Talking Heads: Cecil Phillips, CEO, Place Properties
By Darryl Hicks
11 min read
Why Modular Housing Is the Future
“For the first time since we built the pyramids, we need to rethink the way we build things.” Cecil Phillips, chairman and chief executive of Atlanta, GA-based Place Properties, spoke those words at NH&RA’s Summer Institute in July, and emphasized them again when I interviewed him recently.
Labor shortages and the opioid crisis have made traditional construction methods more expensive and less reliable, says Phillips. After investigating the root causes and alternative construction methods, Phillips switched to modular housing three years ago. With modular housing, all components of a single- or multifamily structure are designed and built in a factory, shipped in modules to the construction site and assembled in a matter of hours.
Phillips believes that modular construction is where the affordable housing industry is headed. Next year, he’s building his own factory and launching a vertically-integrated, one-stop modular construction business to assist other developers and owners.
Phillips has been a developer for 30-plus years and he’s a past chairman of the Atlanta Housing Authority. He has also developed 60,000 beds of student and off-site military housing throughout the country.
Tax Credit Advisor sat down with Phillips to learn more about his transition to modular, the challenges he faced and what advice he can give to other developers.
Tax Credit Advisor: What factors prompted your move to modular construction?
Cecil Phillips: Beginning in 2009, I noticed that while commodity prices for lumber, copper and steel were declining, construction prices were increasing. That made no sense. I investigated and what I found was the construction labor industry was hollowing itself out. Millions of men and women had left the industry and the country during the Great Recession and now they cannot get back into the United States. As a result, the traditional construction industry, which I’ve been part of for 30 years, is now faced with an existential threat to its business model. The average age of a construction worker is 48. The construction labor force is not replacing itself. The supply of construction labor is getting smaller, and therefore more expensive. Only the top one percent of office, commercial or residential builders can afford those higher prices.
TCA: Where did that lead?
CP: I looked at shipping containers, which are okay for pop-up retail or emergency FEMA housing, but not for 24/7 primetime living. When you get through cutting holes for windows and doors, and reinforcing everything, shipping containers are just as expensive as onsite stick building. I then looked at panelization, the process of making sections in a factory instead of out at the construction site. There are problems that panelization solves, but I don’t think panelization is nearly as great an opportunity as conventional wisdom would have us believe. As a result of this due diligence, I decided that until we can 3D print buildings out of something other than concrete, modular was the right solution.
TCA: You commented at the Summer Institute that not only is the labor force reduced, it’s less reliable due to the opioid crisis. Please elaborate.
CP: The opioid epidemic has hit the construction labor force very hard. You’re 48, the average age of a construction worker. You’ve been lifting sheet rock for 25 years and your back hurts. Aspirin, Ibuprofen and Tylenol don’t do the trick anymore. So, you find yourself working up the pharmacological chain until you get to Fentanyl or some other opiate that mitigates the pain but makes you incapable of going to work. The whole construction job gets slowed down.
TCA: Once you decided on modular construction, where did that lead?
CP: I started looking at existing off-site manufacturers. I don’t know how many factories I visited in the U.S. and Europe. Maybe 50. I stopped counting. I found that most of them were unwilling, or unable or unaware of what I thought was an opportunity to provide a better product with more customer choice than they were accustomed to. But I found a couple plant managers who saw what I saw and after introducing them to architects and architects to them, I developed enough confidence that about three years ago I committed our firm to do all of our new construction exclusively with modular.
TCA: What challenges did you face transitioning to modular?
CP: There’s a perception that modular is a synonym for mobile home or shoddy construction. It isn’t. The modular industry began in Europe in May 1945 when the Second World War ended. Up until then, humankind—whether it was the pyramids, the Great Wall of China or the cathedrals in Europe—built things the same way. We found a site, brought the materials to the site and then brought the labor to the site to build whatever it was we were building. That worked for 10,000 years until the end of World War II when Europe’s infrastructure had been bombed to rubble. They knew where they wanted to rebuild, they had the materials, thanks to the Marshall Plan. The problem was they just killed 20 million people. A labor force that had been around for 10,000 years was no longer there. Europeans either had to wait 20 years and hope enough of the next generation grew up to be masons, plumbers and electricians, or figure out a new way to produce housing and everything else. The Brits, the Dutch and the Germans started tinkering. They proved that with less than one-tenth of the labor, they could produce a product that provided safe, affordable and weather-proof shelter. The second challenge to modular success in America is that you have four negotiations: one with the manufacturer, one with the transporter, one with the crane operator and one with the onsite contractor. That’s a lot of negotiating for an owner/developer. Which is why I decided to become the first fully-integrated, one-stop shop for modular construction. We’re starting construction on our first factory in the first quarter of 2020 that will produce wood and steel modules for single-family, multifamily and multistory multifamily housing.
