The Lego Effect: Modular is building momentum

When developer and management company Concord Hospitality Enterprises was doing its due diligence before construction of the AC Hotel by Marriott Louisville Downtown in Kentucky, it looked at both traditional and modular construction methods. The choice the company made ended up saving three-and-a-half months on the construction schedule.

“The site logistics and layout of the building really worked well for modular,” said Carl Hren, SVP of development, Concord Hospitality Enterprises. “As we priced up the project, both conventionally and modular, the numbers were coming in very similar, so it made our decision easy to go modular when you factored in saving months on the construction schedule.”

Hren was especially impressed with the project’s time and labor savings. “Groundbreaking to opening day was 364 days,” he said. “That is incredible for a 156-key hotel with an attached 190-stall parking garage. This allowed us to open the week
prior to the Kentucky Derby.”

Rooms at Z Modular are 90-95% completed when they leave the factory.

While modular construction has been used in other parts of the world for many years, more and more developers, owners and brands are turning to this method in the U.S. to build hotels for a variety of reasons—from time-savings, to quality control, to its reduced need for labor.

With the modular process, an entire guestroom, including plumbing, electrical and FF&E, is manufactured away from the hotel site in a factory. Once completed, the prefabricated units get transported to the hotel site, where the hotel’s base podium has already been built. The units get stacked into place by crane, at which point workers complete the building on site, including electrical, plumbing and other finishing work.

“Off-site construction is bigger everywhere in the world than it is in America,” said Mickey McNamara, president of Z Modular, a manufacturer of modular rooms. “The total percentage of off-site construction in North America is under 4% of total construction; comparatively, in Japan and Scandinavia, it is more than 20%. Every place else in the world has figured out that this needs to be part of the solution. We have been late to the game.”

While what is included in the completed room varies by manufacturer, McNamara said that the rooms from his company’s four factories are usually 90-95% complete before leaving for the job site. These rooms include FF&E, plumbing and electrical, as well as the exterior facade. “The furniture is in there, as are the TVs,” he added. “You don’t mount the TVs on the wall because of the shipping, but they are in boxes. Everything is in the room.”

This cuts down on any touch-ups that would have had to be done to the hotel if the FF&E was installed the way it is in traditional builds, he said.

“You are not humping beds up through hallways,” he pointed out. “In a traditional build, you have a lot of rework that’s done as a result of installing the FF&E. That is not the case with this. When we install the room, we lock the door and it shouldn’t be opened until you unbox the TV and hang it.”

The benefits
The main benefit of modular construction among its proponents is that it saves significant build time versus traditional on-site construction. “The compressed timeframe of modular construction is realized by performing portions of the typical linear schedule simultaneously,” said Joe Uhlenkott, VP of business development for Guerdon Modular Buildings. “While groundwork and foundations are completed on site, the vertical construction is taking place in the factory. While a dirt field is just beginning to take shape, carpet, wall vinyl and other finish work is being completed in the units.”

He continued, “It will look like a normal construction site until the modules show up and are quickly craned into place. The modules for a typical 150-room hotel could be in place in less than a week. There are still more connections and exterior finish work to be done, but that major portion of the vertical construction and room finish work, for all intents and purposes, is complete.”

The speedier process is a huge benefit, considering that it is taking longer and longer to build the traditional way. “We are on a development cycle right now that is probably eight to 10 months longer than what it was 10 years ago,” said Eric Jacobs, chief development officer, North America, select-service and extended-stay brands, Marriott International. “What used to take 10 to 12 months to build a three- or four-story wood-framed hotel is now taking 20-22 months. If we did modular, we would probably be developing these in 10 months. There is not a developer in the world who doesn’t want to start earning revenue on that investment more quickly.”

Ernest Lee, managing director, development & investments, North America, CitizenM, said some of the brand’s modular projects have been completed in half the time of its traditional construction timeline.

The tight labor market has also fueled the turn to modular construction. “Back in 2007-08 when the construction industry hit a major recession, we lost a generation of labor and tradesmen who just never really came back to this industry, again creating really tight labor resources—probably like what Europe experienced many years ago,” said Guerdon’s Uhlenkott. “As that labor market shrinks, modular fills that void more efficiently, where you can harness more factory workforce into one setting, and then distribute product into other markets.”

Guerdon Modular Buildings constructed the guestrooms for the Home2 Suites by Hilton San Francisco Airport North.

With many of the components of the room already completed in the factory, less labor is needed on site. “You are cutting almost two-thirds of that on-site labor for what you need to finish a project on a job site,” he said. “It really reduces the amount of labor.”

