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This episode is about a problem. It's a problem that has to do with how we build things in the U.S., but it's not a new problem. The Department of Housing and Urban Development saw it coming more than 50 years ago.
There's a report called A Decent Home from 1968, which was commissioned by the Johnson administration that basically said that construction productivity in the U.S. had grown about 2% per year in the 40s and 50s and had in the 60s flatlined. That is Ivan Rupnik. He is a professor of architecture at Northeastern University.
productivity, as you probably know, is how economists measure the relationship between the resources that go into a process, money, time, labor, things like that, and what comes out the other end. Humankind has become much, much, much more productive over time, although not always and not in every situation. Let's say you get a new software program that helps you work faster, maybe even better.
that might lead to a gain in productivity. But if that same program is too complicated or glitchy, you might not get a gain in productivity. Or maybe the new software is fantastic and fantastically fun, and you spend hours doing something other than the work you're supposed to be doing, then your productivity might fall. So the productivity arrow doesn't always travel in the direction you anticipate.
And what happens if productivity declines in an industry that is absolutely essential to our economy? Here is what that Johnson administration report said. There was a potential for major societal impact, not just for the construction industry, but for citizens, if that productivity either continued to flatline or decline. The concerns expressed in that report turned out to be valid. According to a new paper by the economists Austin Goolsbee and Chad Severson,
Productivity in the construction sector has fallen significantly over the past 50 years. The value added by a construction worker today is about 40% less than it was in 1970. This is exactly the opposite of how productivity has changed in most other industries like agriculture, manufacturing, information technology. So the construction industry has a big problem, but it's
It's our problem, too, because when productivity falls, prices often rise. Here is Chad Severson. It's more expensive for everybody who lives in a house, drives over a bridge, every company that builds a factory, every school board that builds a school. Today on Freakonomics Radio, why? Why?
Why has construction gotten so expensive in the U.S.? There's some things that are really sticky because the risks are so high. And what's to be done about it?
We need to rethink what we are doing everywhere because it is not working. Could part of that rethink mean prefab? People still look at modular and think of containers. They don't realize that you can build a five-star hotel with modular construction. If you build it, they will complain. We will deal with all the complaints right after the... Here, womp it with me. Womp, womp, womp.
This is Freakonomics Radio, the podcast that explores the hidden side of everything with your host, Stephen Dubner. Chad Severson grew up in North Dakota and trained and worked as a mechanical engineer before becoming an economist. Now he's at the University of Chicago, where he studies how companies function or don't function with a special interest in labor productivity.
In the U.S., over a long history, call it over 120 years or so, as best we can measure it, on average, labor productivity goes up by about 2% per year. I mean, I'm not an economist, but that sounds like an awful lot over time. Well, what it means practically is every 35 years, a given worker hour is able to produce twice as much as they did before. So we're kind of doubling income per capita every generation. Now that 2% moves up and down,
It's been kind of low lately. It's been more like 1% for the last 15 years or so. But again, over the long haul, 2% is a pretty typical number. At least as best we can measure, that's not been true for the construction sector. Construction represents about 4% of GDP in the U.S. That is a lot for one industry, certainly enough for an economist like Severson to be concerned if productivity is not growing.
Along with his colleague, Austin Goolsbee, who recently became president of the Chicago Fed and stopped answering my emails, by the way, Severson has published a working paper called The Strange and Awful Path of Productivity in the U.S. Construction Sector. I asked Severson, what is it that's so strange and so awful? Productivity has been falling in the construction sector for about 50 years.
That is not something that I think anyone's seen anywhere else before. And to be negative for decades on end,
is strange and awful, because if it's right, it means we're getting worse and worse at doing something that's such an important part of the economy. Is there maybe something unique about construction that makes it immune to productivity gains? One interesting thing is we know it's not just something immutably bizarre about productivity and construction, because it actually did have positive productivity growth from 1950 on
to about the late 1960s. So it was going up, it was actually going up a little faster than the economy as a whole, then something turned around in the late 1960s and hasn't stopped since then. So why did construction productivity start falling and why hasn't it recovered? It turns out those questions aren't easy to answer. You're exactly right. Everyone has their own favorite theory when presented with the facts in the paper, but
And they're all quite different. I think I've received an email about each one of them from different folks. Some people might think what's going on is overstated because of measurement issues. There's a set of people, it's regulation. It's this regulation, it's that regulation.
Then there's others about, oh, it's a problem because the way the industry works. The labor market is all messed up for this, that, and the other reason. Or the incentives are bad because the way contracts work are such and such. So there's folks offering explanations that are in some sense external to the sector and others more internal to the sector. And your tone of voice implies that you...
you don't put a ton of stock in at least any single explanation for being a big lever here. Am I reading you right? Yeah, I think that's right. My view is to have a sector this big, to have so many problems for so long, it just seems odd that it would be one thing, that if you just turned that off, everything would magically get better. I asked Severson if he could read me one or two of the emails he received.
