Friday, October 26, 2007

Investors, Developers - Reduce Construction Costs by 37%

Sound too good to be true?

Think again!

This past Wednesday several clients of mine and I headed to Berwick, PA to the Deluxe Home factory to take a look at what could very well be the future of condo conversion construction. As the real estate market has taken a beating from not only the media but from consumers as well the only logical outcome could be a significant drop in prices and as a result lower margins for developers. Several weeks ago one of my clients Stuart Kushner, developer of Maricor Gardens Condominiums, came to me with an idea. How about modular multi-family housing? At the time I hadnt given it much thought, blowing off modular as housing for the past generations.

After much research we came across a manufacturer who was approved by DC for construction, Deluxe Homes, whom we approached to gain insight into the world of off site construction and I must say I could not have been more wrong in my initial impressions. After a long three hour drive we arrived at a small Detroit-like town where it didnt seem like there was much to do besides hunt or fish (neither of which I do). As we walked into the factory site there were pieces of homes laying everywhere, plastic covered sections lying on what seems to be a 50+ acre site with hundreds of huge boxes. Still skeptical, we followed Bill Nash, a rep for Deluxe inside the factory and he showed us how the units are built, the quality of construction and the ease at which homes, condo buildings and commercial buildings can be constructed in up to 12 by 64 foot sections, trucked to the site and stacked like Legos using a crane. The quality far surpassed my every expectation. Bathrooms looked like they were custom built, walls looked perfect, floors, kitchens and wiring looked as if it had been installed by master craftsmen. But that wasnt the best part...we were shocked when he told us what they cost vs. conventional stick-built construction...nearly 37% off.

In running analysis for developers such as Kushner, the typical magic number for construction seems to be $165 per square foot but these modulars, installed and finished were estimated at an astonishing $105 per square foot, nearly 37% off of the largest cost for any developer. Talk about a savings.

To help understand what a savings that is, lets take a 20,000 square foot building anywhere in DC, zoned R5A.
Assuming the lot is buildable we would be able to build
8,000 sq ft footprint (40% lot occupancy = 20,00 *40% )
18,000 sq ft building (0.9 FAR = 20,000*0.9) + Cellar @ footprint size
=Total Construction of 26,000 square feet

Conventional Construction
26,000 * $165 = $4,290,000

Modular Construction
26,000 * $105 = $2,730,000

Thats a total savings (increase in profit) of over $1.5 million on the exact same building. Now, in a market where prices have come down over 5% and to sell quickly, reductions must be made on the initial listing coming close to nearly 10%, thats could quite possibly be an increase in profitability close to 20% (after all additional cost) over conventional construction and sales.

For one example of a finished building using modular construction, there is a building at 12th & K NE.

What are your thoughts on modular housing in DC?


Stu said...

It was very enlightening and VERY impressive. I also thought they built units up to 14' wide. But I may be mistaken.

poo poo said...

i live near this development. i haven't been inside, but they look pretty nice from the outside.

um.... but considering the area, and the pricetag, i have to scratch my head and wonder....

Jesse Kaye said...

Poo Poo, I couldnt agree with you more. I cannot justify the pricing other than the C2A zoning. Get this, 4 of the 8 are already under contract.

You'd be surprised by the finishes in the modular housing. I was skeptical at first but after going to the factory I was pleasantly surprised.

Anonymous said...

I'd like to thank you ,Stu and Ron for visiting us at Deluxe and I'm happy to hear you are impressed with our capabilities and product quality.Also thank you for writing about your trip to beautiful downtown Berwick. If I may, just a couple points of clarification; we can construct modular sections up to 15'10" wide by 64' in length and sizes in between to adapt the Archtectural design drawings to our constuction methods.Also please recall that the generic pricing we discussed did not include site work;infrastructure and building foundations.Actual construction costs will of course vary somewhat based on finish specifications and site conditions.
Thanks again for your favorable comments.

Roy said...

DC is not a bad place to buy a property. It is one of the best place in the world for realtors.
Roy Peter - Construction