Z Modular’s McNamara likens the tight labor market to the banking industry. “You talk about your interest rate and then you talk about your underwriting, your availability,” he said. “I think that is really the labor market now. You can talk about rate, but the real issue is availability. You are starting to see it now on job sites, where the on-site labor cost is going up because there is a battle to get that labor.”

The labor force is also stationary with modular construction—essentially, the projects come to them. “I have a static, full-time workforce,” he said. “They are always ready and available. My cost-per-person today is probably not materially different than the site person, but that is changing. My hourly rates are staying stabilized as we see the hourly rates on site really go up.”

It is better for the employees as well. “It is a much better environment for a construction worker to work in,” McNamara said. “They come to a temperature-controlled environment. They work 40 hours a week [with a]guaranteed source of income. The work is not weather-dependent. That value proposition to the employee has resonated very well.”

That same climate-controlled atmosphere that is attractive for workers is also a big help when it comes to quality control, another benefit of modular. “We do have the same labor doing the same work, day in and day out,” said Uhlenkott. “We are going to maintain that threshold of quality. It is all being built under-roof, so we are not exposed to the elements—the sun, the rain, the wind. Really, even the safety record we have [is better]. Because we’re building in a manufacturing facility, everything is level-one construction, even while we are working on the fifth floor of a hotel.”

For Lee, that quality control is a major draw for modular. “We try to focus and shift our business model away from being a project-based company, more to a product company, and that allows us to have a lot of oversight over how our product gets made,” he said. “The modules are part of our product. We find that being within an environmentally controlled facility and being able to use an assembly-line process—as opposed to being on a job site having to deal with the elements and a lot of cramped quarters—allows us to have much better execution; you see fewer mistakes on the job, you see better safety and, ultimately, you see a better guest experience.”

A modularly constructed room at the Home2 Suites by Hilton San Francisco Airport North.

How does modular create a better guest experience? For one thing, there’s sound insulation. “Double floor-to-ceiling assemblies and double wall assemblies create a tighter building envelope with higher STC [sound transmission class]ratings,” said Uhlenkott. “It simply means there are two layers and an air gap between you and your neighbors on all sides—far less sound is being transferred. Most of our developers have come back to say that their modularly constructed hotels are by far some of the quietest hotels in their portfolio. They get a lot of complimentary feedback from their guests on how quiet the stays are.”

Modular construction also provides a benefit to the environment, which is extremely important to Lee. “We are a Northern European company, so our emphasis on sustainability is quite serious,” he said. “We find that modular typically has about half the construction waste that a normal project would have, in addition to having a much more accelerated timeline, which has lower impact on the communities we enter. If you have ever been to any urban construction site, you’ll see a line of concrete trucks all waiting in a queue. You can see the carbon footprint that that would create if you are doing the typical concrete slab type of construction. We are basically able to manufacture all of these products in a facility and not have the carbon emissions that a typical job site might have, having constant rotation.”

The construction fits in well with Hilton’s overall Travel with Purpose sustainability initiative. “This building method reduces the carbon footprint for each project and employs green and recycled materials, as well as energy-saving systems throughout the construction process,” said Adrian Kurre, global head of Home2 Suites by Hilton.

While all of these benefits can lead to indirect cost savings, the question of whether there is a direct saving is a tricky one. “Is there a cost savings?” said Uhlenkott. “That is the trickiest part to answer because that is relative to the market we are building and selling into. Certain markets have premiums, and certain markets, there are deltas. There can be cost savings. Where we see the most significant cost savings is really the time savings.”

McNamara agreed. “It is really hard to say because my cost savings for a hotel in San Francisco is a lot higher than my cost savings for a hotel on a ring road in a mall in New Mexico,” he explained. “Any developer that is time- and budget-challenged ought to consider it.”

Making the switch
The modular advocates all stressed that there is a lot to learn for all involved in the development process when it comes to modular. One downside of this construction method—at least for the time being—is the necessary education of stakeholders who aren’t familiar with the process.

“Part of the challenge when you are making a move toward a different technique or process is you are not just educating your owner, but you have to educate the general contractor, the subs,” said Marriott’s Jacobs. “You still need a general contractor because you need to build the foundation and bases, and once they are in place, you still have to finish the building. You also have to educate lenders because the development process is different, so your money goes in sooner. You have to educate the architects, engineers—all of the folks. We thought developing a fully integrated modular program was very important because it was one thing to say, ‘Go do it,’ and another thing to say, ‘Here’s how to go do it.’”

