Understanding the costs, risks of modular construction
Understanding the costs, risks of modular construction
08 OCTOBER 2019 8:22 AM

There are many upsides to modular construction, but careful planning and the right team should be in place to avoid some risks that could worry lenders.

PHOENIX—It’s never been a better time than now to do modular construction, but considerable front-end planning is needed to successfully execute, sources said.

Speaking on a panel titled “Modular constriction to drive growth” at The Lodging Conference, Mitch Lund, project manager at Fulcrum Development, said labor is still scarce in many markets, materials are expensive and there’s a pressure to get to a market quicker.

Brad Wagstaff, CEO of Mogul Capital, said his company designs all of its projects modularly and believes it is a solution to a problem.

“Pretty much everybody that I talk to, that is serious in pursuing modular, they’re pursuing it to solve a problem. Either they’ve had a bad experience on a project or their costs are just skyrocketing right now and they’re trying to figure out how to solve that,” he said.

Lund said a macro view should be taken of any modular construction project.

Who should be building with modular
If you’re in a highly dense market with high labor constraints, modular construction should be on your radar, Wagstaff said.

He added that if the difference in the cost of a traditional build and a modular build is marginal, “I would absolutely recommend jumping into the modular space as long as you have the right team,” he said.

Lund cited San Francisco as a region ripe for modular construction.

Compared to three years ago, there are more lenders and architects in the modular space today who can help get it done, Wagstaff said. Technological advancements in factories also make it easier to build modularly, he said.

“These benefits are going to proliferate. … Hospitality is really designed for modular manufacturing,” he said.

Understanding front-end costs
Modular construction offers a better opportunity to control costs, Wagstaff said, adding that his company will take about 70% of a project cost and “stick it into a factory,” which not only saves on labor costs but also on time.

From a general contractor’s perspective, it’s important to look not just at the cost of work, but the entire deal, said Mike Brown, national preconstruction lead at DPR Construction.

“When we look at modular, sometimes you may think that initial cost of work is higher,” he said.

Sanat Patel, chief sales officer and managing partner at Avana Capital, said the challenge for most lenders is understanding that with modular construction, the costs are mostly up-front.

Deposits for furniture, fixtures and equipment are made before anything is built, and work is often done on-site at the same time a deposit is made to the modular manufacturer, he said. Then there is the cost of securing a staging location for the units.

“That requires a level of understanding in the financing. … This is in its infancy. As more people get familiar with the process and what the benefits are and what potentially the cost savings are, that’s when more lenders will get into the space,” he said.

If there’s already a relationship built with a lender, he said, they likely will take a leap with a project. But with projects estimated to cost more than $20 million, most banks will get finicky.

“As a lender, I actually want more competition in this space because then it will mean more projects are getting done,” he said.

Brown said once costs are locked in, it can get pricey if architects and designers make changes.

Patel added that lenders are happy if change orders can be alleviated.

Mitigating risk points
Lenders are more confident when there’s a team in place on design, risk management, FF&E, and manufacturing, Lund said.

“(When) we know where all the risk points are going to be … and there’s already a plan in place to make sure they don’t happen—that’s when the project wins,” he said.

Patel said as a lender, he will take the time to visit the factory where the units are being manufactured and will even monitor a live video feed of it throughout the process.

“Invest the dollars to get on a plane to go to a manufacturer you’re looking at and have (your team) walk through it,” he said. “Once you see with your eyes, you can start quantifying the risk.”

Future of modular
Patel said as modular construction advances, more education and efficiency will be needed.

With the development pipeline that some brands have, most manufacturers don’t have the capacity to take even 20% of a brand’s pipeline modular, he said.

Wagstaff said he wants the modular industry to get to a point where he can pick up the phone and say “I need a 200-room Residence Inn delivered (to this site).”

“I hope it becomes much more of a product and delivery system than a very specific project that you have to start over from scratch every single time,” he said.

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