ULI San Francisco Blog

Alpha Founder, Former Zeta Communities CEO Naomi Porat Talks Modular Construction with ULI SF

Naomi Porat is a social entrepreneur with a portfolio of ventures and projects throughout the U.S. She partners with entrepreneurs to deliver socially responsible products and achieve adoption of groundbreaking new technologies for the built environment and cleantech sectors. She is a founder of Alpha and the former President and CEO of Zeta Communities, a manufacturer of net zero energy and energy efficient housing, schools, and public facilities that utilized modular construction.

Noami will be moderating ULI SF’s upcoming program, Modular 2.0: The Future is Now. This program is part of the Housing the Bay initiative, and, along with other Housing the Bay lead-up programming, will help to inform the conversations and solutions covered in ULI SF’s upcoming Housing the Bay Summit, to be held on March 23rd, 2018

ULI SF: For those new to the discussions concerning modular construction, what are the benefits of modular construction? How is modular construction a potential tool that could be utilized to address the Bay Area housing crisis?

NP: “The primary benefits of modular construction include lower costs, a faster building schedule, more predictability in scheduling and budgets, and a higher quality project. There are also significant benefits to workers, including a safer, healthier and more stable work environment. We’ve also found that neighbors are more supportive of off-site construction due to the minimization of dust and other negative factors that are associated with traditional on-site construction.

In terms of the Bay Area’s housing crisis, it’s important to remember that solutions to the housing crisis will need to include a multi-faceted approach. Modular construction is one very impactful tool, and yet a solution to the crisis goes beyond just reducing construction costs and time. Other areas that need to be addressed to ease this crisis include expanded financing options, CEQA reform, more optimal housing investment  tax incentives, and  land use and housing public policies that reduce entitlement time, including a statewide expedited permitting process for affordable housing projects, to name a few.”

To-date, what are the primary challenges to the widespread implementation of modular construction practices, both nationally and in the Bay Area and California specifically?

“There is a lack of a comprehensive ecosystem to support modular multifamily housing projects. This required ecosystem includes local factories – and professionals such as engineers and architects – as well as lending institutions with experience financing modular projects. To make a shift toward any new and innovative technology, the industry requires an ecosystem to support it. The good news is that the Bay Area now has an emerging industry of professionals in a range of disciplines (architecture, engineering, financing) experienced in modular housing development including pioneering leaders who are excited about the potentially transformative impact of modular construction. Specifically, there is a real desire to share experiences about modular construction methods to work effectively. For example, the launch of Factory_OS will have the potential to supply demand throughout the Bay Area and West Coast and stimulate the expansion of the modular multifamily professional ecosystem.”

What role could municipalities play in leveraging modular construction to create more affordable housing?

“Municipalities could play a very important role in supporting new modular factories and the corresponding ecosystem by educating building and planning staff about HCD’s state jurisdiction for permitting and inspecting modular housing’s off-site construction components, thereby facilitating a more efficient permitting process for the on-site construction for which they are responsible.   Other opportunities for encouraging developers to consider modular construction could include preferential weighting or other requirements for modular housing project financing applications that include plans for affordable housing. An excellent example is the City of San Francisco’s recent RFP for construction of supportive (homeless) housing that included a modular construction requirement due to significant cost and time constraints associated with the property.”

How would you characterize the lending and financing market for modular projects, particularly compared to traditional construction projects?

“There are a very limited number of financial institutions that have prior experience with modular construction. I call these “pioneering institutions.” They can provide very valuable education to other financial institutions, particularly in terms of what to expect and how to underwrite modular projects.

The underwriting criteria and payment schedules are important in this regard. In modular construction, an underwriter will need to consider the factory operations as well as the project. Many traditional lenders, however,  don’t have experience with factories’ financials and operations. But this can be taught, and I think that we can create some direction for financial institutions as to how to underwrite projects that utilize modular factories. On the draw downside, the payment schedule for a modular project is also very different than a traditional construction project. It’s about setting expectations and educating institutions.”

How would you characterize the current environment and market for modular construction?

“The fact that multifamily housing construction costs are hovering at such a high level ($550/square foot on some current Bay Area projects) is a major driver for this drum-beat of interest and optimism around modular construction. The optimism is mixed with caution and diligence, although the launching of firms like Factory_OS could provide the proof points about game-changing reductions in cost and time. These current costs will be unsustainable if we don’t shift to a more productive, lean construction method and technology.”

What are the leading modular firms doing right and what lessons have been learned within the modular construction industry since the modern inception of modular construction?

“There are three key lessons: 1. the team 2. the source of financing 3. the backlog and pipeline.

The modular factories primed for success are those who have founding and executive teams that include multifamily housing developers, general contractors, and architects with experience in both off-site and on-site construction.    The traditional modular or manufactured single-family housing companies serving the suburban and rural markets that try to re-invent themselves into a multifamily modular factory serving the urban markets typically lack an understanding of the standards for quality, finishes, and business development processes.

The source of financing is also a critical component. Venture capital, for example, is a mismatch for the construction industry. They expect fast returns and high margins and tend to insert themselves into the operations of an industry that they know nothing about. Successful factory start-ups need to consider attracting capital from the real estate sector including developers and financial institutions. Modular construction is disruptive, but it’s not the tech industry.

Given the high fixed costs of factories, a continuous throughput of product is critical. so that factory lines remain consistently full.”

Interview by Nate Hanson

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