Thursday, May 14, 2020

Commercial Modular Factories Could Face Bleak Future

It was just a short time ago  hotel construction was the golden egg for many modular construction factories. Marriott, Hilton and other brands found going modular saved them enormous amounts of time which for investors meant saving a lot of money.

In less than eight weeks that has changed drastically. COVID-19 and the restrictions that followed to protect people from the pandemic has seen air travel and hotel stays drop to almost nothing.

Stories of hotels succumbing to “broken construction” are becoming more common every week. Some hotel project developers were counting on equity that never came through, leaving them without the cash to finish the project. This results in construction being shut down and leaving some modular factories with work in process on the production line, with modules setting in the yard waiting for delivery and no final payment for modules that have already been set at the jobsite.

With hotel operators predicting it will take at least two years to get back to “almost normal” occupancy rates, many are deciding to forego new hotels altogether. Where does that leave modular factories that had begun to count on a continuous supply of hotel modules? 

The bad news is business travel to large cities like Los Angeles, New York and other major destinations will see an extremely large drop in hotel traffic. Even Americans with less money to spend on vacations may prefer going to the ocean for their vacations for the next few years.

The good news is predicted to be a shortage of hotel accommodations at the most popular beachfront areas and hotel developers may shift their projects there. Let’s hope so.

Another important part of most commercial modular construction is affordable housing. Again, that may also see a complete collapse if California is a sign of things to come. Their Governor, in an effort to rein in their huge budget deficit, is proposing budgeting $750,000,000 to buy currently underused hotels to house the homeless and provide homes for those families living below the poverty line.

But the biggest part of this proposal is the elimination of a $Billion Dollars$ in state backed or funded affordable housing projects. 

These affordable housing projects were so secure that we’ve seen many new commercial modular factories popping up from Montana to New Mexico all designed to serve the West Coast demand.

If California’s Governor is successful in passing his proposal, look for other states like Colorado, Washington and Oregon to follow. All these states have big affordable housing projects planned for the next decade.

Those proposed projects have also seen many new modular factories open recently to serve a market that may take years to get restarted. What happens to those factories? Will there be enough other projects to keep their production lines operating at a profit? If a new factory can cost up to $20 million to build and start up, don’t look for many more to be built if affordable housing is not on the table.

With the exception of HUD factories and a few modular plants serving a very small single family home demand, most of the commercial factories could be facing a tough future.

COVID-19 showed the country we had a shortage of medical units needed to handle a pandemic and the modular industry has stepped in to help but like all things, politicians that were recently screaming for more hospital beds, will be off to their next disaster which means funding for future hospital projects will be cut.

If Post COVID-19 hurts the construction of hotels, affordable housing, hospitals and even college dormitories with their falling enrollments, look for many commercial factories, especially on the West Coast, to cut costs to stay open for the two years it may take to see a recovery or simply fade away.

Gary Fleisher is a housing veteran, editor/writer of the ModcoachNews blog and Modular Construction Industry Observer and Information Gatherer


1 comment:

  1. Coach. Are you sure about california cutting funds for affordable housing projects? What about those that were approved but not yet fully funded? If what you say about hotels, dormitories and affordable housing is correct, what will all those new modular plants build? Lots of questions.