A discussion of the merits and drawbacks of using modular construction to develop buildings in both dense and strictly-regulated urban environments such as New York City.

1. REIT Center @ Schack Institute of Real Estate
July 27, 2016
COULD MODULAR CONSTRUCTION INFLUENCE HOUSING AFFORDABILITY?
Modular construction holds a promise of affordable housing but compelling economics thus
far have been elusive.
By: Denham Apperley & Scott Robinson
Developers have attempted to perfect the process of modular construction in the hope of improving
construction efficiencies in high-rise developments. Many believe that this will result in cost savings,
improved scheduling, the provision of a better quality product at an affordable price, as well as less waste.
However, modular construction of multifamily residential (for-rent and for-sale), as well as commercial
office buildings, remains a complex proposition with many process-specific benefits and challenges. In
particular, many efficiency advantages as a result of shifting the bulk of the construction process onto an off-
site production line are eroded when the costs of shipping built product into dense cities such as New York
are factored-in. Indeed, many manufacturing facilities have been relocated further away in suburban
manufacturing markets, as ever-increasing rental rates and other expenses price-out industries requiring
large factory spaces.
The following article provides an overview of the concept of modular construction, its current
implementation to date (particularly in New York City), as well as both its qualitative benefits and
drawbacks.
Overview: Modular Construction in New York City
New York City’s first modular building was The Stack, completed in 2014 in the Northern Manhattan
neighborhood of Inwood ‘Utilizing an off-site construction method and an innovative design strategy, The
Stack has managed to streamline the entire development process and create a high-quality product with a
small carbon footprint, pioneering the future of construction in New York City’.1
The modules were
manufactured by Deluxe Building Systems, a company based out of Pennsylvania. These apartments
comprise a combination of one, two and three-bedroomed units over seven stories. In contrast, the city’s
second modular building is also its first micro unit building. Carmel Place in Kips Bay, a 55-microunit
building, was constructed with modules manufactured by Capsys Corp. It rises nine floors, costing between
$300 and $400 per square foot.
The primary difficulty with modular construction has been attaining the necessary height within cities such
as New York, subject to high land values;2
the engineering issues arise out of having to account for wind
shear and seismic forces. Forest City Ratner Companies is of the belief that it has tackled this height issue.3
In partnership with Greenland USA, it is developing the Pacific Park project (formerly Atlantic Yards) in
Brooklyn. Of note, the first building of this project to be delivered – B2 – will be the world’s largest and
tallest prefabricated modular building upon its slated completion in February 2017. It will rise 32 floors and
consist of 930 modules manufactured at FC Modular, Forest City’s modular construction company located
in the Brooklyn Navy Yards.4
This is also the only module manufacturer in New York City. These modular
units are delivered to the site almost fully complete, with most fixtures and fittings preinstalled.5
Although
the original intent was to construct all Pacific Park buildings in this way, this idea has been disregarded,
raising questions as to the efficiency benefits of modular construction.
Modular Construction: The Process
On a practical level, modular construction is relatively simple, at lower building heights. A steel brace frame
is erected incrementally, and this provides lateral support for the module-structure, inserted using a crane.
More than sixty percent of the construction work for such modular products takes place in the factory. This

2. REIT Center @ Schack Institute of Real Estate
is not a simple process, however: the stacking of rigid modular boxes within a steel frame, which bends and
compresses with height, creates engineering challenges.
Modular construction provides the possibility of improved sustainability, higher quality and lower costs,
world-class architecture and faster delivery. On the other hand, this incremental construction process means
that there is no flexibility for error, the effects of which would multiply as the building rose. Further, it is
difficult to predetermine such a building’s performance upon completion.
The Benefits
Shifting the construction process into a factory environment, as contrasted by typical on-site development,
results in an approximate 20% improvement to return. It is important to note, however, that this is based on
delivering the project more quickly than traditional methods, allowing for the developer to benefit from
additional rental revenue. Indeed, the hard per square foot construction costs are similar to those in
traditional developments. The implementation of a production line means that scheduling and costing are
both more efficient and more accurate, given repeated processes and material usage. There is also less waste,
lower labor costs and significantly reduced risk.
On site, only minor installations are needed to fully install the modules. There are an estimated 48% fewer
truck deliveries, and 70% fewer site workers needed compared to traditional development. Manufacturing
these modules indoors, where risk is more easily managed, drastically improves safety, thus theoretically
reducing insurance and delay costs. Further, these buildings can have traditional exterior facades, and thus
their design is in no way affected by their construction method.
In the case of building B2, the delivery time was shortened by almost 50% from 27 months to 14 months.6
Indeed, efficient, repeatable processes and highly skilled union labor enable production of between 600,000
and 900,000 square feet per year, depending on the nature of the project.’7
In general, this ‘all translates to a
cost-controlled, ultra-high quality product that beats conventional construction to market by months.’8
The Drawbacks
Modular development creates a number of atypical issues relating to labor, delivery costs, building codes,
and warehouse space.
Creating a manufactured production process introduces union factory labor into the equation, who typically
earn ~25% less than the average onsite union construction worker.9
Creating a manufactured production
process within a city environment will subject the operation to high operating costs, causing a migration of
factories outside of urban cores. So while the production process may reduce construction costs, the
aforementioned higher delivery costs tend to off-set a portion of these savings.
Additionally, shifting the development of buildings onto a production line creates issues relating to building
codes. Most Departments of Buildings have been of the view that offsite prefabrication does not require
licensed plumbing and fire suppression work; these certified contractors are only required for the installation
of their respective systems on-site, which must be performed in line with the city’s construction codes.
Manufacturing in a town different from where the building will reside means that manufacturers should have
a familiarity with the building codes and regulations facing the project’s final location.10
To mitigate this
risk, a third party consultant acts as intermediary between the local Department of Buildings and the
production facility.
Finally, the physical plat required to build this product is quite large. The large amount of space needed for
modular factories, typically in the range of between 180,000 and 200,000 square feet, is prohibitively
expensive in cities like New York. Indeed, Susan Hayes, president of FC Modular, believes that the largest
hurdle of the growth of modular construction in New York is “a dearth of available, affordable space, which
is necessary for a modular construction factory.”11

