Thursday, April 8, 2021

Is the Modular Construction Industry About to be Hit with Many Factory Closings?

Since the middle of 2020, the modular construction industry has been seeing record numbers of contracts coming in. From huge hotels and affordable housing projects to single-family homes, modular hasn't seen a year like this in decades. It would appear everything is bluebirds and rainbows for everyone in the modular housing industry.

The cyclical nature of modular construction is tied very closely with the law of supply and demand but this year, 2021, is seeing no slowdown in demand with many factories saying they are taking contracts so far into the future that production line space could be sold out into 2022.

Did someone forget to tell all those bluebirds in the modular home industry about the supply side of that law?

While contracts are being signed with everyone celebrating at one end of the process, the other end of the process, the end that actually produces the modules is in complete disarray.

While contracts are being signed at today's material costs, the other end is already paying much more for building materials than anyone thought. The homes and projects currently being completed do not carry enough profit to replenish the building material inventory.

I just learned today that OSB sheathing may soon be breaking $50 a sheet! That's almost $20 a sheet more than what most factories paid for their current OSB used on their modules. 

Now add in the rising costs of drywall, insulation, lumber and MEP systems and it doesn't take long for a module going down the production line to become a loss leader instead of a profit center.

I also recently heard a modular factory brag that their typical 2,200 sq ft home has a $50,000 profit. Not sure if that is even close to being possible in today's modular construction world. 

For modular factories to continue to sign contracts for future work, sometimes into 2022, is playing with fire, especially if more shortages in building materials continue to plague our industry which pushes costs higher at an alarming rate.

The question that must be answered is how can factories continue to pay for tomorrow's building materials when the modules they are currently producing are losing profit at every stage of their production?

The modular construction industry may see another round of factory closings unmatched since 2008.

Gary Fleisher is the Managing Director and contributor to the Modcoach Network and its affiliated blogs. 

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  1. Supply chain is our industry’s biggest risk today, tomorrow and for the foreseeable future. There is no magic bullet but I’m afraid those that aren’t dedicating a substantial portion of their time mitigating this risk may find themselves in a place where they have a large backlog, very little materials, no cash and no exit strategy. This is a very risky time. Undoubtedly we will see factories closing this year and it may very well not have anything to do with how they run their business. Some tides are just too strong to resist. Stay vigilant everyone! We can get through it together.

  2. It would be extremely valuable to both buyer and seller if a hedging vehicle were in place to reduce price volatility on the modular unit side - and saying that I recognize the complexity of hedging raw materials and bought components, and creating a hedge on a complex system - would a hedge on say lumber, plastics, and wiring go some way towards mitigating the risks for both sides, and do options or futures on those components exist today?

  3. I ahve experienced this before in a previous industry with volatile raw material costs and installations that sometimes took 1-2 years. We established an index price at the start of the contract. If raw materials rose 5% during the course of the contract we could raise our per unit price by 5%. We received no increase in price for labor costs rising, utilities, etc but at least we were able to recoup our raw material costs over long contract periods. There are no onsite builders that will cover 6-9 months of material price increases unless they are asking for a huge project management fee to offset the risk, why should modular be different.