Factory-built housing hasn’t taken off in California yet, but this year might be different

By Ben Christopher, CalMatters

As the first home rolled off the factory floor in Kalamazoo, Michigan —  “like a boxcar with picture windows,” according to a journalist on the scene — the Secretary of Housing and Urban Development proclaimed it “the coming of a real revolution in housing.”

For decades engineers, architects, futurists, industrialists, investors and politicians have been pining for a better, faster and cheaper way to build homes. Now, amid a national housing shortage, the question felt as pressing as ever: What if construction could harness the speed, efficiency, quality control and cost-savings of the assembly line? What if, rather than building homes on-site from the ground up, they were cranked out of factories, one unit after another, shipped to where they were needed and dropped into place? What if the United States could mass-produce its way out of a housing crisis?

In Kalamazoo, that vision finally seemed a reality. The HUD chief predicted that within a decade two-thirds of all housing construction across the United States “would be industrialized.”

The year was 1971, the HUD Secretary was George Romney (father of future Utah senator, Mitt), and the prediction was wildly off.

Within five years, Operation Breakthrough, the ambitious, but ultimately costly, delay-ridden and politically unpopular federal initiative that had propped up the Kalamazoo factory and eight others like it across the country, ran out of money. The dream of the factory-built house was dead — not for the first time, nor the last.

By some definitions, the first prefabricated house was built, shipped and re-assembled in the 1620s. Factory-built homes made of wood and iron were a mainstay of the colonial enterprises of the 19th Century. Housing and construction-worker shortages during the Second World War prompted a wave of (ultimately unsuccessful) attempts to mass-produce starter homes in the United States. The modern era is full of those predicting that the industrialization of the housing industry is just a few years away, only to be proven wrong.

This year, state legislators in California believe the turning-point might actually be here. With a little state assistance, they want to make 2026 the Year of the Housing Factory. At long last.

California gets ‘modular-curious’

Assemblymember Buffy Wicks, an Oakland Democrat and one of the legislature’s most influential policy makers on housing issues, is leading the charge. Since the beginning of the year, she has organized two select committee hearings under the general banner of “housing construction innovation.” The bulk of the committee’s attention has been on factory-based building — why it might be a fix worth promoting and what the state could do to actually make it work this time.

The hearings are ostensibly intended to gather information, all of which will be summarized in a white paper being written by researchers at the Terner Center for Housing Innovation at UC Berkeley. But they’re also meant to build political momentum and legislative buy-in for a coming package of bills. Both the paper and bills are due to be released in the coming weeks.

Wicks has “select committee’d” her way to major policy change before.

In late 2024, she cobbled together a series of state-spanning meetings on “permitting reform.” Those provided the fodder for nearly two dozen bills the following year, all written with the goal of making it easier to build things in California, especially homes. The most significant of the bunch: Legislation exempting most urban apartment buildings from environmental litigation. Gov. Gavin Newsom enthusiastically signed it into law last summer.

Now comes phase two. Last year’s blitz of bills, capping off years of gradual legislative efforts to remove regulatory barriers to building dense housing across California, has, in Wicks’ view, teed up this next big swing.

“Over the last eight to 10 years or so the Legislature and the governor have really taken a bulldozer to a lot of the bureaucratic hurdles when it comes to housing,” said Wicks. “But one of the issues that we haven’t fundamentally tackled is the cost of construction.”

Factory-built housing can arrive on a construction site in varying levels of completeness. There are prefabricated panels (imagine the baked slabs of a gingerbread house) and fully three-dimensional modules (think, Legos). Interest in the use of both for apartment buildings has been steadily growing in California over the last decade. Investors have poured billions of dollars into the nascent sector, albeit with famously mixed results. In California’s major urban areas, but especially in the San Francisco Bay Area, cranes delicately assembling factory-built modules into apartment blocks has become a more familiar feature of the skyline.

