Time is finally right for modular to disrupt construction, says McKinsey

Many markets worldwide have the conditions in place for modular construction to take root, says a new report from McKinsey & Co.

“In many countries, modular construction is still very much an outlier,” says the report, titled Modular construction: From projects to products. “But there are strong signs of what could be a genuine broad-scale disruption in the making. It is already drawing in new competitors – and it will most likely create new winners and losers across the entire real estate and construction eco-system.”

However, it warns: “Capturing the full cost and productivity benefits of modular construction is not a straightforward proposition. It requires carefully optimising the choice of materials; finding the right solution between 2D panels, 3D modules, and hybrid designs; and mastering challenges in design, manufacturing, technology, logistics, and assembly.

“It also depends on whether builders operate in a market where they can achieve scale and repeatability. Public owners and regulators can facilitate a shift in the industry structure, too.”

The report cites relative scarcity and cost of labour as the biggest predictors of where modular construction is likely to gain traction, and take hold has it has done in Japan and Scandinavia.

It highlights growth potential in markets such as Australia, the UK, Singapore, and the US west coast.  In the UK offsite manufacturing has been used in about 15,000 new homes in 2018, it says.

“Production costs are still high, but rising labour costs are making modular products more competitive.

“In the western United States, the eco-system is generally fragmented and small scale, with around 200 low-capacity manufacturers. However, high and rising construction wages in skilled trades such as electricians have driven a recent shift toward offsite manufacturing. This is related to the sustained construction boom that is outstripping capacity, which is driving comparatively higher and rising wages. This is making it economical to start using modular construction.”

The report points to major investors including SoftBank, Google’s parent company Alphabet, and even Amazon, which have invested in prefab home developments and builders such as Katerra, RAD Urban, and Factory OS.

However it also points to the challenges still faced by manufacturers and the difficulties of scaling up: “The shift from onsite to offsite construction requires significant investment in manufacturing facilities – and companies will only undertake that investment when they feel certain there is a robust pipeline of projects to keep the facility humming over the long term.

“Shifting from traditional, familiar building techniques to more efficient modular prefabrication will require major changes – not only from modular manufacturers but also for developers, construction firms, investors, and the public sector.”

The full report can be read here.

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