Can there be an Amazon of housing?

A recent WSJ article reported that the disproportionate gains in labor productivity in recent years have affected a small percentage of companies. They write that, “the most productive 5% of manufacturers [in all sectors] increased their productivity by 33% between 2001 and 2013, while productivity leaders in services boosted theirs by 44%.” During that same period, “all other manufacturers managed to improve productivity by only 7%.” 

According to the Organization for Economic Cooperation and Development, the reason for the disparity is what they call diffusion—i.e. innovation and talent are being consolidated by the largest players and not diffusing to the smaller ones.

The market reach and pocket depth of giant multinational corporations—Amazon, Google, Apple, IKEA, Toyota, etc.—enable them to attract top human capital and make large technological investments. These resources create a nearly-insurmountable innovation gap for their smaller competitors and upstarts. In fact, the number of first-round VC financing was down 22% in 2017 versus 2012, and many attribute this to the dominance of companies like Amazon and Google. Investors might be asking why bother competing when the big guys will create a superior product in-house?

As an example of how this phenomenon might play out with housing, the WSJ points to BoKlok, an unfortunately-named joint venture between IKEA and construction giant Skanska.

BoKlok is making modular housing that they claim cuts production time in half and costs by 35%. One of their facilities cranks out 1,200 houses a year and is projected to increase capacity by 50% through increased automation. BoKlok’s director of research and development Jerker Lessing said they will invest in that automation “when we really know the demand from the market and have the volumes to pay for it.”

While BoKlok promises to be a housing titan, buried in Jerking’s statement is a key difference between housing construction and other types of manufacturing. Even though BoKlok is backed by two multinational behemoths, the company is still dipping its foot in the water before fully investing in the manufacturing resources that could boost productivity by orders of magnitude. This tentative approach stems from the nature of housing production and the volatility of the housing market.

Think of it this way: a mobile phone manufacturer can tool up a factory and produce the inventory of a new product based on market demand projections. While far from ideal, if the mobile phone market tanks or the product sucks, the company can probably absorb the loss because of decent margins. The manufacturer can sit on the unsold inventory (and sell it over time) because the cost of warehousing a product that fits in a pocket is cheap.

Yet in order to get the economies of scale necessary to drive productions prices down, the housing manufacturer too must produce large numbers of product. This necessitates investing in large manufacturing facilities with advanced machinery. But unlike the mobile phone manufacturer, the margins on the housing units probably suck, so the company can’t just eat the loss. And more crucially, if the market tanks or the product sucks, they can’t just warehouse 10,000 unsold housing units.

Market cyclicality as a barrier to innovation is something Lloyd Alter wrote about recently in Treehugger. He recounts the noble history of efforts to industrialize housing production, each of which was slain by market crashes. Lloyd points to Katerra—a well-funded construction-tech firm that’s promising to revolutionize housing and has plans to fit out large, automated factories—as another possible victim of this cycle.

And there’s another factor that Lloyd alludes to that could thwart a big (or possibly small) innovator from emerging, which is the non-transferability of innovation in housing production. What might work one place may not work in another.

One of the reasons Apple can improve their products so much is the universality of their market fit. When they introduce a new iPhone, it doesn’t need to comply to hyper-regional phone-manufacturing codes. Local phone makers aren’t protesting that the Chinese-made phones are stealing jobs. Yet these are the kind of issues that could meet BoKlok if they try to ship their modular homes out of Sweden, or if Katerra moves into highly-regulated municipalities.

What could set the stage for things to be different today are a few factors:

  1. Market potential. One estimate suggests there’s a 7.3m housing unit shortfall in the U.S. alone. U.N projections are that the world population will increase by 2b people over the next 30 years, requiring 1,000 buildings to be built per day. Granted, many of these numbers are in developing nations, but even a sliver of this potential—in developed or developing countries—is enough for a giant to emerge. Even if housing as an asset class dips, housing as a need will not for some time to come. 
  2. The brokenness of the current market leaves few options other than innovation. Home prices in the U.S. rose 6.2% in 2017, two times more than income, and three times inflation. One in four Americans is “severely rent burdened” (paying more than 50% of their monthly income on housing) as a consequence. If solutions for more affordable housing are not found—including, but not limited to, production—there will be a massive social and economic upheaval.
  3. The state of robotics and digitization of design, workflows, procurement, etc. provide an unprecedented potential for technology to change how our built world is constructed.

Should there be a major revolution in housing production, will Katerra and BoKlok (after their rebrand) become Amazonian companies? Perhaps. (It could also be Google or Facebook, both of whom have shown interest in housing production.)

I still think the regionality of housing regulation, market needs, and production (especially with respect to any prefabricated solution) would suggest that even if a big player did emerge, its structure would need to have strong regional outposts. And with the U.S. market alone valued at about $32 trillion, there is room for several giants spanning various housing typologies—single family, multifamily, senior, etc.

Then there’s the question of whether this is a bad thing or not? At the end of the day, the way housing is developed and built is so broke, anything beats the status quo. If the future is a one-click-shopping for a well-built, affordable home, I suspect many people are primed to sign up.

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