We Need To Build More Houses: Can Modular Construction Finally Help?

Julia Maltby
7 min readSep 7, 2022


While modular — or “prefab” — construction has gained popularity in recent years, it is by no means new. I won’t go as far back as the Roman Empire — although I could. More recently, prefab construction took off in the US after WWII. Soldiers returning from the war wanted to start families and embrace the American dream of home suburban ownership, and there weren’t enough houses. Prefabricated techniques offered a way to mass produce cookie cutter homes — often referred to as mobile or factory homes — at scale. By 1980, nearly 20% of new homes in the US were prefab.

State of Play Today:

Since the mid-1900s, US modular home construction growth has stalled dramatically. There are a number of geopolitical, regulatory, and cultural hypotheses for this outcome. Stereotypes around mobile homes as “low class” fueled anti-prefab zoning policy restrictions. Building standards for prefab homes also became significantly stricter. Lastly, lending qualifications became more sophisticated, condensing the number of eligible homeowners. Ultimately, fast forward to 2020, and only 3% of new home construction — roughly 28,000 single family units — were completed using prefab methods.

Types of PreFab Homes:

There are two, broad types of modular construction — volumetric and panelization.

Volumetric construction involves the creation of entire buildings or rooms offsite, that are then transported in a completed or near completed state to their final destinations. While volumetric construction can produce single, stand alone structures, it can also produce stackable or joinable modules (like legos) to create larger homes and buildings. Container homes, which can almost be thought of as elevated mobile homes, are a popular type of volumetrically constructed modular home.

Panelized construction, in contrast, involves the production of components of a home offsite, that are then transported onsite for assembly. Panelized homes are more customizable, and generally easier to produce and ship. However, as is always the case with customization, adding design variability introduces complexity to the final build process.

Benefits of Modular Construction:

Modular construction can deliver significant time, and consequently cost, savings to the construction process, the specific mechanisms by which indicated below. (Importantly, these savings are contingent on proper execution).

Examining volumetric construction as compared to typical onsite constriction, there are four main categories of project execution — design and planning, foundation prep, construction, and installation (for volumetric) or construction run-over/re-design (for onsite). The planning and design process tends to be slightly longer for offsite construction as opposed to onsite construction. However, at scale and with repetition, prefab planning timeframes will likely compress. The foundation preparation portion of homebuilding tends to be roughly equivalent in duration for both offsite and onsite construction, as this can’t be completed in a factory.

The next two phases, however, offer massive time savings opportunities for offsite construction if executed properly. Offsite manufacturing benefits from controlled, factory conditions, and the incorporation of machine labor and automation. The “onsite” component of offsite construction is also much more streamlined, involving the assembly of unfinished components. Often, modular construction also involves much less re-work onsite, as production errors can be caught and accounted for earlier. McKinsey estimates that these manufacturing and installation improvements can result in an average of 20–50% in time savings.

In addition to cost savings driven by compressions in completion timeframes, offsite construction — again, when executed properly — can directly drive cost reductions in labor and materials. These categories tend to be the most expensive components of housing production, and only becoming more so due to supply and supply chain constraints — up a combined 9% from 2020 to 2021.

Offsite construction can reduce material costs in several ways. Factories can often cut out middle men via direct procurement, in addition to purchasing in larger quantities to a centralized location. This centralization can also lead to lower costs of material transportation, although materials do need to be transported to their final destinations for installment.

Regarding labor, modular construction can automate repetitive tasks, reducing downtime and the need for human labor. The most significant savings can be captured when skilled tasks, such as plumbing and HVAC installations, can be managed in a factory facility, ideally by less skilled and expensive workers. Traditionally, these are the most expensive labor categories for traditional construction.

Why Hasn’t Modular Taken Off:

Modulars stagnation in the US is complicated. Beyond cultural stigmas (e.g. living in a trailer or mobile like home), the aforementioned efficiencies regarding both cost and time savings don’t always go as planned. And, importantly, implementing modular construction involves buy-in from many diverse parties, many of which operate in “old school” ways and are apprehensive about risking switching methods (in fairness, there are high switching costs in the event of major errors).

Dozens (if not hundreds?) of companies have entered this category, many raising significant amounts of capital, and still struggling to truly take off. Katerra, the formerly modular construction darling, which filed for bankruptcy last year after raising $21B+ largely from Softbank, offers a cautionary tale for the category. The company, founded in 2015, tried everything from sourcing and aggregating building materials to eventually producing their own hardware fixtures (e.g. toilets). When builders didn’t want to use Katerra products, or had preferences for sourcing certain products from specific suppliers, Katerra started full-on producing their own buildings. Initially, the company started with standard building skews, but reports indicate they got involved with producing everything from multi-family apartment buildings (in India) to single family residential units in the US. TLDR — as the company encountered more complexity around multiple players being involved in the end to end building production process, they brought more and more in house. Katerra was ultimately unable to successfully vertically integrate everything that goes into building construction.

Could now be the moment for modular construction?

All of the operational challenges noted above still ring true for the category. However, there are a few macro factors that make offsite construction particularly interesting to track now, and over the next few years.

First, as I’ve described in an earlier post here, the US is in a state of crisis regarding our housing shortage, and it is only getting worse. Much of the construction labor force is set to retire in the coming years, and Millennials and Gen Z’s have no interest in assuming those roles (which are already under-filled). As noted in the McKinsey graph below, when looking at demand in conjunction with construction labor shortages, the US is literally off the charts regarding our need for new building solutions.

Second, given the severity of our housing shortage, the government may start to implement and/or change regulations that have made it historically challenging to build prefabricated structures. We’re already seeing this in California with changing regulations on ADUs and with SB9, as the state desperately works to find more ways to add affordable housing at scale.

Third, stigmas around “smaller”, modular, and not customized homes may be fading. “Tiny Homes” are quite literally a trending category on YouTube and other social channels. What previously signified an inability to buy a proper home, is now regarded as “cool”. (Flybridge’s investment in Getaway aligns with this theme for vacation homes, but we’re starting to see it for primary residences as well).

Fourth, in conjunction with the above, Millennials and Gen Z’s are extremely environmentally conscious. Modular construction has the potential to produce homes much more sustainably, and also create homes that post production are much more sustainable long term.

Fifth, while many believe Gen Z and Millennials are obsessed with customization, I’ve found this doesn’t necessarily ring true when it comes to housing. Or, even if customization is preferred, this category of consumers is willing to make tradeoffs in the name of savings, flexibility, and being eco conscious. Importantly, this flexibility also extends to where consumers are willing to live, for the first time (also in conjunction with rising remote and hybrid work trends). With major urban centers like New York becoming increasingly inaccessible financially, consumers are increasingly willing to move to regions of the US where modular construction companies could centralize operations, and build in a capital conscious way. Geographic density matters a lot for modular construction.

Does Modular make sense for early stage, venture capital investment?

As noted earlier, this can be a tough category for early stage venture investors. If you’re a business that needs extensive amounts of factories and equipment, a $3M seed round is’t going to do much to move the needle (without additional forms of capital). That said, software businesses are adding value to the category, such as Cottage, which offers homeowners a SaaS platform and marketplace for managing the process of ADU builds, without actually being a builder themselves.

As always, if any of this is of interest to you, please reach out — julia@flybridge.com!



Julia Maltby

Early Stage Investor @ Flybridge & X-Factor Ventures | GP @ The MBA Fund | Previously @ Underscore VC, WeWork, and Plum Alley Investments | Wharton MBA