Shifting construction away from traditional sites and into factories could dramatically change the way we build. Will modular construction make a sustainable impact this time around, ask Nick Bertram, Steffen Fuchs, Jan Mischke, Robert Palter, Gernot Strube, and Jonathan Woetzel, authors of 'Modular construction: From projects to products'.

What is modular construction and how has it evolved

In broad terms, modular construction involves producing standardised components of a structure in an off-site factory, then assembling them on-site. Terms such as 'off-site construction', 'prefabrication', and 'modular construction' are used interchangeably. These terms cover a range of different approaches and systems, from single elements that are clipped together using standard connections and interfaces to 3D volumetric units with full fixtures. Modular construction has been a cost-efficient option at certain historical points, but its popularity has been shortlived. It enjoyed postwar booms in the United Kingdom and the United States, when there was a need for speedy reconstruction and social housing, when wartime factories lay empty, and when there were shortages of steel and labour. But its popularity waned as supply and demand began to even out in the United States; a 1968 UK apartment-tower collapse also sparked concerns about the safety of prefabricated buildings. Today, modular construction is experiencing a new wave of attention and investment, and several factors suggest it may have renewed staying power. The maturing of digital tools has radically changed the modular-construction proposition—for instance, by facilitating the design of modules and optimising delivery logistics. Consumer perceptions of prefab housing are beginning to change, particularly as new, more varied material choices improve the visual appeal of prefab buildings.

Technology-based disruptors entering scene

Perhaps most important, we see a change in mind-set among construction-sector CEOs, as many leaders see technology-based disruptors entering the scene — and realising it may be time to reposition themselves. For decades, construction has lagged behind other sectors in productivity. Modular construction offers the industry an opportunity to make a step change: shifting many aspects of building activity away from traditional construction sites and into factories with off-site, manufacturing-style production. Modular (or prefabricated) construction is not a new concept, but technological improvements, economic demands, and changing mindsets mean it is attracting an unprecedented wave of interest and investment. If it takes hold, it could give the industry a huge productivity boost, help solve housing crises in many markets, and significantly reshape the way we build today. Our new report, Modular construction: From projects to products, dives deeper into the issues.

Potential for profound impact

Construction is one of the world’s largest sectors, so a profound shift in the sector can have a major impact on global economic productivity—and recent modular projects have already established a solid track record of accelerating project timelines by 20 to 50 per cent. The modular approach also has the potential to yield significant cost savings, although that is still more the exception than the norm today. As supply-chain players advance along the learning curve, we believe that leading real-estate players that are prepared to make the shift and optimise for scale can realise more than 20 per cent in construction-cost savings, with additional potential gains in full-life costs (for instance, through reducing running costs via energy and maintenance savings). Under moderate assumptions of penetration, the market value for modular construction in new real-estate construction alone could reach $130 billion in Europe and the United States by 2030.

Pockets of promise — especially where unmet demand coincides with labour shortages

To date, prefabricated housing has achieved a sustainable foothold in only a few places, including Japan and Scandinavia. In markets such as the United Kingdom and the United States, it has been in and out of favour since the postwar era. However, modular construction in European and US markets has the potential to deliver annual savings of up to $22 billion, and there is reason to believe the current revival could be different. The industry is adopting new, lighter-weight materials as well as digital technologies that enhance design capabilities and variability, improve precision and productivity in manufacturing, and facilitate logistics. Countering the old reputation of prefabricated housing as an unattractive, cheap, poor-quality option, some builders are focused on sustainability, aesthetics, and the higher end of the market. New entrants and first movers that are unwilling to tolerate the industry’s fragmentation and lagging productivity are starting to disrupt the market and change the mind-sets of incumbents.
In many countries, modular construction is still very much an outlier. But there are strong signs of what could be a genuine broad-scale disruption in the making.
Many factors determine whether a given market is likely to embrace modular construction, but the two biggest determinants are real-estate demand and the availability (and relative costs) of skilled construction labour. I n places such as Australia’s east coast, Germany’s major cities, the southern part of the UK, and the US West Coast, labour shortages and large-scale unmet demand for housing intersect, making this model particularly relevant.

A real estate disruption in the making

Capturing the full cost and productivity benefits of modular construction is not a straightforward proposition. It requires carefully optimising the choice of materials; finding the right mix of 2D panels, 3D modules, and hybrid designs; and mastering challenges in design, manufacturing, technology, logistics, and assembly. It also depends on whether builders operate in a market where they can achieve scale and repeatability. In many countries, modular construction is still very much an outlier. But there are strong signs of what could be a genuine broad-scale disruption in the making. It is already drawing in new competitors—and it will most likely create new winners and losers across the entire construction ecosystem. Different stakeholders face a series of choices. Realising the benefits of modular construction will require different stakeholders to make a series of choices. Developers, for example, need to identify segments of the portfolio that can serve as their 'product core'; investors, on the other hand, must focus more on markets likely to be disrupted and trends defining winners and losers. For example, a good starting point for developers is to identify the segments of a portfolio where volume and repeatability come into play. These can be designed as a 'product core' that remains consistent across developments. Developers should assume that successful modularisation will require more than merely asking suppliers for tender offers on existing designs; rather, they will need to work with the supply chain to optimise for manufacturability and make the right trade-offs among quality, cost savings, and time savings.

Particularly interesting sector for smart investors

Meanwhile, for investors, the anticipated disruption will create a very different-looking landscape. This makes it a particularly interesting sector for smart investors seeking alpha at this time. They should look to understand the markets that will most likely be disrupted and the detailed trends, strategies, and capabilities that will set the winners and losers apart. Building-materials suppliers will face a shift in the choice of materials available to customers and prefabricators. For instance, cement companies will be affected if cross-laminated timber and steel-frame-based modules gain market share. Materials suppliers may also face an entirely different go-to-market landscape. Their customers may no longer be fragmented installers or traditional distributors but rather larger manufacturers that are optimising for different objectives. However, these suppliers may be well positioned to enter the prefabrication space, given their knowledge both of traditional construction and of efficient manufacturing and supply-chain environments.
Modular construction in European and US markets has the potential to deliver annual savings of up to $22 billion.
Public-sector entities, like private-sector developers, will be able to capture cost savings and productivity benefits by taking a modular approach with any large-scale publicly funded projects that have repeatable elements, such as schools and affordable housing.

Modernising building codes

At the same time, the public sector has an additional role to play in facilitating modular adoption by modernising building codes — which dovetails with the goal of removing barriers to more housing. Approval processes can be faster and more efficient if product designs and production processes can be approved in factories rather than on each individual project site, thus reducing the on-site inspection burden solely to assembly verification. Finally, engineering and construction companies should consider preempting the trend that will see on-site construction becoming a smaller and more commoditised part of the value chain. Today, general contractors manage complex on-site projects with many subcontracted trades involved, but they may risk being cut out of a value chain focused on simple module assembly that brings with it a high degree of cost and schedule certainty. After decades of relatively slow change, an at-scale shift to modularisation—alongside digitisation—looks likely to disrupt the construction industry and broader ecosystem. All players should evaluate the trend and impact, and assess their strategic choices, to ensure they can benefit rather than risk being left behind. Download 'Modular construction: From projects to products', the full report on which this article is based (PDF–1MB). Authors: Nick Bertram is an associate partner in McKinsey’s London office, Steffen Fuchs is a senior partner in the Dallas office, Jan Mischke is a partner in the Zurich office, Rob Palter is a senior partner in the Toronto office, Gernot Strube is a senior partner in the Munich office, and Jonathan Woetzel is a senior partner in the Shanghai office.