Will these modular apartment buildings help the Bay Area handle its housing crisis?

Updated: Jul 31, 2020

Fast Company, July 30, 2020

By Adele Peters

Several affordable projects in the area are assembling apartments off-site and then simply locking them into place. If they’re successful, it could cut millions of dollars off construction costs and months off building timelines.

Building just one affordable studio apartment in San Francisco can cost as much as $600,000 to $800,000—and finishing the building can take as long as six years. A few years ago, Tipping Point Community, a local nonprofit, started searching for a better approach. “We just saw 25, 30 years of work that really wasn’t changing anything, unfortunately,” says Daniel Lurie, founder and board chair of Tipping Point. “And we knew we wanted to try something different.”

One part of the solution: changing how apartment buildings are built. In a football-field-size factory in the city of Vallejo across the bay from San Francisco, a company called Factory OS is constructing apartments for a project that Tipping Point and its partners hope can be a new model for addressing the housing crisis in the Bay Area—and for the challenge of homelessness specifically, in a region where around 28,200 people are homeless. In September, the modular units will be trucked across the bridge, where they’ll be stacked like Lego bricks into a new 145-unit apartment building for people who have been struggling with homelessness. The project is expected to cost less than $400,000 per unit and should be completed in less than three years—stats that Lurie says most people working in the field don’t believe are possible.

The new approach to construction helps bring the cost down. “If you build a house or an apartment more like a car, in an industrialized fashion, you can do it much faster, higher quality, and less expensive,” says Rick Holliday, cofounder and CEO of Factory OS. Compared to traditional construction, he says, the costs of modular construction are around a third less. In another affordable apartment complex the company is working on near Lake Tahoe, the project wouldn’t have been viable at all if it had been built traditionally. When the company redesigned the building to use modular construction, the cost dropped by $6 million.

It’s faster to build in a factory since the process can be optimized for speed in a way that isn’t possible outside, and the basic foundation work can happen on-site simultaneously. Shrinking the amount of time for a project reduces overall costs. Factory OS also saves labor costs because of its location, outside the middle of San Francisco, and the way it’s structured. It’s a union factory—something that’s often necessary for projects that need public funding—but individual workers assemble the entire apartments, rather than work solely as electricians or plumbers, for example.

Modular construction can also help make it faster to get permits in California, since this type of construction can be permitted at the state level, rather than needing individual permits in each city. “Typically, you wait six months to get a plan approved at City of Berkeley, but this will bring it down to zero,” says Patrick Kennedy, CEO of Panoramic Interests, a modular construction company that is now working on a new building in Berkeley that will have 39 tiny studios for formerly homeless residents, along with support staff on-site and services such as help finding work and an on-site food pantry.

As with Factory OS, the company’s process moves more quickly than standard construction. Kennedy says that Panoramic Interests will be able to build the apartments for the new project this fall in its Nevada factory in just a month while the foundation is laid in Berkeley, and then can deliver and stack the units immediately afterward. A project that might have otherwise taken 48 weeks will take 16. It will also cost about 30% less than it would have with standard construction.

Still, changing construction methods can only solve part of the overall challenge of building new affordable housing in the area. “What we’ve really found out is that you have to address every part of the development process, and every input into the process, if you’re going to have the kind of significant reductions in cost and time that we achieved at [the project in San Francisco],” says Chris Block, who leads the Chronic Homeless Initiative at Tipping Point. The project is also saving money because it’s using private funding from a donor, rather than having to go through the complex and lengthy process of getting public funding.

City funding also comes with regulations that add costs, such as requirements to use local businesses on the design and development teams. “It’s a good program, but it is often implemented in a way that drives costs up pretty significantly,” says Kate Hartley, chief lending and investment officer at the San Francisco Housing Accelerator Fund, an organization that partnered with Tipping Point to manage the new housing project. (Hartley previously served as the director of the San Francisco Mayor’s Office of Housing and Community Development.) City policy makers will have to make a choice, she says: If eliminating some of those regulations could make more affordable housing available at a time when it’s desperately needed, even if the regulations had some other benefits, is it worth making the changes?

Other local policies also impact costs, such as a discretionary review process that allows a single person to object to a project and then continue appealing even if they don’t prevail. “It is so expensive,” Hartley says. “As a developer, you don’t know if you’re going to prevail. That really amps up the risk factor, which means that developers’ money tends to cost a lot more because they could be shot down after investing millions of dollars . . . They end up needing to build housing with really high price tags, sales, and rentals. And so it’s a pretty vicious cycle.” Zoning is another challenge, as many areas in the city are zoned for single-family homes, making only a small percentage of the city even available for these projects.

Hartley hopes that the new project could be a model for others. The private funding helped get the project moving quickly. The developer, a partner called Mercy Housing Construction, was then able to turn to low-income housing tax credits and low-interest bonds for more funds. The city will sign a long-term lease for the apartments, in the same way that it currently pays for rooms for the homeless at single-room-occupancy hotels. Similar projects could happen with other donors—such as tech companies that are beginning to invest in affordable housing—who could provide an initial loan to speed up projects and save costs, and could then be paid back as the project begins to use tax credits and bond financing.

The project can serve as a tool to push for changes. “We really can hold people’s feet to the fire now, because we have proof that it doesn’t have to cost that much and take that much time in the middle of a literal homelessness crisis in the state of California and in the city of San Francisco,” says Lurie. At the same time, Tipping Point is still searching for ways to further lower costs. “Four hundred thousand dollars in three years is not enough,” he says. “Let’s continue to push that cost curve down. Why can’t we get to $200,000? Why can’t we get to $100,000 a unit? With the crisis that we’re seeing on the streets of San Francisco, and in the state of California, we have no other choice. We have to do this. And we need to be committed to this, whether it’s politically expedient or not. I can tell you, a few years ago, we would not have had many people backing us. Now we’re going to be able to show projects and people are going to have to answer: Why is your project costing double and taking twice the amount of time?”

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