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Can Factory-Built Apartments Solve California’s Housing Woes?

Larry Pace is giving a tour of a construction site … kind of.

He’s near the entrance of a 258,000-square-foot factory in Vallejo, on the outskirts of the Bay Area. The Navy built submarines here during World War II.

Picture one of those gigantic General Motors plants in Detroit, where a car is put together in an assembly line. Instead of a Buick and a conveyor belt, construction workers in hard hats and goggles are assembling a 156-unit apartment building for a development near Oakland.

“They build one floor approximately every two and a half hours,” said Pace, standing astride Station 1, where construction workers piece together the bottom floors of two adjoining apartments. “It’s fast.”

Pace is the co-founder of Factory OS, a modular housing manufacturer that opened this plant last year. It’s one of several companies in California and across the country trying to reinvigorate factory-made housing as a solution to the state’s housing affordability woes.

Further inside the massive Vallejo plant, there’s a station for cabinets, and a station for roofing, and a station for plumbing and electrical wiring. All the way through Station 33, which looks like a furniture showroom not quite ready for the floor — washer, dryer and microwave included.

From there the apartment pieces are wrapped and trucked to the construction site, where they’re assembled in a matter of days, not months.

“It literally becomes a plug and play,” said Pace. “We have become very proficient at what we do, and it will revolutionize the construction industry from what we’ve seen in the past. It already has.”

Part of the reason California rents are so astronomical — the state now has five of the top 10 priciest rental markets in the country, according to real estate data firm Zumper — is because it’s really expensive to build new apartments here.

While estimates of average construction costs vary, a recent UC Berkeley study found that it takes $315,000 in labor and materials to build a 900-square-foot apartment in the Bay Area.

A shortage of skilled contractors and President Trump’s trade policies have contributed to rising “hard costs” for homebuilders, who argue the more expensive it is to build, the more new developments skew away from middle-class housing and toward luxury condos.

Pace has worked in the construction industry for 40 years. He used to do what’s called “stick” construction — the conventional method, where you prep the foundation, then wait for the carpenters, then the plumbers, and then the electricians. A rainy week can set you back thousands of dollars.

With so-called modular housing, units can be assembled offsite while the foundation is being prepared, no matter the weather. Pace says that and other efficiencies will translate into three- to five-story apartment buildings completed 40% quicker and 20% cheaper than your average project constructed the old-fashioned way.

It’s not just Pace who believes modular housing is the future. Large corporations, like Citibank, have poured millions into Factory OS. Other pre-fab housing companies have sprouted in recent years in California and elsewhere, attracting tech-savvy investors with the lure of innovating an industry that builds housing mostly in the same way it did decades ago.

But the dream of mass-produced, factory-built housing has been around for over a century — with a pretty checkered history.

“I went in this dragging my heels,” said Pace. “I had heard all the war stories of failed modular experiences in the past.”

When Richard Nixon tried to build houses in factories

Manufactured, modular, or pre-fab housing has always played at the margins of the American construction industry. Arguably the most successful example dates back to the early 20th century when the retail giant Sears offered single-family homes through its mail-order catalogue.

After prohibitively high transportation costs caused Sears to pull the plug in 1940, the term “manufactured housing” gradually became associated with the lower rung of the housing market: mobile homes and shoddy factory-built dwellings with poor craftsmanship and small profit margins.

“The last century of experiments hasn’t yielded a whole lot of good results,” said Alex Anderson, an associate professor of architecture at the University of Washington. “There’s been all kinds of interesting experiments, but not a lot of whole lot of economic successes.”

But the siren song of mass-produced housing continued to lure private capital and public officials.

In 1969, President Richard Nixon was confronting housing challenges that might sound eerily familiar to 21st century Californians: Population growth was outstripping new home construction, and rents and home prices were escalating.

Then-Housing and Urban Development Secretary George Romney — future GOP presidential nominee Mitt Romney’s father — launched “Project Breakthrough” in 1969, aiming to solve the country’s housing shortage by jumpstarting the pre-fab industry with a little help from Uncle Sam.

Congress poured $190 million in inflation-adjusted dollars to coax major blue-chip manufacturers such as Alcoa and Boeing into participating. HUD identified nine sites across the country — including one in Sacramento — on which both single family and multifamily pre-fabricated housing could be assembled.