I think I can find one here. Indulge me while I search through my email. Here's one. Thanks for your work on this long overdue topic. I've lived my entire life in and around this industry. My father was a builder before he retired. I've been a builder and developer. The construction industry is the place that exhibits all of the maladies of the development, planning, design, and construction industries combined.
And then let me see if I can find one like about incentives, and then I'll see if I can find one about regulation. All right, let's skip those emails. I think we get the picture. I asked Severson if it might be useful to list some of the factors that he thinks aren't causing the problem. Sure. One way that labor productivity goes up is through increases in capital intensity, the amount of capital per worker.
So we looked at that. We looked at how much investment the sector has done over the long run and the measured growth in its capital stock per worker, and it's kept up with the rest of the economy. All right. So lack of capital investment, you're kind of crossing off your list. Yeah, exactly. Then we look to see whether the prices of inputs change.
that construction uses are going up faster than the prices of inputs that other sectors use. So have wages in the construction sector gone up faster than wages in other sectors? Or the intermediate materials that they're buying, are those getting expensive more quickly? And the answer in each case is no, there's no real evidence that the input prices that the sector faces is going up.
So it's not that either. Another possibility is that basically everything's been taken in profits. They're not getting more efficient, but they're pulling out a lot of margin. You don't see that. That's not going up. One thing that you do see is that the average price of construction output is going up faster than the average price level in the economy as a whole.
The average price of construction output is going up faster than the average price level in the economy. In other words, construction workers today are building more expensive buildings than they were 50 years ago. Now, that might not sound like a bad thing. Maybe the newer buildings are nicer, bigger, safer.
Severson says that's part of the story, but only part of it. You might say, well, okay, maybe houses are changing over time. Their quality is going higher. Well, if they're getting bigger, fine, let's look at square feet. So we'll count square feet or we'll get really fancy. We'll use data calculated from the American Housing Survey to adjust for all the changes that we can observe in average housing, whether it's size and number of bathrooms, et cetera, et cetera. And you can adjust for all that.
And there, you don't have a negative growth anymore in that subsector, but it's basically flat over 50 years. One way to think about it is the number of square feet of housing
that a worker in the housing construction sector builds now is the same as it was in the mid-1970s. Let's talk about the nature of the business itself. When you bid for a job, you're usually bidding against a couple others, so there might be some competition there. Once you get the job, however, your incentives shift a little bit, and a lot of your attention needs to go on the next bid. And if you win that next bid, then you may have a little bit of a labor shortage.
and then slow down job one in order to get job two going. Can you just talk about that as a problem inherent to construction? What you described, I know folks think happens and I find it believable. You might think most sectors like, well, if you get more orders, you hire more people rather than let's take some of the people we have now making stuff for this customer and move them over. But I think it just gets to the broader issue of
The way the sector works in average is you can make a lot of money when things aren't going as smoothly as possible. You just might not have the incentive to make things go smoothly or you're trying to get that next contract. And so the most important thing, rather than being good at what you're already doing, is to just get started even in an inefficient way at the next thing. Look, there are a lot of
Let's call them frictions, for lack of a better word. Things that drive allocation of where construction happens just have other motives than let's get this done as effectively as possible. Okay, so let's look into some other factors that might account for the construction puzzle.
For that, we will need another economist. I'm Ed Glazer. I'm the Fred and Eleanor Glimp Professor of Economics at Harvard University, where I also chair the economics department.
Glazer is well known for studying the economics of cities with a particular angle. Much of my work in the policy side is focused on land use regulations and their pernicious effects on the affordability of American housing. In other words, Glazer is in the camp that Severson mentioned earlier, who think regulation has played a major role in the construction problem.
And the consequences of this problem have been severe. Freddie Mac, or the Federal Home Loan Mortgage Corporation, estimates that the U.S. is nearly 4 million housing units short of where we ought to be. What does that mean? It means prices that are higher than they otherwise would be, particularly in the most dynamic parts of America. It means that
the most productive parts of America are much smaller than they otherwise would be. So in previous epics in American history, Americans moved by the millions to those parts of America that were more productive, whether or not it was the Ohio River Valley in the 1810s and 1820s, or California in the 1930s and 1940s, or African-Americans leaving the Jim Crow South to find both economic opportunity and a little human dignity in the cities of the North. This is the true
Additional way that America has dealt with technological change is by moving to it. That doesn't become possible if it is impossible to build in Silicon Valley or greater Boston. Housing shortage also means an intergenerational transfer of wealth.
