Benefits of modular construction stack up for owners
 
Benefits of modular construction stack up for owners
07 JANUARY 2019 9:34 AM

Hotel developers have many things to consider when debating the use of modular construction. The process has its advantages, sources said, but saving money during construction isn’t one.

Editor’s note: This is the first of a three-part series on modular construction in the hotel industry.

REPORT FROM THE U.S.—Hoteliers looking to save money by utilizing modular construction in development projects should think again. But while the method doesn’t necessarily equate to savings on construction costs, the old adage of “time is money” does apply, sources said.

Time to market is one of the biggest reasons Mogul Capital chose modular construction for its dual-branded Courtyard by Marriott/TownePlace Suites Los Angeles/LAX project in Hawthorne, California, owner and managing partner Brad Wagstaff said during a breakout session at October’s New Hotel Construction & Development (West) Conference.

“Reducing time invariably creates a huge reduction of risk,” said Andy Berube, VP of sales and marketing for Stack Modular Structures, during the NHC&D event. “What are the risks associated with labor, supply and weather? So we try to dig down deep into why we’re looking at modular construction because sometimes it’s not a fit.”

Utilizing modular construction can trim six months off development time, according to Stuart Turner, VP of acquisitions and development for Barings, a Charlotte, North Carolina-based part of MassMutual. In addition, the punch list might go on longer in traditional construction. Modular construction requires individual hotel room units be built at a manufacturing facility, shipped to the construction site, then stacked to create a single hotel facility.

“Deploying capital in an efficient way and getting a return back to the investors in a most efficient fashion (is the biggest advantage to modular projects),” Turner said. “If we’re looking on our new fund for a five- to seven-year horizon, we want to be able to develop whether it’s ground-up or modular or a combination of both in a very efficient manner so we can turn that capital and redeploy if necessary.”

Key considerations
Many hoteliers have the misperception that modular construction is cheaper than conventional construction, according to Berube.

“The first question we ask (hoteliers exploring the modular option) is why they want to do it,” he said.

Follow-up questions, he said, include: What’s the problem that is to be solved? In what region is the project to be located? And how does time to market play into the equation?

Wagstaff said using modular construction for the LAX project cut the construction timeline to about 16 months from the 24 to 30 months that would have been needed with traditional construction.

“Especially with what we’re seeing here in the Los Angeles market—constraints on construction and the timelines that we’re seeing to build a project, especially large projects, 300 to 400 key projects—modular made sense,” he said.

That thinking also applies to the financing of projects.

“How quickly can we deploy our capital, get a project built, get it refinanced, take our capital back off the table and roll it into another project?” Wagstaff said. “That’s where we see the real benefit of modular construction, is being able to turn that capital over and over again to build more projects.”

The time-to-market advantage is enhanced by the ability to have tighter control of the construction process, according to Steven Upchurch, managing director/global hospitality practice leader for Gensler, an architecture, design, planning and consulting firm.

“It’s all about quality control; it’s all in the details,” he said during the NHC&D panel. “A number of projects that we’re working on right now are fairly large scale. So we’ve got 200-plus rooms, maybe 600 or 800 across a campus. You want to be able to control the details.”

The details include the delivery of the units to the construction site, Upchurch said.

“(If) you’ve got a large-scale project, and you’ve got a number of different subs working across a (traditional construction) site, you can’t ensure necessarily that you’re getting the same detail in every bathroom or every guestroom,” he said. “For us, it’s more about controlling your quality and keeping that design aesthetic that we set out in the modular prototype.”

For Mogul Capital, the timing aspect includes looking at cash deployment, Wagstaff said.

“During that upfront, we had … very little capital deployment as we were going out and doing some of the clearing,” he said. “When we signed our contract to develop the modular, we funded that out of our equity. We signed that contract in October—so at the same time we’re pouring footings and foundation on site, we have 200 modules to make our 354-room hotel being manufactured in a climate controlled factor in Boise (Idaho).”

By the time the footings and foundation were ready to go, the modular structures starting showing up onsite, Wagstaff added.

“That duality of that labor being able to be bifurcated and happening at the same time rather than sequential is where a lot of our time savings came in. We estimate we roughly saved about eight months overall in the project,” he said.

“From a cost perspective, we paid a slight premium to build this modular versus our stick construction.”

Growing trend
Modular construction isn’t a new phenomenon, but it is gaining momentum in the United States, sources said.

David Bader, managing principal for Cumming Construction Management, said during the “Current pace of new construction” breakout session at September’s Lodging Conference, that the U.S. is behind the rest of the world in modular construction, and the healthcare industry is further along than the hotel industry is in the U.S.

“Then there’s certain regions, like California, that are behind the rest of the United States,” he said. “Part of that is code-driven, part of that is jurisdiction-driven, part of that is … union-driven.

“It is an evolutionary process, so the larger (sub-contractors), they’re killing it by pre-(fabricating) a ton,” Bader added.

Pre-fabrication is a big part of the attraction to modular construction, according to Nate Gundrum, VP of real estate development for Mortenson Development.

“We’ve been implementing pre-fabrication strategies for years—pre-fabricated exterior wall panels, interior wall sections, primarily healthcare, hospital facilities, where there’s a lot of repetition,” he said during the Lodging Conference panel. “We’re just starting to delve into modular hotel.”

Mortenson is building a steel modular hotel in Seattle, Gundrum said.

“Steel modules are built, shipped across the ocean, accepted through the port of Tacoma, shipped to the project site and then erected,” he said. “That project was more cost-effective than a traditional ground-up build.”

In addition, quality control for modular construction is high because everything—including construction and inspections—are happening in one warehouse, Turner said.

“We’re the process of researching, underwriting and trying to understand if we can invest in the premier or select-service space and get the appropriate returns and how quickly we can make that happen,” he said.

As with traditional construction, the costs for modular construction vary by location and region, according to Berube and Upchurch.

“We don’t buy a 2x4 any cheaper than anybody else, whether you’re site built or modular construction,” Berube said. “(Location) may or may not be a factor and shouldn’t be the only reason you’re coming into reviewing modular construction.”

Upchurch added that Gensler “it’s a regional thing … in terms of where the manufacturing is completed and where our projects are located.”

“You really have to weigh labor, cost of materials, (and) cost of installation once it’s on site. You have to really weigh all of the factors before making a decision about going modular,” he said.

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