The results were uninspiring

“Operation Breakthrough was really a big and pretty expensive failure and really quite an embarrassment for the Nixon administration.” said Anderson.

Much of the housing ended up being uninhabitable after a few years, adding to the public perception that factory-built housing was, at best, shabby and, at worst dangerous. Congress pulled the plug shortly after the prototype sites were completed.

The technology deployed by Factory OS and other modern pre-fab companies is leaps and bounds ahead of what Operation Breakthrough was working with in the early 1970’s. But Anderson says many of the issues that confounded the Nixon administration still haunt the industry today.

Organized construction labor opposed Operation Breakthrough, fearing lower wages and reduced hours. Factory OS, while employing members of a regional carpenters union, has faced similar hostility from other building unions.

Operation Breakthrough also failed to achieve the economies of scale the federal government dreamed would materialize. Anderson says the finances of mass-produced housing works only if it is truly mass-produced.

“You need to produce a lot of units in order for the savings to accrue,” said Anderon. “Because setting up a factory is not cheap.”

Factory OS isn’t profitable yet, but Pace’s co-founding partner Rick Holliday says he expects the company to turn the corner in the next two years. Holliday says the company has $200 million in projects in the pipeline, including orders from Google for workforce housing and from nonprofit developers for housing for the homeless.

“I don’t like to pretend we’ve made it because we’re only a 2-year-old company,” said Holliday. “But I can tell you with absolute clarity that we’ve started a company that’s an industry leader.”

Part of the problem with Operation Breakthrough was the federal government’s focus on building single family homes. Proponents of modern modular housing can take solace in one positive development from the initiative– one that’s still standing in east Sacramento.

Cynthia Sarthou, a 60-year-old resident of the Greenfair Apartments, had no idea the nine-story apartment building she calls home was built in a factory and erected in 23 days. The complex now serves as subsidized housing for low-income seniors.

“Good restaurants are around, it’s very safe inside,” said Sarthou, who said she has no complaints about the apartment. “It’s cozy and we’re happy.”

A building in 10 days

While the Greenfair Apartments are still functional, aesthetically they’re reminiscent of those towering public housing projects synonymous with 20th century low-income housing.

Factory OS only constructs mid-rise apartment buildings no taller than seven stories. It isn’t in the single-family home market, which means economies of scale should be easier to achieve.

And its first project in West Oakland will look pretty indistinguishable from other apartment buildings nearby.

“I think what’s different about this is we can make a whole building erect in 10 days,” said Jessica Goldbach, project manager at the first Factory OS project nearing completion in West Oakland.

Ten days is how long it took cranes to stack the 110 units at the “The Union” project last month. She says it’s about time the construction industry embraced technological changes that have transformed other parts of the economy.

“Why are we still looking at paper drawings?” said Goldbach. “I just think unfortunately building and the way that we build is so far behind.”

Goldbach’s crew is doing touch up work on “The Union” now, connecting modular units together, adding insulation. The project should open its doors early next year.

While Factory OS has projects in its pipeline that will serve lower-income households — including permanent supportive housing for the homeless — the Union project isn’t one of them.

A two-bedroom unit will rent for $3,700. That’s comparable to other brand new market-rate housing opening up in the region, and certainly isn’t a bargain.

“Until the market really changes and the producers are producing more units and there are more producers of those units, there won’t be really enough competition for consumers to recoup those savings,” said Anderson, the University of Washington professor.

Holliday, whose development company separate from Factory OS will own and dictate rents in the new building, says the expensive price tag was necessary to satisfy investors in the new development. But he stresses that without the cost savings that came with modular construction, the new housing wouldn’t have been built in the first place.

“If we had tried to stick build that project, it wouldn’t get built,” said Holliday, citing rising labor and materials costs in the Bay Area. “That’s the reality of the market we’re in.”

Beyond market-rate housing, Holliday sees the future of Factory OS in projects subsidized by the state for housing low-income families and people experiencing homelessness. He says Factory OS has 10 different supportive housing projects in San Francisco, Oakland and Los Angeles in the pipeline.

In Los Angeles, one new apartment for the homeless costs about $500,000 to build — nearly twice what the median single-family home sells for in the rest of the country.

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