Because, you know, people who bought in 1972 in Los Angeles have done very, very well. Their children's generation or their grandchildren's generation, they still need to buy a home, but they're not going to be able to afford that home, at least not unless they've gotten very, very lucky. And so there's sort of massive harming of the young. And in some sense, this is a larger phenomenon that's related to the things Manker Olson wrote about 40 years ago in The Rise and Decline of Nations.
in which in a stable society, insiders basically figure out how to rig the game for themselves. And in some sense, that's what I think of as being behind this housing shortage, that incumbent owners have figured out how to use a maze of rules and regulations to protect what they have and to make sure that they don't have any sort of inconvenience. But people do pay a cost for it, and the cost is paid by outsiders.
And why does Glaser think that regulations are behind this problem? I will certainly not claim that the evidence for that is ironclad, but I will push what I think is my preferred hypothesis, which is that what all the regulation did was it ensured that it became very, very difficult to focus on mass production.
The most obvious is just minimum lot size. A rule in a suburb that says you cannot build on less than one acres or two acres or, heck, there are parts of greater San Francisco where it's a 60-acre minimum lot size. Those are going to be the most obvious limitations
Now, there are also a variety of more subtle ones. So, for example, in greater Boston, almost universally, there are limitations on building next to wetlands that go beyond the state's already fairly rigorous rules on protecting wetlands.
So it's very easy to sort of think of wetlands and, oh, think this is the Everglades. This is a great natural thing. Wetlands are defined basically so that anything that's at all swampy means that you can't build on it. In fact, one town in the survey that we did 15 years ago actually defined wetlands as a wicked big puddle. So you talk about all those regulations as if they have a pretty sizable negative component. On the other hand, I could say, hey, Ed, more labor regulation means there's greater safety and work-life balance.
More building regulations means our buildings are safer, maybe have, you know, cleaner utilities and are better for the environment. So is that maybe the cost of doing business in the modern world where we want everybody to be well taken care of? There are plenty of regulations that we want. So in the 19th century, New York became healthier, not just because it built the Croton Aqueduct, because it built sewers, but because it actually required tenement owners to connect to those sewers. And
And I am certainly in favor of regulations that actually make sure that workers die less often on construction projects and regulations that make sure that buildings don't fall down. But you do want to have some sense of cost benefit analysis. And you also want to understand that even from purely environmental perspective,
Restricting building, particularly restricting building close to an urban core, has costs as well as benefits. The more that I restrict building near to Boston, it means I'm going to get more building farther away from Boston, which is also going to eat up land and is going to involve a more carbon-intensive lifestyle, which is going to impose its costs on the planet. So you really want to be balanced about these things. Glazer points to another unintended consequence of tougher regulations. If you think about a world between 1960 when, you know,
Levitt could just build thousands of houses and there wasn't anyone to say no versus the world of 2010 or 2020 when, you know, everyone got to say no to everything.
The Levitt he's talking about is William J. Levitt of Levittown fame. Levittowns were huge suburban developments with affordable homes. In lots of parts of the world, the projects got smaller and smaller. The lots got smaller and smaller. And what that means, Glazer says, is that most construction firms are also small or construction establishments, as he calls them. So in construction...
There are almost 600,000 establishments with fewer than five people. By contrast, there are exactly 101 establishments with more than 1,000 people. Compare that with manufacturing...
which has 171,000 establishments with fewer than five, so less than a third, and 990 establishments with more than a thousand. So almost 10 times as many really big ones and less than a third really small ones. So a completely different skew of the size of the entity. A similar way of seeing the small size of this comes from the CoStar data, which is about residential parcels being developed.
So out of their sample of about 3,700 parcels, the median parcel is 7.3 acres and has 3.2 units. These are tiny things. You're not getting any benefits from scale economies there. Little firms are figuring out how to fit little things inside little spaces and are being wedded to this sort of tiny firm model is symbolized by what California has tried to do to increase the supply, which is to make it easier to add a second unit
on an existing parcel. So if I own a thing, I can add an extra unit. Now, I'm cheering for that. I think it's great that they're doing something. I'm not at all a critic of that. But, you know, this is not mass production. This is not Levitt. This is not Henry Ford. This is not the sort of thing that makes products genuinely affordable to middle class people. Let's say I want to build a 12-story office building and I want to do it in Eastwood,
Either Austin, Texas or Boston, Massachusetts. How much difference is there in the process in those two places? I'm going to revert to the Turner and Townsend data on this, which comes from a survey of builders. It's about $700 a square foot in New York and San Francisco. It then goes closer to $500.
in Chicago, and then Houston is closer to 300. I'm sure there will be developers who will then say, that's absolutely crazy. It cost me a lot more than this. It cost me a lot less than this. And I'm sure that is true. It depends on the nature of the product and so forth. But that's the Turner and Townsend data that shows a sort of twofold difference between L.A. and Chicago and then even more in New York and San Francisco. And what would you say are the top three drivers of that cost difference?