Randall Thompson, who runs the prefabrication division of Nibbi Brothers General Contractors, said he’s seen attitudes shift radically just in the last couple of years. Not long ago, pitching a developer on factory-built construction was a tough sell. But a few years ago he noted a growing number of “modular-curious” clients willing to run the numbers. Now many are coming to him committed to the idea from the get-go.

Policymakers are interested too, debating whether public policy and taxpayer money should be used to propel off-site construction from niche application to a regular, if not dominant, feature of the industry. Evidence from abroad is fueling that optimism: In Sweden, where Wicks and a gaggle of other lawmakers visited last fall, nearly half of residential construction takes place in a factory.

The renewed national interest is part of a “back to the drawing board” energy that has pervaded policy circles at every level of government in the face of a national affordability crisis, said Chad Maisel, a Center for American Progress fellow and a former Biden administration housing policy advisor.

Yes, the country has tried and failed at this before, most notably with Operation Breakthrough. Yes, individual companies have gone bust trying to make off-site happen at scale. “But we haven’t really given it our all,” Maisel said.

Henry Ford, but for housing

If the goal is to bring down building costs, rethinking the basics of the construction process is an obvious place to start.

Over the last century, economic sectors across the United States have seen explosions in labor productivity, with industries using technological innovation, fine-tuned production processes and globe-spanning supply chains to squeeze ever more stuff out of the same number of workers. Construction has been a stagnant outlier. Since the 1970s, labor productivity has actually declined sector-wide, according to official government statistics. In 2023 the average American construction worker added about as much value on a construction site as one in 1948.

Thus the appeal of giving residential construction the Henry Ford assembly line treatment.

“When you go to buy a car, you don’t get 6,000 parts shipped to your house and then someone comes and builds it for you,” said Ryan Cassidy, vice president of real estate development at Mutual Housing California, an affordable housing developer based in Sacramento that committed last year to build its next five projects with factory-built units.

In theory, breaking down the building process into a series of discrete, repeatable tasks can mean fewer highly trained workers are needed per unit. Standardized panels and modules allow factories to buy materials in bulk at discount. The work can be done faster, because it’s centralized, tightly choreographed, closely monitored and possibly automated — but also because multiple things can happen at the same time. Framers don’t have to wait for a foundation to set before getting started on the bedrooms.

Off-site construction reliably cuts construction timelines by 10 to 30 percent, according to an analysis by the Terner Center. Some even rosier estimates have put the figure closer to 50%.

That can translate into real savings. “Factory-built housing has the potential to reduce hard (labor, material and equipment) costs by 10 to 25% — at least under the right conditions,” Terner’s director, Ben Metcalf, said at the select committee’s first hearing in early January.

But historically, it’s been very hard to get those conditions right.

The ghost of Katerra

The main hitch is an obvious one: Factories are hugely expensive to set up and run. Off-site construction companies only stand to make up those costs if they can run continuously and at full capacity. Mass production only pencils out if it massively produces.

That means factory production isn’t especially well-suited to industries that boom and bust, in which surplus production can’t be stockpiled in a warehouse and everything is made to order and where local variations in climate, topography and regulation require bespoke products of varying materials, designs, configurations and sizes.

All of which describes the current real estate sector.

“In a world in which housing projects are approved one at a time under various local rules and designs and sometimes after years of piecing together financing sources, it’s hard to build out that pipeline for a factory,” said Metcalf at the early January hearing.

The particular financial needs of a factory also upend business as usual for developers and real estate funders.

Industrial construction “costs less overall but costs more in the short term. Everything is frontloaded,” said Jan Lindenthal-Cox, chief investment officer at the San Francisco Housing Accelerator Fund. All design, engineering and material decisions have to be finalized long before the factory gears start turning. Real estate investors and lenders tend to be wary of putting up quite so much money so early in the process.

The Accelerator Fund, a privately-backed non-profit, is hoping to ease some of those concerns by providing short-term, low-cost loans to developers in order to cover those higher-than-usual early costs. The hope is that traditional funders — namely, banks and investors — will eventually feel confident enough to take over that role “once this is a more proven approach,” said Lindenthal-Cox.

