Presented By: JPMorgan Chase
How Modular Housing Is Changing the Game for Affordable Housing
Future Of Affordable Housing, Presented by JPMorgan Chase
How is modular construction part of the puzzle?
The huge gap in affordable housing is a major crisis in virtually every market around the nation, not only in terms of numbers, but also in terms of the human toll it takes. This ongoing crisis is not limited to high costs markets, has dramatic long-term implications for people and it disproportionally affects communities of color. This gap in affordable housing continues to grow, and the existing financing tools and resources, which tend to be designed around public and private partnerships, are typically slow in delivering units and ineffective in containing costs.
We have gotten to a point where the entire affordable housing industry recognizes the need to create more resources and be creative in coming up with multi-pronged approaches to expanding affordable housing. A key focus has been lowering construction costs and improving speed of delivery.
Modular and other prefabricated options are not new, but they haven’t played a major role in producing affordable housing across the U.S. to date. Modular housing offers real opportunities for affordable housing. It’s not a silver bullet — as the likelihood of savings are market-, site- and project-specific — so industry players should look at total development costs, factoring in transportation, storage and assembly site needs; insurance; among other factors.
For the right projects, it’s a great option to lower costs and substantially shorten the delivery period. This will be especially true if efforts to pre-build the units prior to construction closing get to scale. It has major implications for permanent supportive housing, with strong urgency to deliver additional units.
What markets are seeing increased modular housing activity?
Today, we see modular housing pop up mostly in large metropolitan and high-costs areas across the U.S., where there tends to be higher affordable housing activity. Modular housing is largely driven by very active, innovative developers, including some housing authorities and local governments who are prioritizing affordable housing and pushing for innovation.
How are you looking at it as a lender?
JPMorgan Chase has financed 10 modular affordable housing deals nationwide in the past five years and our origination, credit and construction teams are well versed in underwriting those transactions. We’ve also adjusted our disbursement process to work with supply agreements, deposits and the need for weekly payments. We focus on four key underwriting points when exploring a modular housing project:
- We spend a fair amount of time assessing the financial strength, capacity and experience of the modular manufacturer and the entire team. We might see more vertical integration over time, but so far, we have not seen much of it. We expect the modular manufacturer to be a sub to the general contractor, and without a separate contract directly with the owner. Conversations about payment and performance bonding and what’s covered by whom should happen early in the process.
- We look at any potential pipeline challenges. We expect the developer to carefully negotiate a place in the pipeline with the modular manufacturer, with room to accommodate delays. Not losing one’s place in the pipeline is key, as deadlines to put units in service are strict in affordable housing.
- We confirm that during the manufacturing process, materials and completed modules will be kept separate from other projects and tracked with the appropriate security interest held in them.
- We make sure the developer has properly adjusted soft costs in addition to hard construction costs, such as transportation, lease, security, insurance, and storage and assembly site costs if needed, among other potential costs. This is extremely important in assessing whether modular is the right call for a specific project and whether the savings will indeed materialize.
In terms of risk, there are still few options in finding alternative modular manufacturers, if issues arise to bring the project to completion on time and within budget. However, that risk can be mitigated and we’re seeing growth in the industry, which is expanding those options.
What’s next for modular housing? Are you seeing more developers and investors going that route?
JPMorgan Chase is supporting efforts to expand options for affordable housing, including through modular and prefab. As an example, in April 2021, JPMorgan Chase became one of the investors in the Factory_OS final $60M Series B round.
Not all industry stakeholders are ready to embrace those construction types, but these alternative construction options will continue expanding, and we expect to see more real estate investors and developers exploring them as demand and costs increase.
In terms of how much more activity there will be, documenting and sharing data on savings as an industry will be crucial, as well as developers’ ability to assess effectively, and early on, whether a project is a good modular housing candidate. It’s encouraging to see more modular, prefab manufacturers enter the field or expand their capacity, so they can take on more projects, targeting all segments of the housing market. Having more options reduces the risks associated with project completion and bringing this approach to scale will result in more project savings.
The industry continues to evolve and drive new ways of crating modular and manufactured housing, with new innovations that break down the prefab approach into even smaller components (panels), easier to transport and store. There are plenty of reasons to be optimistic that modular and other prefab options will play an increasingly meaningful role in expanding the industry’s toolbox to tackle the ongoing affordable housing crisis.
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