So the beauty is, again, this is supposed to be actually the physical costs. And the Turner and Townsend data actually has elements of the things that go into the physical cost. They're going to highlight just the generic labor costs, which are just a lot higher in New York, material costs, which are slightly higher in New York. And then what they call daily plant cost, which is the day to hire a 50 ton mobile crane plus an operator. And
Of that, the New York versus the average, and this is a global average of cities, New York versus the average in their data, 50% of that's labor. Then 20% is the combination of material and plants. And the rest is sort of a residual unexplained component in New York, which may be something about zoning. It may be something else. Part of that residual unexplained component, not just in New York, but anywhere that makes it hard and expensive to build is
may be explained by a rise in what is called citizen voice. The economists Leah Brooks and Zachary Lisko recently published a paper about the rise in infrastructure costs in the U.S. They found that when it comes to building highways, spending per mile increased more than threefold from the 1960s to the 1980s.
One cause, they argue, is the rise of citizen voice, which they define as a combination of social movements, legislation and judicial doctrine that expand the opportunity for citizens to influence government behavior directly to reflect their concerns. You can certainly see the upsides of more citizens having more voice when it comes to big decisions like where to put a highway or housing development or an office building, but
You can also see how building anything can quickly become more complicated and more expensive when there are more public hearings, more fights about land use and so on. So there is a lot to complain about when it comes to how things are built today in the U.S. Does anyone have anything good to say about it?
If we think about 100 or even 50 years ago, your air conditioning was your window and your heating was your fireplace. But now we have much more complicated systems and we're computerizing our building systems. That is Keri Sturtz-Dosick. I'm faculty in the Department of Construction Management at the University of Washington. Dosick has a Ph.D. in engineering and she worked in the construction industry for several years before going into academia.
She admits that the productivity problem is real, and she says that people in the industry knew it well before Chad Severson and Austin Goolsbee published their paper. Every presentation, every conference I went to had that productivity curve where all the other industries are going up.
and construction is going down. What is wrong with us? How can we fix it? And there was a lot of conversation around inefficiencies of designers creating drawings, creating information and knowledge, and then passing it over the wall to construction and construction running with it, but losing information and recreating information. So, Keri, on the one hand, I personally am just in awe of construction. I've done just enough work
minor construction, carpentry and so on, to know how hard it is to get things right. It's just a complex and difficult thing to do well. And more often than not, it is done well. On the other hand, from my layperson's perspective, at least, the construction industry and the building trades generally are
Yeah.
I think it's a yes and question. I think there's some things that are really sticky because the risks are so high. You're spending lots of money to build very big things. We have big toys and we're
We're building big projects with big toys. Those big toys are expensive. If you have a crane on the site, you're spending thousands of dollars a day. So you got to get it right when the people and the equipment and materials show up so that you're ready to build and spend that time effectively. I think there's a reluctance to try different things and do something new because on the job site, the risks are really high. It's hard to introduce new tech and
Because it feels risky and people want to just do what they know because that's more reliable. You know, I think back to the building of the Hoover Dam, which was done before computer modeling, plainly. And what I've read about it, two noteworthy things I remember when I read about it was that, one, it was overengineered to a great extent because without computer modeling, you didn't know how thick was safe enough and so better safe than sorry. But like it
It's still working really well. So plainly, it worked, but also was the danger. Like a lot of people died during the building of that. And I can't imagine that we have the public appetite for that kind of danger on any construction project now. Yeah, yeah. No, our safety goals in the industry are very, very high. You know, zero fatality, low major accidents is the goal on all construction projects in the U.S. And we're still not there. Yeah.
What have been some important innovations in construction over the past few decades that most people don't appreciate or know about? My really extreme example is cell phones. I would suggest if we looked back at it, that cell phones were probably adopted almost immediately by field superintendents who are out on the job site. You mean I could call the office from the job site where things are going wrong and I can contact the designer, I can contact the owner's rep, and we can have a chat right here, right now, because time is of the essence?
So when technology makes their job faster, easier, it's immediately adopted. The challenge is when the value of that technology isn't clear or it's complicated and the adoption is spread across multiple industries.
companies or multiple team members, then they have to coordinate their innovation. Is there something in particular you're thinking where the value isn't clear or is complicated, something you think might have real value, but the adoption is the problem because of that complication? Well, that's what happened to BIM. BIM stands for Building Information Modeling. It is a class of software and protocols that
that allow the various parties involved in a big construction project to work on a shared digital model. BIM's advocates hoped that it would make the construction process more efficient. But when you are building a skyscraper or a bridge, the pursuit of efficiency can seem risky. I was at a conference a few years ago, and we were talking about this for civil work, for making roads.
And the designer said, oh my gosh, you mean that my line that I make on my drawing is going to operate a bulldozer? Like the idea of that really scared the heck out of them because it was...
challenging the rules and separations of the contractor has the means and methods of production and the designers have the design intent of like, I want the road to go this way at this angle. You figure that out, builder, right? And the builder holds the risk of making it happen. But if you connect digitally the drawing to the making, you've just broken that separation. Part of the challenge with construction is that every project is unique.
