October 22, 2020
Three months, or just 90 days. That’s the current forecast of new home supply that we have in the U.S., which is an all-time low, says Ali Wolf, chief economist at Zonda, a data, media and advisory company serving the built environment.
Common sense would say that with demand like that, home builders are thrilled. However, so many constraints have been put on building that the process has turned into a very precise formula that squeaks out thin margins in most cases, and more generous in some.
Knowing that, Amit Haller, the CEO and cofounder of home builder Veev, dissected the process to cut out inefficiencies and to make a different business case for home building.
Haller’s new formula proved itself when it was recently able to develop homes four times faster than average traditional construction by completing a 78-unit development in San Jose in 90 days, including all steps of the process.
Haller is crazy passionate about solving this problem, citing a shortage of seven million homes in the U.S. After the 2007 recession, production was more than halved, going from a peak of 1.6 million starts to less than 700,000 per year.
Because of that dip, the housing market had to readjust their organizations, laying off thousands of experienced workers. Now those workers are in other careers or retired and the industry is recovering, but doesn’t have access to a talented pool of labor.
Meanwhile, housing demand continues to grow because the population is increasing.
Plus, Wolf says that housing starts per 1,000 people is much lower than it was in the Great Recession. In 2019, housing starts per 1,000 people was at 3.95, much lower than the historical average of 5.93.
In 2007 and 2008, there was very little need or desire to build new homes. Several years later, the housing market started coming back, but builders were still cautious. At that point, builders had developed a high level of risk aversion, and that, coupled with a lack of developable land, high land costs, and a labor shortage, kept the industry at a slow pace.
“Shortages are piling up and it’s uncatchable right now,” Haller said. “This entire industry, had literally zero productivity improvements during the past 70 years. We cannot train new people fast enough. That’s why it’s so important to build so much faster, so that we can build more with the same amount of people.”
For typical on-site construction, dozens of contractors are involved contributing to sometimes individual tasks. Veev has reimagined the process to cut out unnecessary outsourcing, making it completely in-house. Those efficiencies have led to the company being able to install a fully complete wall in just 30 minutes with only five team members.
Through proprietary design and off-site fabrication, Veev manufactures walls that are framed with steel, waterproofed, and finished with other high-performance materials. The walls are built with a fully closed and cladded panel system that includes all the mechanical, electrical, and plumbing to be ready for assembly at arrival on site.
Haller says that he was able to make all of those efficiencies, and at the same time, increase quality. This article goes into more details about the new materials and the process innovation behind Veev’s speed, including 3D printing and replacing traditional materials.
Not only did Haller increase quality, but was also able to lower the price. Haller won the bid for the San Jose project for being the lowest bidder. While the costs are not comparable because the project was for temporary emergency housing, the 78 units came to $96,000 each including amenities like a community kitchen and pantry, a community dog run, laundry facility, office space for case management, WiFi, landscaping and a parking lot, according to the City of San Jose Housing Department.
Home building supply chains are historically fragmented, and can have extensive lead times, up to six months for one single component. Veev manufactures all its own components, including kitchen cabinets, vanities, windows and doors. Plus, typical construction sites have thousands of line items, but Veev used a vertically integrated approach to limit it to only hundreds.
The pandemic has exacerbated this building challenge as well. Based on recent discussions and surveys with builders, Wolf reports that they are having incredible issues sourcing appliances, windows, doors, lumber, and even things like door knobs. Government delays in permitting and entitlements are also becoming an issue as cities lose some efficiencies with work from home policies in place and many are operating with reduced staff.
“One manufacturing plant had to shut down to quarantine because one worker had COVID-19, and when it reopened, it only opened with 25% of the initial capacity, which is causing supply delays,” Wolf said. “The same thing is happening with other trades, like painters. If one painter gets COVID-19, then the whole team is out for two weeks. We are increasingly hearing that there’s a longer period today from start to completion.”
The way that Veev is operating, makes it immune to these issues.
“We focus on removing the points of inefficiency more than anything else,” Haller said. “What do we keep in the field? How do we reinvent the way we construct by using different materials? There is a lot also that is behind the scenes in order to make it happen. It has to be seismic proof, water proof, code compliant. It’s a heavy lift, but we manage to put it together.”
As more and more builders are able to innovate and incorporate these efficiencies, the gap in housing will certainly be reduced, prices will come down, and the housing landscape will be more equitable.