While the time it takes to complete a project is shortened by using modular construction, Uhlenkott said that the timing of certain elements needed in the process is different than traditional construction. “If a developer or contractor is considering this, timing is a big question mark that people should think about,” he said. “The earlier, the better. It sets the stage for the schematic design and the design development to be more modular-friendly.”

Z Modular’s McNamara agreed. “You have to buy into the process to get the full benefit,” he said. “It is a different process. It requires you to plan more on the front end for quicker delivery on the back end.”

Developers have to be willing to make decisions early with modular construction, he added. “Change orders aren’t really possible because we purchased all of the lead items. If you buy into all of that, it is a significant time, labor and material savings,” he said.

Local construction authorities should also be made aware of what is involved with the modular process. “Work with the local jurisdictions to understand the intent of modular…because local jurisdictions are not familiar with it,” he added. “They are getting there, but it is still new to a lot of them. [They need to understand] it is not a shortcut in construction and is still going to follow all of the same rules and regulations—it is just a different way of construction.”

Marriott’s Jacobs agreed, especially when it comes to educating the jurisdiction about the inspection process. “They no longer inspect the guestroom on site; they have to go to the factory to inspect,” he said. “We are flying a city official to sign off on the rooms before they ever leave a factory. That is a change. It has been a big education in the last three to five years that we really lean hard on, which has culminated in a focus on a volume program around modular.”

Embracing modular
With so many benefits, owners and developers are embracing modular in many of their projects.

CitizenM has been a proponent of modular construction since the brand’s launch 12 years ago. “We’re a Northern European-based platform and like most places in Western Europe, modular is considered a mainstream form of construction methodology,” said Lee. “Since our first projects, we wanted to create our business model around being able to use this approach as one of our baseline strategies. It is interesting to us when people tag on that here in the U.S. where only over the last few years is it picking up steam.”

CitizenM is building the first steel modular construction high-rise hotel in Downtown Los Angeles.

The brand’s first hotel, the CitizenM Schiphol Airport hotel in Amsterdam, was built using modular construction and, in May, the brand broke ground on the first steel modular construction high-rise hotel in Downtown Los Angeles.

In June, Hilton opened its first modular project with the Home2 Suites by Hilton San Francisco Airport North, using rooms constructed by Guerdon Modular Buildings. “In a market like San Francisco, which is traditionally high-barrier-to-entry for new-construction, a modular build made sense for several reasons,” said Kurre. “This building method provides developers (like Southern Hospitality Services, which ultimately made the final decision in this instance) with a time-efficient, cost-effective model, an advantage in tight labor markets where skilled construction workers may be difficult to find and the cost of labor is high. Additionally, the shortened construction timeline leads to revenue generation far quicker than a traditional build in the San Francisco market would.”

Vijay Patel, EVP, Southern Hospitality Services, and president, Akshar Development Inc., the general contractor, said that modular made a lot of sense in this project. “The costs in the Bay Area and lack of good, quality contractors were big issues,” he said. “The location we are at makes it less desirable for workers to come due to traffic and congestion.”

Modular was also a good fit for the project given its location and strict building codes. “The modular building system meets—or even exceeds—the quality standards of traditional construction,” he said. “In an earthquake-prone location like the Bay Area, this is an important consideration to take into account.”

Hilton is working with other developers who have modular projects in the pipeline. “Due to the nature of their prototypes, Home2 Suites by Hilton and Tru by Hilton are ideal modular-build candidates,” said Kurre. “Similarly, Hilton Garden Inn, Hampton by Hilton and Homewood Suites by Hilton are also great considerations for modular in the right market. Urban and downtown sites, particularly those that are closer to modular manufacturers thus cutting down shipping costs, are currently the optimal markets.”

For the last several years, Marriott has had an initiative encouraging its owners to use modular construction, including the 168-room, 26-story AC Hotel New York NoMad in New York City, which is expected to open later this fall as the world’s tallest modular hotel.

“We felt we were at an inflection point to help the modular industry know that Marriott was in this in a big way,” Jacobs said. “As a message to our owners to consider this, for folks who are willing to do a modular development, we are incentivizing them to do that. Marriott is willing to put some balance sheet against that to help this growth.

“When you think about it, a hotel room lays out very, very well,” he added. “The building, the product type—it says modular all day long. We can control the quality, we get a better build, less waste, and a better sleep experience for our consumer; I am not sure why more folks aren’t pushing and running to it.” HB


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