3. REIT Center @ Schack Institute of Real Estate
Although many argue that the portability of modular construction implies that units can be manufactured
elsewhere and delivered to their destination, oversight issues result in the fact that architects and engineers
are unable to monitor the construction frequently enough. This can lead to large potential delays if any
construction problems are not identified early. Moving production further away also makes the process more
susceptible to time delays, transportation expenses, and on-site logistical issues of having to store the
modules and manage their placement.
Conclusion
As real estate developers seek alternative, innovative means to reduce construction costs and speed time-to-
market, modular construction holds much appeal. However, this construction technique is still in its infancy
and therefore difficult to properly evaluate, especially in cities with complex zoning and regulation
requirements. Nevertheless, many industry participants remain positive about modular construction, so the
completion of Forest City’s B2 project will hopefully provide better physical evidence as to the success of
such a business model.
About the authors:
Scott Robinson is a managing director at Oberon Securities, a FINRA-regulated broker-dealer, and has held
senior positions at Citigroup and Standard & Poor’s. He is also an associate clinical professor at the NYU
Schack Institute of Real Estate and Director of The REIT Center at NYU. Mr. Robinson earned an M.S. in
Real Estate (Finance) from NYU and has a degree in economics from the University of California,
Riverside. He can be contacted at scott.robinson@nyu.edu
Denham Apperley recently graduated from the NYU Schack Institute of Real Estate with an M.S. in Real
Estate Development. His interests lie in improving process efficiency in the development of real estate
within dense urban environments. Mr. Apperley also has a degree in economics with law from the
University of Cape Town. He can be contacted at Denham.apperley@nyu.edu
About the NYU Schack Institute of Real Estate and the REIT Center
Established in 1998, the REIT Center provides a forum for the study and analysis of publicly-traded REITs
and other real estate operating companies and the related corporatization, securitization, and consolidation
trends that are transforming the real estate industry nationally and globally.
The NYU School of Professional Studies Schack Institute of Real Estate (sps.nyu.edu/schack) was founded
in 1967 at the initiative of prominent real estate leaders, who encouraged NYU to establish an academic
center that provided an educational foundation for professionals within their industry. Today, the Schack
Institute of Real Estate offers graduate degrees, notably the MS in Real Estate, the MS in Construction
Management, and the MS in Real Estate Development, as well as an undergraduate degree, the BS in Real
Estate.
Endnotes
1
Streeteasy. 2016. ‘Building: The Stack’. [Online]. Available at: http://streeteasy.com/building/the‐stack (accessed
April 17, 2016).
2
Modular construction, if its manufacturing process is perfected, means that developers operating in high land value
areas may be able to improve their basis if they can reduce construction costs.
3
Daily News. 2015. ‘Forest City Ratner’s modular Brooklyn tower is back on track’. [Online]. Available at:
http://www.nydailynews.com/life‐style/real‐estate/forest‐city‐ratner‐modular‐brooklyn‐tower‐back‐track‐article‐
1.2076674 (accessed April 10, 2016). Bruce Ratner also believes that his firm has managed to crack the code of this
type of construction, thus possessing the ability to provide higher quality units at a more affordable price point.

4. REIT Center @ Schack Institute of Real Estate
4
These modular units are typically 14 feet wide by 35 feet long, and 10 feet tall.
5
These include floors, walls, electric lines, plumbing, kitchens, toilets, exterior facades, and even smaller details such
as towel racks.
6
This is not including the delays resulting from legal proceedings and other issues.
7
FCModular. 2016. ‘Your Vision: Faster, Safer, Smarter’. [Online]. Available at: http://fcmodular.com (accessed April
9, 2016).
8
FCModular. 2016. ‘Innovation Done’. [Online]. Available at: http://fcmodular.com (accessed April 10, 2016).
9
Of course, the availability of factory work is more stable given fewer temperamental on‐site issues. Thus, workers
can more adequately account for the incomes they will make during any given period. Further, their income levels are
smoother.
10
As expressed by Patricia Lancaster in The Real Deal. 2015. ‘Modular imports edge into nascent Brooklyn industry’.
[Online]. Available at: http://therealdeal.com/issues_articles/modular‐imports‐edge‐into‐nascent‐brooklyn‐industry/
(accessed April 11, 2016).
11
NY Curbed. 2016. ‘Modular Construction in New York City, Once the Future, Is Fading’. [Online]. Available at:
http://ny.curbed.com/2016/1/15/10849436/modular‐construction‐in‐new‐york‐city‐once‐the‐future‐is‐fading
(accessed April 10, 2016).