Series: Understanding the Housing Crisis | Part 2

The Path Forward is Prefab Construction in Infill Locations
Sean Roberts, CEO of Villa
January 2024

After explaining how we got into this housing crisis in Part 1, it’s time to get solution-oriented. 

As a country, we need to build smaller, more attainable homes in the locations where people want to live, work, and go to school. At Villa, we believe that the best way to do this is through building in infill locations using prefab construction.

First, some definitions. Infill development is the construction of buildings on vacant and underused land in or very close to places that have been previously developed. Prefab construction, a type of offsite construction, refers to an approach to homebuilding (or other kinds of buildings) in which the home is manufactured piece by piece in a factory, then transported to the property and installed or assembled.

Unwinding detrimental zoning and housing policy

Encouragingly, many jurisdictions throughout the country have come to realize the problems that stem from prior decades of restrictive zoning and housing policy and they are making positive changes. Many local politicians have started to relax zoning requirements and do many things to encourage new housing development – we’ve seen this happening in many cities in recent years. These changes include updating zoning codes, reducing minimum lot sizes, reducing overly strict building code, construction and site requirements, easing some unnecessary environmental restrictions, and reducing fees and timelines for project approvals.

At their core, many of these policy efforts are aimed at supporting infill housing development. We’ve seen these measures in many states and at the municipal level across the country—and they’re gaining momentum, especially with widespread public pressure stemming from the lack of affordable housing options.

Infill homebuilding is already more prevalent than most people realize. Nationally, 25% of all new single-family homes built in 2020 were either on an infill lot or a teardown/rebuild in an older neighborhood.12 It is even more common in the Pacific states (CA, WA, OR) where 38% of new homes were built in infill locations.  Infill building is a massive part of the housing supply landscape.
Infill building is common sense. Infill homes are built in better locations with closer proximity to amenities, schools, and jobs. The local infrastructure required is often “ready to go” with existing roads and utilities nearby, reducing cost and making it faster to build. Municipalities are increasingly supportive of infill building as it puts much less strain on municipal finances (by leveraging existing infrastructure- rather than building new roads and utilities) and adding to the local tax base. Research from the Urban Land Institute shows that, in the long-term, sprawl costs 40 to 400 percent more than infill development in added costs to residents and governments.13 Arguably, infill building provides one of the best uses of land because it focuses on repurposing land in infill locations, rather than consuming huge swathes of raw land for “sprawl.” Infill building also helps promote the establishment of urban growth boundaries, limits on outwards urban development, which helps to preserve untouched nature around cities.

12Annual Builder Practices Survey, 2021; Home Innovation Research Labs; NAHB
13Urban Land Institute; “Report Estimates Sprawl’s Cost to United States at $1 Trillion per Year” (2015)

Villa’s approach to infill development

Infill homebuilding can take many forms, but Villa is focused on some of the most impactful and scalable:

  • Accessory Dwelling Units (ADUs) are an excellent form of infill housing which increase the density on single family and multifamily zoned lots, and can be applied in many different forms (at least in California today):
    • ADUs can be added adjacent to single-family owner-occupied homes to add more space and/or rental income.
    • ADUs can be added adjacent to single-family rental homes for landlords to increase the yield on their existing property. 
    • ADUs can be added adjacent to multifamily properties, typically low rise or garden-style apartment complexes with excess land or parking, for owners to increase yield on their existing property. 
    • As a side note, Villa is currently the largest builder of prefab detached ADUs in California.  We have seen tremendous growth in ADUs in California since 2016 when state legislation largely removed the local barriers to ADU construction. As a result of this change, we have seen ADU permit volumes in California increase from ~800 per year 10 years ago to more than 24,000 per year today (a 30x increase in 10 years!).  In 2022, about 18% of all new housing units permitted in California were for ADUs.  This is a massive trend towards smart infill homebuilding.
  • Smaller footprint single-family homes, typically less than 1,800 square feet, in locations well-suited to scattered-site prefab construction are a smart approach to building much-needed housing inventory. Sometimes these are referred to as “cottage homes” because they are smaller and often one-story.

  • Duplexes, which are single-story, side-by-side homes add density to infill sites, lower cost of construction, and offer a compelling option when the economics of “going vertical” to a two-story product doesn’t make sense.

  • Two-story townhomes add moderate density to infill sites while still maintaining the aesthetic appeal of the local neighborhood. 

