 17 per cent. With demand for housing high and the supply of workers short, builders are bidding up prices for the limited number of contractors.

Construction prices nationwide have risen about 5 per cent a year for the past three years, according to the Turner Building Cost Index. Costs have gone up even faster in big cities and across California, according to RSMeans, a unit of Gordian, which compiles construction data. In the Bay Area, builders say construction prices are up 30 per cent over the past three years - so much that even luxury projects are being stalled by rising costs.

"It's reached the point where you cannot get enough rent or you cannot sell enough units to make it a viable deal," said Lou Vasquez, a founding partner and managing director of Build, a real estate developer in San Francisco.

The surge in construction prices is coming at the worst possible time for booming cities like New York, Seattle and San Francisco, already dealing with an affordable-housing crunch that has increased the homeless populations and stoked acrimonious debates about growth and gentrification. City and state legislators have tried to tackle their housing problems with proposals to increase subsidised affordable housing, reduce building regulations and make it legal to build taller.

But even if every overpriced city suddenly overcame the thicket of zoning rules and neighbourhood opposition that make it difficult to build new housing in the first place - which seems doubtful - today's diminished building industry would lack the capacity to build at the needed pace. This affects the rich as well as the poor, because it raises the cost of high-end condos and affordable housing alike.

This year, Californians will vote on a proposed US$4 billion bond to build more subsidised affordable housing. In San Francisco, where developers say the per-unit construction cost is edging towards US$800,000, that would buy about 5,000 units, a relative blip.

"Costs have risen so much that it is not possible to build homes where people want to live at the prices and rents they can afford," said John Burns, founder of John Burns Real Estate Consulting. All this has prompted developers like Mr Holliday to go scrambling for cheaper and less labour-intensive construction methods - and investors to pour money into startups that promise to do just that. Katerra, a three-year-old prefabricated building company in the Silicon Valley city of Menlo Park, has raised US$1.1 billion in venture capital.

A number of other building startups including Blokable, based in Seattle; Kasita, based in Austin, Texas; and RAD Urban, based in Oakland, California, have all popped up over the past five years.

"The current system can't meet demand and that's resulting in a lack of opportunity for some folks and a major hit to the economy," said Stonly Baptiste, a co-founder of Urban Us, a Brooklyn-based venture capital firm that invested in Blokable. "These aren't small problems, and they aren't small markets."

The basic concept isn't new. In 1624, Massachusetts settlers built homes out of prefabricated materials shipped from England. The pattern was repeated in Australia, Africa and India as the British Empire shipped colonists and structures wide across the globe, according to "Prefab Architecture," by Ryan Smith, a professor at the University of Utah. Over the next few centuries, new versions of the idea seemed to pop up anywhere people needed to build lots of homes in a hurry - during the California Gold Rush, after the Chicago fire, and through America's westward expansion.

In the early part of the 20th century, Sears sold tens of thousands of kits for Sears Modern Homes, which consisted of prefabricated parts and panels that buyers assembled. Along the way, the construction industry absorbed manufacturing concepts such as the assembly-line techniques that were utilised by Levitt & Sons, the pioneer of mass-built subdivisions. But the idea of factory-built housing was never adopted long enough or widely enough to make an impact, at least in the United States.

One reason the United States has lagged behind Europe, Australia and Asia - which all have well-established companies doing modular and prefabricated building - is that it is a predominantly suburban nation, and the vast supply of open land has kept the cost of single-family-home building relatively low. Another is that the construction industry has slim profit margins and invests little in research and development.

Mr Holliday of Factory OS started thinking about modular housing about four years ago, when he was struggling to build a project in Truckee, California. The idea was to build 800 to 1,000 high-density apartments and condominiums, but "the numbers wouldn't work", he said. "You couldn't get the construction costs down enough."

Mr Holliday floated the idea of modular building to his longtime contractor, Larry Pace, from Cannon Constructors, who over the past four decades has built various projects from one-off homes to office towers. "I said 'modular jobs have been a fiasco - we don't need that in our lives,'" Mr Pace recalled, adding an expletive for emphasis.

But Mr Holliday persisted, and he and Mr Pace used modular technology from two manufacturers to build four projects in the Bay Area. They are planning to do the same with the original Truckee development. Mr Pace became so comfortable with modular that he suggested that they find some investors and build their own factory.

On a recent afternoon, Mr Pace laid out the factory's process. At the first station, just past the door, four workers toiled above and below a raised platform to build what would eventually become the floor. The two men up top laid down flooring while a man and woman stood below simultaneously installing pipes. From there the unit would move steadily down the line, and, over 21 additional stations, would acquire toilets, indoor walls, outdoor walls, a roof, electric outlets, windows, sinks, countertops and tiling. It takes about a week to finish a unit, Mr Pace said. The goal is to churn out about 2,000 apartments a year, which would be turned into four- and five-storey buildings with 80 to 150 units each.

For workers, factory building seems to mean lower wages but steadier work.

Factory OS pays about US$30 an hour with medical insurance and two weeks of vacation. That's about half what workers can make on a construction site, but the work is more regular and, for many, requires less commuting. Tony Vandewark, a 51-year-old foreman at Factory OS, is OK with the trade-off. He lives a few minutes from the factory in Vallejo, where homes cost less than half what they do closer to San Francisco. Contrast that with a job he once had in the Silicon Valley city of Sunnyvale. He drove two hours to work and three hours home before deciding to rent a room so he could stay closer to work on weekdays. "On a job site, you can go do piece work and make really big money, but then the job is gone," he said. NYTIMES