How modular enhances returns for a project’s financial partners
Modular makes it easier to generate the returns that investors need. To illustrate this, let’s consider a real-life, three-story, walk-up affordable housing project. It’s a 3-story project designed by R3B Architecture in Indianapolis, Indiana.
The building specs are as follows:
- 36 rental units, in a mix of 2-bedroom and 3-bedroom floor plans
- Unit sizes from 1116 to 1205 sq. ft.
- Total space under roof of 41,196 sq.
Let’s assume that potential investors will require a 12% internal rate of return, or IRR. (IRR is an estimate of the total returns a property will generate.) In this example, there are four possible scenarios, as outlined below. These numbers are estimates based on my 17 years of experience as the head of a modular company, and more than 20 years of experience in residential construction. If I was considering an investment in this project, these are the numbers on which I would base my decision.
1. A traditional build would take approximately 18 months and would only provide an IRR of 11. 23%. That would not meet investors’ requirements.
2. A modular build of the exact same plan would provide an IRR of 15.81%, which is well in excess of investors’ requirements. Why the higher return? The fact that the modular construction timetable is eight months shorter means there is less construction loan interest to pay, as well as lower costs for a variety of other things, such as site security and equipment rentals. In addition, the property begins generating operating revenue eight months sooner.
Now let’s consider a couple of cost variables.
3. What would happen if the use of modular construction came in at a 3% premium? The answer is that because of the savings provided by the shorter timetable, returns would still exceed those required by investors. IRR would only fall to 14.08%.
4. By contrast, a mere 1% cost overrun with the 18-month traditional build would drop IRR to 10.58%, making it even less attractive.
The point is that even if a modular project has an initial cost premium over conventional construction, overall returns will still be better. I call this doing The Modular Math.
Ken Semler is President & CEO of Impresa Modular, as well as the Publisher of Offsite Builder magazine. This sidebar was originally published in the November 2023 issue.