And that most of the work has to be done in a specific space and within the constraints of that space. You can't get the kind of controlled precision you get in a factory that makes semiconductors or cars or dishwashers. But what if you could?
Chad Severson again. There are a lot of commonalities between construction and manufacturing. You're taking physical elements and combining them in different ways to make a final product for sale. It's just one you do under a roof and they tend to be smallish and the other you don't have a roof and they tend to be biggish. But why do you have one of these sectors that's famously small?
productivity growth and the other one going the wrong way. Why can't we make construction more like manufacturing? Okay, maybe we can. That's coming up after the break. I'm Stephen Dubner and this is Freakonomics Radio. What does it mean to be rich?
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Take your business further with the smart and flexible American Express Business Gold Card. It's packed with benefits to help unlock more value from your business purchases. That's the powerful backing of American Express. Learn more at americanexpress.com slash business gold card. In the U.S., nearly all construction happens on site. Building the frame, laying down the floors and raising the walls, routing the electrical wiring and plumbing, painting, on and on.
But it doesn't have to be that way, at least according to this man. I'm Vaughn Buckley, founder and CEO of the Volumetric Building Companies. Also known as VBC. Buckley started the company in 2009 in Philadelphia. When VBC first started, we were building single-family homes and townhomes primarily. Now we build apartment buildings and hotels. But VBC does their construction in factories, not at the site of the eventual building.
They build modules that are then shipped to the site for assembly. Buckley says VBC is one of the three largest commercial modular construction companies in the world. Our largest projects to date have included the world's tallest modular hotel in New York City, 20-plus-story Citizen M Hotel in the Bowery, and one of the largest unit count buildings of modular construction in the U.S., which was a 410-unit apartment building here in Philadelphia.
We're also working on projects that include up to a thousand units and some really exciting projects in new mega cities around the world, especially in the Middle East. Modular construction has some obvious benefits. Speed, for instance. On average, we produce buildings in half the time, less than 50% of the time that it takes to build it on site.
The biggest factor in why modular construction is just so much quicker than site-built is because we have a dual timeline. So think about it as while the parking garage is being dug underground, all of the floors above are being simultaneously built in a factory some distance away from that job site. When those modules arrive on site and are installed, they're almost completely finished.
For example, if we were to build a hotel room, about 90% of the work that goes into that hotel room is complete at the time that it's delivered, right down to the furniture, mattress, and all of the components that are necessary to use the room. Most of the work that occurs on site is foundation, facade, roof, all of the connections to put those Lego pieces together. But the Lego themselves is almost completely finished.
Buckley also points to a labor advantage. The work is easier, which means more people can do it. When you think about this from a factory environment perspective, you eliminate the demographic restrictions that are preventing folks from entering this industry. People that can't lift a whole sheet of drywall by themselves and carry it upstairs. People that don't want to hang heavy things above their head and would rather work in an office job.
They can now join a factory, work on a floor, use computers and robotics to help them, and be in a safe environment with the access to the tools that they need to do their job more efficiently. And the efficiency of factory building means less waste and pollution. One independent analysis found that modular construction produces 40% less emissions than conventional construction. Construction is the highest of all
of all industries from an impact perspective, resulting in almost 40% of the world's carbon. Our buildings are currently producing 66% less carbon than the UN construction benchmark. We're ahead of 2030 goals in most countries already, simply for the modules that we produce today, which are getting better. So that all sounds impressive and promising, but in the US, only 6% of construction is modular.
Some countries have more. In Japan, around 15% of houses have prefabricated elements, as do around 80% of houses in Sweden. There are different types of modular construction with a different breakdown between what happens in the factory and what happens on site. Some modular builders just assemble the structural components like walls and roofs off-site.
Others, like Buckley's firm, transport entire 3D modules. We should say the idea of modular construction is not at all a new idea. Here again is the architecture professor Ivan Rupnik. Around World War I, there was a lot of really important, innovative, industrialized offsite construction happening. Back then, for instance, you could page through a catalog from Sears Roebuck and
and pick out one of around 450 house options and then have the components shipped by boxcar with assembly instructions. Think of it as an IKEA for houses. Maybe it's no coincidence that Sweden is so big on modular houses today, but the U.S. never really got with the program.
It wasn't for lack of trying. In 1969, George Romney, Mitt Romney's father, was the Secretary of Housing and Urban Development, or HUD. He put forward a plan called Operation Breakthrough. The goal of Operation Breakthrough was to break through what were called institutional barriers in the regulatory framework around housing.
construction. Operation Breakthrough promoted modular construction in particular as a means to cut through the regulations and technological stagnation that were already hurting the construction industry. HUD worked with private firms to build nearly 3,000 prototype housing units across the country. But, Rupnik says, the timing turned out to be wrong. Some of the funding was removed at a critical moment where these 20-odd companies
Companies that had just made significant investments of their own without federal funding into new factories, into new employees, were met with not just a lack of that aggregated demand that was promised, that was argued by George Romney, but they were also met with the energy crisis and an economic downturn producing kind of an extinction event.
in companies. It's interesting because a similar program went underway in Japan at the same time, but one of the differences was that those companies in Japan were actually supported by companies like Toyota. In our case, many of the companies were not as well capitalized, and so they were not able to survive that, and so we lost...
the knowledge. And we also never completed that framework transformation. Besides teaching architecture at Northeastern, Ivan Rupnik is a founding partner of a company called ModX, a consulting firm that works on modular construction. ModX has been working with HUD to study the accomplishments of Operation Breakthrough.
