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  June 27, 2017  
     
  THE ELEPHANT IN THE ROOM 2.0
by George Casey, CEO of Stockbridge Associates, LLC
 
     
 
 
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Here's home-building operations guru George Casey's take on how tech-driven automation will drive into site-built home building sooner than later.

My recent article “Home Building’s Elephant in the Room” has elicited some interesting responses and has opened a simmering anger.

It seems that many in and around the home building industry have seen the same trends set forth in the article: a persistent labor shortage for skilled trades, a need for disruptive solutions, a cry for a new business model for home building, and an astonishment that many of the leaders and owners of home building companies are neither seeing the problem nor seizing the opportunity created by this situation.

There is an anger that many see the issue, but those who could do something about it are doing nothing substantial, creative, innovative, or exciting to lead their companies into the future where new leadership and business models will make a positive difference.

Too busy grinding the same old business model that yields capital returns that are ho-hum at best and T-bill worthy at the worst. A model that is hated by customers, is as slow in delivery as Amazon is fast, and is antediluvian.

Listening to and speaking with some of the commentators on the article has opened interesting ideas that have pointed to a “gaze through the haze” look at what the future might look like.

The way forward appears that the core outfacing role of the builder will look pretty much the same. Finding land, getting it entitled, understanding markets and demands, relating to customers in multiple ways, and providing the ingenuity in creating great neighborhoods that people value will continue to create great value. Owning the customer relationship is critical.

However, the creation of the home itself will be divided into two segments.

In one case (and for those who can afford it) there will still be “craft-built homes,” just like there are bespoke suits and shirts. They will be desirous and costly, as the pool of craft laborers will continue to dwindle. This model will be expensive, still take a lot of time, and will become more and more of a rarity available only to those with wealth.

In the other case, for those with more modest incomes and for affordable and workforce housing, factories that are highly automated will create “Lego pieces” of various sizes and functions that can be easily assembled on site to create homes of various complexity and end-price.

These factories will be characterized by high use of robotics, the creation of standardized shapes and functions, and relatively low labor content. Builders and architects will use the core components to create individual floor plan end elevation solutions, but out of the common tool kit.

The builders will have, most likely, a multi-disciplinary crew or crews who will assemble the pieces on-site. Some may be contracted, but my guess is that they will probably be employees of the builder, just to ensure consistency and efficiency.

I also believe that, at some level of production, the factory will be owned by the builder to ensure supply, but that is not a necessary component.

What will be necessary is a high degree of partnership between the factory and the builder, most likely with very robust, high frequency sharing of information among builder reps in the factory and factory reps in the builder.

I also believe that builders will most likely adopt a model where they are building homes both for-sale and for-rent to keep throughput high and to reduce the variability in production that is inherent when a builder is tied solely to the for-sale market and its finicky mortgage availability and underwriting issues.

Even if not owned by the builder directly, I also believe that the factory will need to have its production going to both for-sale and for-rent pieces of the industry for the same volatility dampening logic.

The logical combination of high automation and components inside of a high production factory has not happened recently in the US. Companies like Unity HomesBluHomes, and Proto Homes are already in this space, but tend to be small in terms of overall production and relatively high in cost, in part due to focus on high energy performance or architecture.

They are great current prototypes to understand and study.

On the other hand, the manufactured home industry, with existing factories, is ramping up production. It looks like the industry will do about 80,000 units for 2016, up from 40,000 at the bottom of the recession, but still significantly less than the 250,000-400,000 per year the industry did up to about the year 2000.

Although offering an ability to assemble large near-complete components in a factory environment, the degree of automation used is relatively limited. It is more akin to stick building or panelize building homes on an assembly line than the more automated factories that we are used to seeing in other industries. Clayton Homes is the leader in this segment with about a 50% market share nationally.

The product is set to work on a pretty standard modular or manufactured home type of simple rectangular platform currently, without a lot of real architectural diversity.

Bridging the gap is the modular home industry, which allows for factory building of near-complete subcomponents that are connected on-site to create homes of more interesting architectural character. Champion Homes and Cutting Edge Homesare two examples here.

They tend to retail out through independent contractors and smaller builders and are not as easy a purchase process for a customer.

I think that one of the best current prototype to look at comes from Sweden in the form of a 90-year-old company, Lindbacks. They employ high automation, even-flow and lean techniques, and create architecturally pleasing modules for both the for-sale and for-rent markets. An article in Treehugger by Lloyd Alter last March is a very good top-level introduction to the company and its methods.

What has become evident to me is that we are seeing the pieces of what the new business might look like, but not the right combination of heft and sophistication on the customer-facing side (neighborhood development, marketing, and sales) combined with the new automated factory component production technology that does not have the labor issues inherent in the current subcontractor-based, craft-built system we now use.

What is interesting is that we have been here before. National Homes, based in LafayetteIN, was started in 1940 and throughout World War II and up into the 1970’s, they did prefabricated single family homes nationally and with high volume, but with a strong emphasis in the mid-west. Factory built components were assembled on-site by builders and many National homes still stand.

The split of the building industry into distinct multi-family-for-rent and single-family-for-sale segments, coupled with very low cost manufactured homes created a branding problem for factory-built housing that we live with today.

There are four logical routes to meaningful scale in a short period that I can see that could impact the business in a reasonable future timeframe.

One is for the current large-scale home builders, who own the customer-facing part of the industry right now, to either deeply partner with or acquire the existing major and minor modular and/or manufactured home builders and then drive automation to a Lindback-type scale, so that the labor to capital asset balance tilts more to the capital asset side, permitting higher levels of production without the skilled labor constraint.

The second is for the reverse to happen. The large-scale modular and manufactured home businesses either deeply partner with or acquire home builders to attain the customer-facing elements of the business and then invest in the automation to drive even higher scale.

The third is for one of the existing smaller prototype companies to perfect their product and process and then either create more production capability and front-end capability or acquire it by purchasing existing builders and/or factories to drive scale faster.

The fourth is for an out of country player who is familiar with this integrated process to come in and establish a beach-head by acquiring or deeply partnering with existing builders and factories to drive the scale.

I am not smart enough to know which of these might be the actual path, but all of them are possible. Who will have the vision, leadership, capital, and execution capability will be the deciding factor.

All I know is that disruption is on the way and current owners and leaders of both home building companies and manufactured/modular home companies will either be driving the disruption or will succumb eventually to it.

There is going to be a National Homes 2.0 for the 21st century created at some point and the ethers of the past will reform to create a new dynamo home building business model.

It is going to be interesting to watch, no?

Originally published in Builder Online on December 26, 2016 and can be found at http://www.builderonline.com/building/the-elephant-in-the-room-20_o

 

 
     
     
     
 

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