London 2019: Beyond modular: From projects to products

June 2019

Modular construction is experiencing a new wave of innovation and investment, as discussed in a new McKinsey report, “Modular construction: From projects to products.” On June 25, the Global Infrastructure Initiative (GII) convened a roundtable of senior executives in real estate and construction to discuss the opportunities, challenges, and potential disruption posed by modular construction.

A broad range of the real estate ecosystem was represented, with attendees including developers, investors, engineering, procurement, and construction firms, modular manufacturers, and software developers. The discussion focused on how to scale the penetration of modular construction in the real estate industry to achieve the potential benefits. During the discussion, several key themes emerged.

  1. There are numerous clear benefits to a modular approach to construction—potential cost reduction and significant schedule compression allow for risk mitigation and earlier revenue capture. Participants also noted the importance of waste reduction from moving to a manufacturing approach, less disturbance for local residents, the improved (carbon) sustainability performance of a structure through its lifecycle, and increasing demand for various types of temporary structures.
  1. However, the industry has not yet reached the tipping point that would see suppliers building second and third factories, or investment at scale from banks and other organizations. There were also diverging views from attendees about whether this tipping point might occur in 3, 10, or 20 years – or whether the barriers to reaching it are too high to overcome entirely.
  1. Several barriers impede the scaling of modular construction. These include the immaturity of the supply chain, regulatory issues, customer perception, access to investment, and a need for different capabilities. However, solutions are emerging to address each of these barriers.
  1. Immaturity of the supply chain: Developers in particular noted the inherent risks in awarding large contracts to suppliers whose ability to deliver at scale is untested – not least because competition often relates to land rather than construction cost. Part of this risk can be mitigated with better interfaces between products, and some developers are successfully cultivating the supply chain themselves, enabling substantial longer-term improvements to products and cost.
  1. Regulatory: Planning regulations and gaining permission for modular projects can be challenging, as can issues obtaining insurance and assurance for modular products. There is, however, clear will to improve the situation, and much has already been achieved. For example, Homes England is even mandating that a share of construction leverage new methods including modular, although definitions seem tricky.
  1. Customer perception: Modular construction has traditionally been seen as being of poor quality and design. However, these perceptions are beginning to change. Technology has evolved such that the design sophistication of traditional and modular developments is virtually on par. And younger generations of consumers may have fewer reservations when it comes to the safety or reputability of a factory-built home. Modular developers are also reaping the value uplift from providing design choices and individual configurations, while learning which choices really matter to reduce complexity.
  1. Access to investment: All participants recognized the need for deep pockets to scale modular construction – factories are expensive to build and even more expensive to keep running. Participants shared examples of how some players are accessing alternative sources of capital through private equity investment or venture capital funding to enable them to achieve scale.
  1. Capabilities: Capability building across the real estate industry—including a deep understanding of customer segments and their needs—is required to shape the highest value product offering. Areas of focus include design and manufacturing excellence, including mass customization and complexity reduction; world-class logistics to secure on time delivery and industrial-grade supply chains; and innovation in existing business models and approaches. Some industrial projects may lead the way, such as the global supply chains of modules with long-term performance guarantees that have emerged in petrochemicals, where the scale of expected work justifies the investment.

There is much to do and many challenges to be faced before modular construction is adopted at scale by the real estate industry. But for those organizations willing to take the risk and disrupt the industry, the rewards potential seems large.

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