Some of them were procedural, for instance, creating a national code for mobile homes or manufactured homes. And some were inspirational. Countries like Japan and even the European Union generally have literally done what the late 60s HUD proposals were for the U.S.,
Did they copy the HUD report or did they do this independently? So in Japan, which from our research is probably the most manufactured housing friendly regulatory environment in the world, they sent delegations to visit HUD specifically during this work. The European Union, generally speaking, really started in 1975 to think about shifting from a myriad of prescriptive codes to a performance-based code, performance-based codes that
being codes that describe how something should perform and not telling you the specific recipe. It's taken them 50 years and
and they still haven't completed that process of getting the now 27 member states of the European Union to adopt it. But a country like Sweden, for example, which adopted it early, has had direct impact in the industrialized off-site construction space and can now demonstrate an increased productivity of 10% as compared to conventional construction. ♪
In 2015, an American company called Katerra tried to finish what HUD had started. Katerra described itself as a technology-driven off-site construction company. It was founded by Michael Marks, who had been interim CEO at Tesla, and they had more than $800 million in funding from the Japanese investment firm SoftBank.
Here again is Vaughn Buckley of the Volumetric Building Companies. Katerra had a fascinating business model, and I think that their goals were really quite noble. They came into a market telling the rest of the world how they were going to build in the future. Buckley says Katerra was intimidating to a firm like his.
At the time that Katerra was really raising the vast majority of their cash, we had raised zero dollars and had produced more products than they had. So it was certainly scary to us when we saw the billions of dollars that were getting pumped into the business and the lack of track record that was resulting from that investment. Katerra had a number of modular factories in California, Arizona, Washington State, in India, California.
They put up a Marriott Hotel in Texas, a big apartment building in Virginia, a townhouse project in Arizona.
But the finances weren't working. In 2021, Katerra filed for bankruptcy and they shut down. They're trying to invent their own ways of doing things in so many different parts of the construction industry that it was almost impossible for them to achieve what they needed to in the time that they wanted to do it. They're trying to revise 150 years of history in two by throwing a few billion dollars at it. It didn't work.
It did work for Buckley's company. They acquired a lot of Katerra's assets, including one of their factories.
The Katerra story may have been a particularly visible failure, but the construction industry is full of them. Here again is Keri Sturtz-Dosick from the University of Washington. I watch these companies kind of stand up and be like, we're going to disrupt. We're here to disrupt. And construction, I don't think we're shaking in their boots very much, but not because we didn't want to be disrupted. I think there's lots of people in our industry that are
have been championing disruption for a while and like, we're ready to change. Come on, let's go. But each of those disrupting companies came into the space and were like, whoa, this isn't working. It's not disruptable or we're not big enough. In the case of Katerra, Ivan Rupnik thinks there has been an impact.
I think their legacy is already positive. They didn't just find the best people. They put them together and they trained each other. A number of the factories they built are still in use by great new companies. They actually proved out both that some of these concepts that have been working for 30, 40 years abroad could work technically. And they reinforced some of the barriers that I think the federal government identified in the 60s and 70s.
And was not able to fully overcome. But there is a paradox here, going back to something Ed Glazer told us earlier. The centralization and scale that could launch a modular boom in the U.S. are at odds with the reality of American construction, which is dominated by really small companies.
Still, Glaser has a vision for what could happen next. You can imagine a world that doesn't feel that different than, for example, what happens with solar panels, which is the solar panels can be produced by a large factory, but then it's going to be installed by a small mom and pop operation. Ooh.
What you're describing here would be a success for housing supply, but it would essentially eliminate much of the value of these small firms, correct? I mean, what they are doing is they are hand assembling a small group of people who will build by hand a house in a particular place. And you are shifting that production to a different place, a factory, right? You're right. And it is certainly true that in the 18th century, a lot of old style weavers were pretty darn upset
by, you know, Arkwright. That is certainly true. Technological change always has winners and losers. I guess I would rather protect the construction industry with a robust safety net and with robust education for people of all income levels rather than trying to shut out technological change. But I'm with you in that it's important to acknowledge that even if the dream that I just suggested comes true, there will be losers from it. But there are also losers in the current system, especially if we're not able to build the housing and infrastructure we need.
