The world of construction appears to be one of the only commodity-based industries yet to become truly efficient in the production of homes, office space and specialty structures. If anything, it is taking longer today to build something with sticks and bricks or concrete and steel – at least that is my impression.
Robert Gordon, a noted Northwestern University economist, estimates the construction industry recorded negative productivity growth around the turn of this century. He called it “multifactor productivity,” which is academia’s way of saying the industry lacks innovation.
Methods to build taller and more complex structures have ushered in cloud-piercing high-rises and architectural achievements that would make the likes of Gaudi and Gehry proud. Think One World Trade Center, Sydney Opera House and Seattle’s Highway 99 tunnel, at 2 miles believed to be the longest such tunnel in the Continental U.S. Determining how to bring homes to market faster and more affordably, however, has seemingly escaped the industry.
Why are innovations in housing construction so elusive?
When asked that question, one local developer blurted: “People are happy to buy the same iPhone as everyone else, but they want a home that looks unique.”
In researching this story, the best answer I found came from the editor of Construction Physics newsletter, Brian Potter: “The simplest, high-level way of explaining the lack of productivity [is] it’s hard to make money trying new ideas in construction, and strategies that improve productivity in other industries don’t really seem to work in construction very well.”
The nation is conservatively 3.8M units short of meeting housing needs, according to Up for Growth, a housing advocacy research group. That includes a shortage of 140K homes in Washington. And that’s only as of 2019 before the pandemic changed many aspects of housing.
The causes for underproduction – which doubled between 2012 and 2019, are multifaceted. They include exclusionary and outdated zoning laws, soaring costs to build, supply-chain backlogs, skilled labor shortages and NIBYism.
No question, the construction business is under enormous pressure to effectively produce homes while staying in the black – no easy task. Steel, concrete and roofing materials contribute up to 80% of typical construction costs. These and many other invoiced items have caused finished construction costs to spike by about 50% since the start of the pandemic.
Government and industry leaders understand a lot is at stake. They are tasked with reversing decades of policy decisions (or indecisions) that have failed America. We face housing challenges from all directions – crumbling infrastructure, historic racial inequity, climate change – with cities, towns and their people all suffering the loss of economic possibilities that come with a housing shortage.
One real estate journalist told me that between 2016-2021 more venture capital was put into property-related technology – such as improving user experiences when searching on and touring homes – than any other category. VC proptech investments hit $13.1B through the first half of this year and were on pace to at least equal the yearly record. A portion of that is going toward building improvements, such as developing new materials and increasing offsite modular construction to expedite repeatable pieces of a home.
Yes, there is tangible evidence of progress but we need more breakthroughs – like the development of 3-D printed homes that have recently received national attention more than a year after my blog post on the topic. We also must pursue greater financial resources to research and develop the next great ideas and bring more technical education online to train future builders in these advances.
Homes have not changed significantly over the past few decades and there is a consumer segment known as “aspirationals,” who, among many of their characteristics, set high expectations of brands, value innovation over sameness and are willing to wait for a breakthrough before embracing the product or service. About four in 10 global consumers fit this profile, a majority of whom are Millennials, the largest home-buying segment in America.
Essentially, more and more consumers are dictating to corporations what they want to see or experience – not the other way around. The CEO of a national firm specializing in residential architecture said he is focused on “designing the thoughtful home” by infusing floor plans with performance capabilities that will save homeowners time, make life simpler and possibly extend lifespans.
Instead of buyers choosing technologies after buying a home, this CEO – and presumably others – are aiming to integrate new tech earlier in the process even when it impacts the bottom line. (The unnamed CEO was paraphrased in a report, “Emerging Trends in Real Estate – 2023,” from PwC and Urban Land Institute.) Weighing the cost against the value added is undoubtedly part of the building development process. Hopefully, more in the industry will lean into risk-taking, otherwise, improvements will come more slowly if at all.
If Henry Ford could slash the time needed to build the Model T from 12 hours to roughly 1.5 through process improvements, similar thought should be harnessed toward innovative housing techniques. Sure, consumers won’t embrace assembly-line construction if their home looks the same as the neighbors’. But if we could work toward reducing the construction cycle by, say, 50% – from design to occupancy – builders could theoretically offer homes for less while improving affordability.
“Innovation thrives when entrepreneurs can experiment cheaply and fail without too much catastrophe,” The Atlantic recently wrote. “In housing, experimentation is expensive and design failures fatal.”
This is not just a Seattle concern, but I expect that our region – home to pioneers, innovators and the creative class – will welcome the challenges of improving home construction methods, tech integration and (the hard part) making it more affordable.
We live in a special part of the world. Our region is home to global leaders in cloud computing and commercial space travel, we shine in institutional research for medicine and are the corporate home to the world’s original mass producers of desktop software, lumber and paper products, and aircraft.
We are not shy to dream and to fail. With failure comes success, so what are we waiting for?
2023 FORECAST
It’s time to dust off the crystal ball and assess our housing market heading into the new year.
As I wrote for my Living the Dream blog, we are again in a challenging time for residential real estate. Unlike the Great Recession, the real estate market is not the cause but more the effect.
Housing affordability has fallen to its lowest level in over 30 years. Prices (and rents) have soared relative to incomes. Amid a global economic downturn, relief for U.S. consumers – especially first-time home buyers – may be in short supply as much as toilet paper was almost three years ago.
Gyrating mortgage rates and stubbornly high home prices appear to have pushed the brass ring to homeownership further out of reach for potential buyers, though the days of sharp volatility for those key indicators appear to have ended. To be sure, there is room for cautious optimism sprinkled with a helping of patience.
Read all about it in my annual look at the housing market for Seattle/King County and beyond – 2023 edition.
TAX CHANGE
Beginning Jan. 1, Washington real estate excise tax rates will change. The first-level threshold on home sales will rise by $25K, meaning a greater amount will be taxed at the lowest rate. Each subsequent threshold in the graduated tax table will change accordingly. The figures below include the levies applied by local municipalities.