Such skittishness pervades every step of the off-site development process, said Apoorva Pasricha, chief operation officer at Cloud Apartments, a San Francisco-based start-up.

A subcontractor unfamiliar with modular construction might bid a project higher than they otherwise would to compensate for the uncertainty. Building code officials might be extra cautious or extra slow in approving a project for the same reason.

As the industry grows, “creating familiarity with the process helps drive that risk down,” said Pasricha. “The question is, who is going to be willing to pay the price to learn?”

Some would-be pioneers have paid it. In 2021, the Silicon Valley-based modular start up Katerra went spectacularly bankrupt after spending $2 billion in a hyperambitious gambit to disrupt the building industry. Katerra still hangs over the industry like a specter.

Brian Potter, a former Katerra engineer who now writes the widely-read Construction Physics newsletter, said he too was once wooed by the idea that “‘we’ll just move this into a factory and we will yield enormous improvements.’”

These days, he strenuously avoids terms like “impossible” and “doomed to fail” when asked about the potential of off-site construction. But he does stress that it’s a very hard nut to crack with limited upside.

“Beyond just the regulatory issues, which are real, there are just fundamental nature of the market, nature of the process, things that you have to cope with,” said Potter, whose recent book, The Origins of Efficiency, digs into how and why modern society has succeeded at making certain things much faster and cheaper — and not others.

Certain markets in California could be a good fit for factory-built construction, he added, but not for the reasons that off-site boosters typically lead with.

Construction costs in the Bay Area, specifically, are notoriously expensive. Many of the region’s most productive housing factories are located in Idaho. That arrangement might make financial sense, said Potter, not because of anything inherently cost-saving in the industrialized process, but because wages in the Boise area are just a lot lower.

That raises another potential impediment for state lawmakers hoping to goose the factory-built model: Organized labor. In a familiar political split, while California’s carpenters union has historically been open to the idea of off-site construction, the influential State Building & Construction Trades Council has been hostile.

Will the state step in?

Neither Wicks, nor any other legislator, has released legislative language yet aimed at supporting the industry.  But in committee hearings, developers, labor leaders, academics and other off-site construction supporters have repeatedly pitched lawmakers on the same three themes.

Building out the pipeline is one. The state, supporters say, could keep the factories humming either by nudging affordable developers that way when they apply for state subsidies or by out-and-out requiring public entities, like state universities, to at least consider off-site when they build, say, student housing.

Insuring factories against the risk of a developer going bankrupt (and vice versa) is another common proposal. Developers and investors are hesitant to schedule a spot on a factory line if that factory’s bankruptcy will leave them in the lurch. Likewise, factories tend to charge high deposits to make up for the fact that developers go out of business or get hit with months-long delays. One solution could involve the taxpayer playing the role of insurer.

Third: Standardizing building code requirements. The state’s Housing and Community Development department already regulates factory-built housing units. But once a module is shipped to a site, local inspectors will often do their own once-over.

Some of these proposed fixes are specific to the industry. But some are regulatory changes that would make it easier to build more generally.

That might suggest that policy should ideally focus on making it easier to build stuff more generally, “not on a specific goal,” said Stephen Smith, director of the Center for Building in North America, which advocates for cost-cutting changes to building codes. For all the emphasis on building entire studio apartments inside factories, he noted that plenty of steps in the construction process have entered the modern era.

“You find walls built in factories, you see elevators, you see escalators,” said Smith. “You need to consider the small victories and think of it as a general process of (regulatory) hygiene.”

Wicks has heard all of the arguments for why emphasizing factory-based construction won’t work.

“I don’t think factory-built housing is going to solve all of our problems. I think it’s a piece of the solution,” she said. “We’re not talking about actually funding the building of factories. We’re talking about creating a streamlined environment for these types of housing units to be built.”

In other words, it can’t hurt to try again.