Vaughn Buckley, again.
we are on the way down. We are not at the bottom here. We're going to lose more labor. We're going to lose more people in the industry. We're going to lose the skill that they had.
We are in a spiral. And that spiral requires us not to just encourage more people to enter the industry, create more education, or generally invest in new building materials. It requires a complete shift in the way that we are building today in order for us to maintain our output tomorrow. And that's where offsite construction is just one tool in the belt. It's not the only solution to this problem. But we need to rethink what we are doing everywhere because it is not working anywhere.
So what combination of old and new can work? That's coming up after the break. I'm Stephen Dubner, and this is Freakonomics Radio. Freakonomics Radio is sponsored by Range Rover Sport. Range Rover Sport leads by example, combining assertive on-road performance with signature Range Rover refinement and commanding all-terrain capability. The third generation Range Rover Sport is the most desirable, advanced, and dynamically capable yet.
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as a possible solution to the construction industry's productivity problems. As you listened, you may have been thinking, that sounds great. It's also possible you were thinking, that sounds like a recipe for buildings that are hideous.
People still look at modular and think of containers. They don't fully understand what they're getting. They don't realize that you can build a five-star hotel with modular construction. That is Michael Hawke. He runs MJH Structural Engineers in Dublin. His company was behind the design of what is currently the tallest modular tower in the world. There are two towers, actually, in Croydon in South London.
And the planners in Croydon unusually wanted to go taller and taller. So it was a very unusual situation where our client wanted to go taller, obviously, and the planners wants to go taller. And as structure engineers, we're looking at what we can achieve and what we're comfortable with. One of the towers is 44 stories, the other 38. Before them, the tallest modular tower was a 32-story apartment building in Brooklyn near the Barclays Center Arena.
That project had a lot of structural issues. It wound up taking much longer, costing much more than planned. The Croydon Towers were different. Oh, I think all in it was three and a half years or something like that. It was incredibly quick. It was on a derelict site that had been derelict for over 20 years. It was part of a regeneration of the area. It was seen as a flagship building in the area. When you have everybody on board, client, contractor,
architects, planners, everybody wants to see the delivery as quickly as possible. It's quite amazing what can be done, which is very different to planning rules and how they work normally. The two apartment towers are made up of around 1,500 separate modules. They stand taller than anything else in the area. The skyline in Croydon has definitely changed. There are 546 housing units, an art gallery, a cafe.
And how long would it have taken to build all that with traditional methods? It'd probably be closer to five years, I suppose, in total. So it's a lot faster. And some of that comes from the fact that there's parallel construction methods going on, that you have your site being built and your building is being built in a factory at the same time. So there are two parallel streams of work. And then the taller you go, the more significant that percentage is. Now,
Now, as Hawk tells it, the Croydon project was a bit of an anomaly from a regulatory perspective. A collective desire to get the towers built quickly pushed aside some of the usual slowdowns.
You could imagine advocates of modular buildings citing Croydon as an example for how lawmakers and planning boards should think about the future of construction. Hawk points to another viable example in Singapore. Singapore have demanded that if you do a building on government lands, it has to have at least 70%.
off-site within that building. So they're encouraging off-site and as a result their off-site industry is very strong. They're producing some amazing buildings at real pace and having a significant effect on their market. I think governments probably need to do that but it's a little bit of a chicken and egg situation. If you're going to do that you need to know that the businesses are there to support that 70%.
How do you get to a level whereby you know that you can be confident that there's enough manufacturing capability to do the 70% of all the work you want to do? So it's a really difficult situation if you're not there. And if you're low in the numbers, I mean, I think in the States, you're at like 6% in terms of modular in the country. So could the States decide they want to do 70% of their constructions? Would the 6% be enough to pick up that? Who knows?
Getting even halfway to that 70% mark in the U.S. would require a lot of innovation within the construction industry. And the research paper that inspired this episode by Chad Severson and Austin Goolsbee proves there just hasn't been very much innovation yet.
We asked the construction scholar Carrie Sturtz-Dosick to read that paper and tell us what she thought. I had more questions than answers when I was reading the paper. One of the things they said was that the investment in R&D is pretty low in construction. I agree with that. In our own attempts to build industry partnerships, it's hard because when we talk to our industry partners online,
They say, well, I don't have an R&D budget to work with you. So what happens then is people are asked to innovate in the projects that they're working on. And while some projects that we've studied have been effective at being innovative within that context, other projects are stuck. Dasik says she can envision a time when construction is radically transformed by automation and industrialization.
The future version is robots going out and building houses in a day. Yeah, when do we get that?
Well, you know, I think when we can build in space, we'll be able to build on Earth, too. I think the construction in space will motivate construction. One of my undergrads is going to work for Blue Origin and focus on construction in space. And I was like, oh, my gosh, that's the frontier right there. That technology will motivate the ways and change the ways we work on Earth. Until then, what changes can be made down here?
