Modular is on the rise, but lenders are reluctant to put the pieces together

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Bisnow/Samantha D’Angelo

Fulcrum Senior Project Manager Brad Lancaster, Cloud Apartments Founder and CEO Curtis Wong, First Community Housing Senior Construction Manager Mike Schaefer, Synergy Modular CEO Justin Stewart, Tidewater Capital Director Ross Stackhouse, Vantis Vice President of Operations Aaron Shah, MBH Architects Senior Associate Tim Haley .

Modular construction is having a moment, touted by many as a solution to the rising costs and gaping construction schedules that plague just about every development in the U.S., but it’s not without considerations of its own, including boosting credibility among lenders .

Prefabricated and modular construction is gaining popularity among affordable and below-market homebuilders in the Bay Area as rising construction costs make it difficult to build economically while maintaining profitability.

“We want to address the ‘middle lost,'” said Andy Ball, oWOW’s development president, during a panel discussion at Bisnows Bay Area Prefab and Modular Construction Summit at the JW Marriott in San Francisco.

Ball’s company is building a bulk timber project at 1510 Webster Street in Oakland with 236 residential units, 42 of which will be income-restricted.

However, the technology is relatively new and, in the eyes of some, unproven, which can make securing funding a challenge.

“On the front end, lenders are like, ‘What is this stuff?'” Ball said.

Some funding issues arise because some lenders have misconceptions about construction alternatives like solid wood, often confusing it with other types of wood, Ball said.

These misunderstandings can often lead to concerns about the product’s flammability, causing headaches for lenders, for example, as well as in the permitting process with city officials, Ball said.

“The codes aren’t appropriate for the type of product,” Ball said. “There’s a lot of educational work going on.”

Tidewater Capital Director Ross Stackhouse echoed those frustrations in a separate panel at the event on the growing pains in the contracting and funding process.

“It was difficult for us early on,” Stackhouse said. “There was a lot of education and patience with lenders and equity partners.”

Stackhouse said a problem lenders face is the disparity in construction schedules that are common with modular builds, since the financing process for traditional construction financing allows lenders to provide capital in smaller draw packages and add more as the project progresses, increasing collateral.

For modular construction, much of the cost is required upfront.

“Proving that you can deliver in an unproven market is critical, and that’s usually the lender’s first question,” Stackhouse said.

Regardless of its challenges, modular building is on the rise.

A recent report by ResearchAndMarkets.com estimates that the global market for this segment is on track to reach nearly $154 billion by 2026, a 6.4% growth from today, as reported by Yahoo Finance.

Building affordable products also puts limits on what lenders can turn to, said Andrea Osgood, senior vice president of real estate development at Eden Housing.

Michael Van Every, president and managing partner of Republic Urban Properties, took a more bleak view of modular construction, noting that cost challenges are one of the biggest hurdles to development, regardless of construction type.

“If I can’t get people to pin prices, it doesn’t matter what the technology is,” he said. “What is the price of goods? How can I lock it up?”

“Signing change orders sucks.”

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