Naysayers will argue that “infill building is hard!” They’re not wrong….Many jurisdictions make infill building difficult through zoning, regulatory, and architectural restrictions.  Local neighborhoods may present grassroots opposition (known as “NIMBYism”).  As mentioned above, a lot of these policy-driven restrictions are starting to fall away, but there are still headwinds to infill building around every corner.

Since our inception, Villa has learned to navigate these challenges over the course of doing hundreds of infill development projects, primarily ADUs all over California, a notoriously difficult state in which to build anything. We deeply understand how to execute on infill homebuilding in a way that works favorably for and collaborative with local communities, governments, and capital providers. It takes a special touch to work across all of these stakeholders to build infill housing, but it needs to be done—and at large scale.

Offsite construction, a crucial part of the solution

Offsite construction, which takes various forms of construction methodologies (i.e. prefab, panelized, “3D printed”, etc.), is playing and will continue to play a critical role in bending down the cost curve for adding new homes. With prefabricated homebuilding, where homes are built in a factory, there are numerous advantages over traditional site-built construction. It is lower cost, with prefab often up to ~30-50% less expensive than site-built construction (especially when building homes under the federal HUD-code, which is what we tend to focus on here at Villa). This is partially because it requires much less labor (about ~25% less by some manufacturers’ estimates) and the workers who help to build homes in a factory environment can often be trained more quickly than traditional on-site construction workers.

It’s also faster than building on-site, typically ~2-4x faster. Speed matters more than ever with higher interest rates (where “time is money!” for people building homes using borrowed funds). Speed on-site also especially matters for infill building as it minimizes construction disruption for the local neighborhood. It is more scalable by leveraging the efficiencies of mass production and repeatable processes in a factory setting.

Prefab construction must be utilized if America is to solve our immense housing undersupply problem. In general, consumer goods that can be produced using modern manufacturing techniques typically see either price deflation or reduced price inflation to end-users over time. Prices of consumer goods like clothing, new cars, electronics, furniture — all built using modern manufacturing — experience far less price inflation over time than consumer goods that cannot be manufactured like healthcare, education, haircuts, childcare. Building things in factories helps reduce the costs to end consumers.

Fortunately, factory-based manufacturing has been happening for decades. But it still constitutes only some ~3% of new housing construction in the United States today.  This lags basically every other developed economy where prefab/offsite construction comprises a greater share of new housing supply, including the UK (5%), China (6%), Germany (10%), Japan (15%), and the Scandinavian countries (25%).14  Why?  You can point to several hypothetical reasons: lack of physical product innovation (factories don’t always build the home designs that people really want), lack of distribution (realtors have limited incentive to sell prefab homes, general contractors make their money on site-building, and factories often lack direct customer relationships and have antiquated distribution), or a negative consumer “stigma” about prefab homes.

However, the underlying root cause of this is arguably many decades of post-WWII housing policy (and related policy advocacy) that has favored site-built construction as a primary driver for job creation. Lots of well-paying, middle class jobs were created as housing contributed massively to GDP growth. This made sense when we had a large workforce to put to work.  However, our skilled construction workforce is aging out and shrinking so the “old way” won’t keep working going forward, especially for building homes that are at lower price points.  

In the last 18 months, we have seen prefab home production decline by ~30% from peak spring 2022 levels. This is strange and counterintuitive as this is happening at a time when affordable housing is more important and in demand than ever. Part of this trend is undoubtedly due to rising interest rates which have put a disproportionately tight squeeze on the ability of most of the typical prefab end-consumers to afford new homes. However, in an environment where we need more small, affordable homes—and will for years to come—America needs to find ways to apply offsite building methods to add more affordable housing stock. It is worth noting that during the high-inflation era of the 1970s, the US produced ~367k factory-built homes per year which is more than 3x the output in 2022.15  We can do this again and with more modern home products and better know-how on bringing prefab into the modern era.

14 McKinsey, “Modular Construction: From projects to products” (2019)
15 Federal Reserve Bank of St. Louis

Of course, not every new home will be built with prefab construction. Site-built construction makes good sense in many, many applications and works well for large-scale “production” homebuilding and for highly custom homes. However, the tremendous benefits of prefab in terms of cost, speed, scalability, and sustainability mean that it will inevitably comprise a materially greater share of US housing production – especially for building more affordable homes – in the years to come.  This is especially true for smaller homebuilding projects, especially those that are scattered-site or smaller development projects (less than ~50 homes), where prefab production has a massive advantage over site-built construction.

You can learn about Villa’s industry-leading approach to prefab construction here. But don’t forget to check out Part 3 in this series, where we lay out the four things that need to happen for prefab construction to make a real impact.

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