We asked Vaughn Buckley what he thinks it would take to boost the modular construction industry. I think about the carrot and the stick as the two ways that we can make sure this industry succeeds. Many countries have chosen the carrot. For example, Canada has put over half a billion dollars into a recent initiative to speed up housing deployment, which has invariably gone to the modular and offsite construction space because there's no way to speed up housing unless you put it in a factory.
California has issued home key regulation, which gives equity dollars for units that are on the street within 12 months of that funding being issued. The only way to get units on the street within 12 months of funding is to renovate existing buildings or build in a factory. Then you go to places like Ireland, where they've recently implemented a stick.
The stick in this case is regulations that call for new public housing units to be built in factories. And the reason that they've done that is they've carefully analyzed the results, the costs, the efficiency, and the labor market and said, we have no chance of building what we need to build in the field over the next 10 years. So it's now time for us to tell the industry how to do it. And back in the U.S., what about easing up on some regulations to boost construction?
Here again is the economist Ed Glazer. So most land use regulation is local.
And most of the things that need to happen for this to change are local. This creates a particular challenge because, in fact, the cause of making housing affordable is not a cause that too many homeowners think is a particularly sensible cause. It's not a cause that they woke up in the morning and said, oh, you know what I really like? I'd like the value of my most important asset to decline by 30 percent. That would be a really great outcome for me. But that's fundamentally what we're talking about when we're arguing for affordability.
And for that reason, it becomes sort of really close to impossible to, you know, just jawbone the localities to make changes. The push has to come from somewhere else, even if it's localities that are making the changes. Can you describe a future in America where –
The different players with guidance from people like you and others could produce a lot more housing more easily, more efficiently and more cheaply. In other words, how important would that be to the functioning of this country and the society in the future and so on? Imagine Silicon Valley. Imagine Boston. Imagine New York. Imagine the possibility that some parts of these cities and they wouldn't have to be huge if you allowed lots of density. We just tore up the rules.
We just actually tore up the rules about how dense it could be. We said, you know, as of right, you can build up to 50 stories, whatever you want to do on this stuff. You've got to be safe. You've got to make sure that the buildings aren't going to fall down. But basically, you can build what you want.
Imagine in the highly priced parts of America how many builders would actually like to take the people up on that, like to take the communities up on that and create innovative ways of supplying lots of that construction in ways that actually provided lots of ordinary people with affordable units.
And I think the more of these things that you had, the more that you would end up catering not to elite buyers, but to ordinary buyers. And the more pressure there would be to figure out how to do the building cheaply and at scale. And maybe we start by just buying out the existing owners at, you know, twice their housing values, three times their housing value, something like that. We engage in a very generous buyout program. And then we just say the rules are that you now allow huge amounts of building in this area.
That sounds like a really fun experiment to run. Is anybody doing it? You know, parts of East Asia allow this. But not on these shores yet. Not that I am aware of. If someone is listening to this and has a few hundred million or maybe a couple billion spare dollars in his or her pockets, would this be a significant and legitimate project to try to engage in with some city or state that's willing? If the demand is there for the housing, then sure.
If you got, you know, 50 acres of prime land in Silicon Valley that you were allowed to put, you know, 5000 units on. Yeah, absolutely. There are, in fact, some tech billionaires trying to do something like that, but with a lot more than 50 acres.
A mysterious company, in the words of The New York Times, with funders including Reid Hoffman, Marc Andreessen, and Laureen Powell Jobs, has spent over $900 million to buy tens of thousands of acres on the northeastern edge of the San Francisco Bay Area. It is mostly agricultural land now. Their goal is to transform it into a city as dense as Paris or New York.
Is such a thing even remotely possible in California, which has some of the strictest building regulations in the world? If so, that might go down as one of the most radical innovations in the history of construction. Let us know what you think of this idea and what you thought of this episode. Our email is radio at Freakonomics.com.
Coming up next time on the show, if you build more housing in cities, that would make even more people reliant on public transit. So should public transit be free? That's next week. Until then, take care of yourself and if you can, someone else too.
Freakonomics Radio is produced by Stitcher and Renbud Radio. You can find our entire archive on any podcast app, also at Freakonomics.com, where we publish transcripts and show notes. This episode was produced by Alina Kullman. Our staff also includes Eleanor Osborne, Elsa Hernandez, Gabriel Roth, Greg Rippin, Jasmine Klinger, Jeremy Johnston, Julie Kanfer, Lyric Bowditch, Morgan Levy, Neil Carruth, Rebecca Lee Douglas, Ryan Kelly, Sarah Lilly, and Zach Lipinski.
Our theme song is Mr. Fortune by the Hitchhikers. All the other music was composed by Luis Guerra. As always, thanks for listening. I can say right now that my neighbor is engaging in a large construction project on his house. And I have not said anything negative about that. You have a chance now. You've got a microphone in case there's anything you want to get off your chest. The Freakonomics Radio Network. The hidden side of everything.
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