TCA: You operate all over the country. Does this mean you work with multiple modular construction companies? I am curious whether there’s a limit to how far a modular construction company will ship everything to the construction site.
CP: You don’t want your factory to be more than a day’s drive from the site. That’s a radius of about 350 to 400 miles. That’s your market area for each factory. It doesn’t do any good to let the module sit in a parking lot overnight, and it gets expensive. Transportation costs are significant. If this is scalable, and I think it is, you’ll do that throughout the country.
TCA: Are there enough modular factories to allow for this?
CP: No. They are all very busy doing what they’ve been doing for many years and that’s building manufactured homes. It’s difficult to change their mindset. The market for affordable double-wide homes or basic manufactured homes, that’s what they’re going to keep doing until they see, or others show them, that there’s a market beyond what they’ve been doing.
TCA: I suppose that’s why you’re building your own factory?
CP: Yes. Right now, I am just a customer of these factories. When you buy a modular product, you’re not only buying the product, you’re buying a place in line at the factory. A factory only produces a certain amount every day. If they’re booked for the next 60 days, you won’t get in until the 61st day. That taught me a big lesson. I wanted more control over my destiny.
TCA: What lessons have you learned during this transition from traditional construction to modular?
CP: The existing modular manufacturers want to stay as manufacturers. They don’t want to be full-fledged contractors. Similarly, on-site contractors don’t want to change their business models to become manufacturers. Therefore, if you want a modular product, you’ve got the four negotiations I mentioned earlier. I want to be a one-stop shop for modular products. To do this, you’ve got to have both ends covered, that is, the manufacturing and the site work. The transportation and the crane can be outsourced.
TCA: What challenges have you had convincing tenants that modular is better?
CP: The only way to overcome any prejudice is through education. We opened our first home to the public and had over 500 visitors. They came away amazed at what they saw inside and outside – the appearance, the quality, the curb appeal. It was a shock. Our focus has been here in Atlanta, but if I am correct, the solution will be scalable throughout the country. The housing crisis has not been made up by the politicians or the media. It does exist and it’s not being addressed by traditional construction.
TCA: What has been the time and cost savings to your company? How much have you been able to reduce your rents? Has modular housing given you a competitive edge?
CP: The answer to the last question is yes. The first house we built was 1,840 square feet. Three bedrooms, two baths. Nine foot ceilings. Attached garage. It was built in the factory in four days and set on its foundation in four hours. It was 95 percent complete when it arrived at the site. Modular multifamily is a little more involved. You must run all the utility connections—plumbing and electricity—through multiple floors and multiple units. That takes longer and requires more onsite work. All the plumbing and electricity was added in the factory, it’s just a matter of connecting everything in the building and from the building to the street once you’re onsite. We strive for anywhere from a 15 to 20 percent cost savings. The time savings is priceless. The home that we finished in four days would take conventional homebuilders six to seven months and cost $25/foot or more. And those prices will keep going up year after year because of the labor shortage I mentioned.
TCA: How much freedom do you have in designing modular housing? Does modular housing lend itself to using “green” technology, appliances and other amenities that are common in traditional multifamily housing?
CP: One of the many beauties about modular is that you can design anything you want. Our modular units come off the assembly line Earth Craft certified.
TCA: Once you started transitioning to modular housing did you have any pushback from the state housing finance agencies? I am curious if the HFAs had any negative perceptions.
CP: I spent a lot of time with regulatory agencies, state housing finance agencies, Fannie Mae, Freddie Mac and the U.S. Department of Housing and Urban Development. They have all become enthusiastic proponents of modular construction. I hosted representatives from the DC Housing Authority. They couldn’t build anything new because their construction costs are $300/foot. There’s not enough subsidy in the system to buy down that cost to something that’s affordable. They ended up not doing anything and getting criticized for it. It’s not because they don’t want to, it’s just that they can’t. In California, Amazon and Google have invested in a modular manufacturing facility. It’s out of self-interest, because their engineers can’t afford to live in San Francisco and Silicon Valley. Google and Amazon don’t want to become homebuilders, but want to invest in people who are, and seeing if they can deliver an affordable product for their employees. Otherwise, those employees are going to vote with their feet and go to Nevada or Salt Lake City where they can exchange their intellectual capital for a job that’s challenging and where they can afford to live.
TCA: What changes do you foresee in modular housing construction over the next five years?
CP: I see us in five years saying, ‘Wow, are you kidding me? This is what happened to general construction?’ It’s going to be like what the postal system felt like about Federal Express or brick and mortar retail felt about Amazon. Or hotels about Airbnb. These industries are being disrupted and challenged. Their business models aren’t sustainable. In the case of affordable housing, builders can’t meet the demand. Not because they don’t want to, but because of the costs.
