For years, housing experts have debated and forecasted problems within the housing market, with concerns about inflated property prices and unsustainable mortgage rates. But behind the scenes, a different kind of bubble is inflating—and it’s just as dangerous, if not more so, for the future of housing and construction.
top and this photo – VBC modular
The “Capacity” bubble, defined by labor shortages, material scarcity, and soaring costs, is quietly wreaking havoc on project timelines and the ability to deliver new homes, affordable housing, and commercial projects. Lead times that used to be manageable have now stretched to three or four times longer than just a few years ago, leaving a trail of unfinished projects and frustrated developers in its wake.
I reread an article I wrote about the lack of capacity in our industry a couple of years ago and knew I had to update it to make it relevant to today’s market. Gary Fleisher, the Modcoach
Unlike the housing bubble, this crisis doesn’t threaten foreclosures or property values, but it presents a far more insidious problem: the inability to meet demand. Whether you’re building onsite, offsite, or using modular construction, the Capacity bubble is tightening its grip on the entire industry, and its impact is being felt from factory floors to new home buyers and renters.
photo – Vantem modular
The Growing Demand Meets the Shrinking Supply
Orders for new homes, hotels, affordable housing projects, and other commercial ventures are pouring in, yet the capacity to build them is stretched thinner than ever before. Factories are seeing extended backlogs, developers are growing increasingly desperate for completion dates, and even when a project gets off the ground, it faces delays due to the lack of available workers and materials.
This perfect storm of high demand and low supply is pushing some general contractors into legal battles with developers who can’t move forward without promised timelines. Modular builders, large and small, find themselves caught in the same dilemma—no matter what building method is used, the industry is collectively facing a capacity problem.
Modular factory owners are feeling the pressure most acutely. With orders coming in faster than they can fulfill them, some owners are starting to wonder if they can even survive this surge. While a backlog of orders may seem like a good problem to have, the reality is that if they can’t complete projects quickly enough, builders’ customers may start pulling out. And with that, modular factories could face the nightmare scenario of returning hundreds of thousands of dollars in deposits—possibly pushing them to the brink of closure.
Meanwhile, the rental market is heating up again. Potential homebuyers, once ready to build their dream homes, are finding themselves priced out of the market due to rising costs and labor shortages. As a result, they’re turning back to renting, further fueling demand for “build-to-rent” developments.
The capacity bubble could have a devastating impact on modular factories. If offsite factories continue to be overwhelmed, with no solution in sight, closures or mergers could become inevitable, shrinking the industry’s ability to deliver at a time when demand is soaring.
photo – Rochester Homes
The Dream of 20% Modular Market Share
For years, modular construction has been touted as the future of the housing market—a more efficient, sustainable, and affordable way to build homes. But while modular construction holds enormous potential, it currently makes up just 3% of total construction in the United States. To meet growing demand, some experts have suggested raising that figure to 20%, a monumental task that would require hundreds of new factories and significant investment.
At present, the roughly 100 modular factories in the U.S. produce about 100,000 modules a year. To meet the 20% market share target, these factories would need to produce seven times that number, an impossible feat without a massive expansion of capacity. Here’s why that expansion is unlikely to happen anytime soon:
Lack of Capacity
To reach the 20% market share goal, the number of floors produced by modular factories would need to increase from 100,000 to over 700,000 annually. This means building 230 new factories and dramatically increasing the production output of existing ones. However, the current labor and material shortages already affecting the industry make this level of expansion seem far-fetched.
The Cost of Building New Factories
Building a new modular home factory isn’t as simple as erecting a 200,000-square-foot building at $100 per square foot. The real costs come from land, excavation, utilities, paving, equipment, and other essential infrastructure. Add in production floor equipment, offices, showrooms, and model homes, and suddenly, you’re looking at a price tag of $20 million or more per factory. Multiply that by the 230 new factories needed, and the industry faces a staggering $4.6 billion investment requirement.
Even if the money could be found, the investment comes with a significant risk. Rising interest rates and inflation could stifle demand just as quickly as it has surged, leaving investors wary of committing to such a large-scale expansion.
The Shrinking Pool of Builders
To meet the needs of an expanded modular construction industry, the U.S. would also need around 10,000 new home builders, each building 12 homes a year. But finding that many qualified builders is a Herculean task. New builders aren’t entering the field in the same numbers as they once did, and those who do are often deterred by the risks involved in such a volatile industry.
Moreover, the modular industry’s shift toward commercial projects—tract homes, high-rise condos, and hotels—means that smaller builders may soon find themselves squeezed out of the market. Modular factories are increasingly focused on larger projects that promise greater returns, leaving fewer opportunities for smaller-scale residential builders.
The Labor Crisis
Modular factories are often located far from the urban areas that need their products the most. Workers who once found steady employment in stick-built construction aren’t willing to relocate hundreds of miles to work for lower wages in modular factories.
Compounding the problem, the local labor pools near these factories are drying up as service jobs lure potential workers away from the more grueling work of construction. Factories are also struggling to find workers who can pass drug tests, further shrinking the available workforce. Without enough labor, even the construction of new factories would do little to meet the rising demand for modular homes.
Transportation Bottlenecks
Even if the modular industry were able to scale up production, there’s still the issue of getting the finished products to their destinations. Transporting modular units requires specialized carriers, trucks, and drivers, and the industry is already seeing shortages in these areas. States have begun implementing lotteries, allowing only a limited number of modular units to enter each day.
As fuel costs rise, the expense of transporting these large modules will continue to climb, adding to the overall cost of modular construction. Without significant investment in transportation infrastructure, the capacity to deliver modular homes on time will remain constrained.
photo – Quartz Properties
Modcoach Note
While much of the industry is concerned about a potential housing market crash, the real danger may be the Capacity bubble bursting. As the demand for housing continues to grow, the modular industry must confront the reality that it simply doesn’t have the capacity to meet that demand.
To stave off disaster, the industry will need to rethink its approach to expansion. That could mean investing in automation and technology to increase productivity without relying as heavily on labor. It could also mean forming strategic partnerships with developers and municipalities to ensure that modular construction is prioritized in urban areas where it’s most needed.
Whatever the solution, the modular industry is at a crossroads. Without bold action, the Capacity bubble could be the industry’s undoing—curtailing its ability to supply the homes and buildings that so many people desperately need. In the end, the industry must find a way to build smarter, faster, and more efficiently, or risk being left behind in a market where demand far exceeds supply.
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