Thinking Inside the Box Podcast
Episode #4: A Developer's Perspective: Adopting and Adapting a Modular Standardized Design
Watch full podcast or if you prefer to read, the full transcript is below. It has been edited for easier reading.
Julia
Welcome to the GreenStaxx podcast, Thinking Inside the Box. I'm Julia Hansen, your host and the Director of Business Development and Partnerships at GreenStaxx. This mini-series aims to advance modular multifamily construction by sharing GreenStaxx's experience with standardized, replicable unit designs and hosting conversations with some of the key players in our process.
Today, I'm here with Justin McFarlane of Nine Zero Two Development. Justin is a partner in GreenStaxx's most recent project, a double triple-decker in Lowell, Massachusetts. Today, we'll explore his perspective as a developer using the GreenStaxx system for modular multifamily projects. Welcome, Justin. Thanks so much for joining me today.
Justin
Good afternoon, Julia.
Julia
So, let's get into it. Tell me more about your company 902 Development and how you got into multifamily development.
Justin
Well, it's a long story. About a decade ago, my wife and I moved from Canada to Massachusetts to explore opportunities and chase the American dream. My first position in the United States was in a maintenance facility with a nationwide property management firm. That's where, I would say, I cut my teeth on the maintenance side of property management, started learning the ins and outs of construction and maintaining buildings, and then had the opportunity to move into a property management role with a smaller regional property management firm.
From there, I was hired onto a development team with my mentor, Joseph Degangi, with D2 Development. He showed me the ropes of managing, developing, and acquiring real estate in Massachusetts.
From there, I started my own development company. We initially focused on adaptive reuse projects or historic renovations. We most recently completed a 24-unit ground-up construction project in Lowell, Massachusetts, and we currently have another 26 units under construction that will be adaptive reuses of a former gym facility. We're predominantly focused on modular construction and how to incorporate successful modular buildings into our portfolio.
Julia
Wow. So you had the insider [view], literally from inside the building, looking outwards on your road to becoming a developer. That's cool. Before starting this project, did you have any experience using modular systems that 902 developed alongside Oaktree at 102 Westford Street, Lowell?
Justin
As a project manager for D2 Development, I worked on a 14-unit modular project in Roslindale. That was my first crash course in modular. It did not go how I thought it would, mainly because I had no experience with it being a completely different animal.
For me, modular meant ordering the boxes and having them delivered. The factory would figure everything out. That was a very amateur way of looking at it. I've since realized that the heavy lifting is done upfront. If you want a modular project to go smoothly, you have to put the legwork in much further in advance than you would typically do with a stick-built project.
Julia
And so, after having that sort of awakening on your first modular project back with your former company, what made you decide to look at it again in the context of the double triple-decker and using Gwen's design for a modernized triple-decker?
Justin
Well, I had the pleasure of meeting Gwen during the construction of her Newtonville project. We're probably going back five or six years now, maybe even more. But I had been invited to walk the site with Gwen, spend some time with her, and see the boxes fly into place and be bolted down. It was just amazing. Walking into a box just set and seeing the tile in place, faucets in place, and finishes completed was eye-opening.
Typically, we see the greatest lag from a general contractor in those finishing stages. Finishes can take a while, and seeing a lot of that work having been completed in advance was really cool. Listening to Gwen and trying to understand her vision for modular was also eye-opening, and we realized that there are sustainability aspects as well. There are means and methods of construction that I was not familiar with that would expedite the process. It's fascinating. And I truly believe it's an untapped market.
Julia
What made you decide to partner with Gwen via Oaktree Development on this particular project at 102 - 108 Westford Street?
Justin
So, Lowell is where the majority of my portfolio lies. Lowell is an incredible development market, and real estate is attainable there. Working with the city is a pleasure. Gwen has a substantial amount of knowledge and experience. Her vision of an attainable and replicable product was something that I had been studying for years. As soon as she showed me that design, I knew that I wanted to build that or versions of that design going forward.
Julia
Let's talk about that design because, as you and our listeners know, Gwen's triple-decker standardized design was originally built for a project in Cambridge, Massachusetts. It was designed as a single triple-decker, so just three units. It has Passive House features and is certified Passive House.
So, what were the changes, or let's talk about the customizations that needed to happen between that original design and the vision or needs that you had as a developer for this new project in Lowell?
Justin
Sure, that's a good question. We made several changes. I think the majority of the changes were based on the fact that this would be a portfolio rental project, whereas the [Cambridge] project ended up being owned by a private individual. A lot of customization on the Cambridge project came at the behest of the owner. When Gwen and I were designing, tailoring, or customizing the Lowell project, we were gearing it toward the local rental market and incorporating design elements that would be easy to maintain and certain elements that would have ease-of-use functionality. So, we wanted everyone to be able to see themselves renting a unit in that project.
Julia
Got it. And what were some examples of that? I recall during one of the walkthroughs I've been on that maybe the windows were a little bit different from the Cambridge design. Is there anything that you want to highlight about those customizations?
Justin
Well, what's interesting about it, obviously, is that it's a double-triple-decker. Cambridge was just a triple-decker, so we had to tweak the window placement. This is not a certified passive house, so we were able to play with the mechanical systems to make it a little more cost-effective. That said, they're still incredibly energy efficient and, in my opinion, surpass the efficiency of other rentals in the area. So, by no means did we scale down; we just tweaked things a little bit.
Again, the window layouts were slightly different. There are no balconies. We had initially discussed that with the city, but they felt as though it would impede too much on the street. So, we wanted to be cognizant of the city's needs and wants because we plan to do this again and again in the city of Lowell. And we wanted to show them we could get it done, we could get it done fast, and we could get it done according to plan.
Julia
Right. So, I want to learn more about your experience working with the City of Lowell. It's great to hear that they were a pleasure to work with. Starting with a set of designs that the Cambridge Building Department had approved, were there any particular hurdles that you had to overcome to have the Lowell Building Department sign off on these plans?
I'm curious about the experience of switching municipalities with a standardized design.
Justin
Sure. The city of Lowell, again, has been a pleasure to deal with.
They're looking for developers to come to the city, work with them, enhance streetscapes, and create housing, and they're not afraid of taking chances. That said, the majority of the developers that I've met in the city of Lowell are responsible developers. It's just that the city has the foresight to allow these types of projects to start.
Most of the plans are vetted before bringing the official set to the building department. In modular construction, a third party will review and sign off on the plan at a state level. From there, it gets brought to the city or town where you want to construct the project. There's always a learning curve. Not every town or city has worked with modular before. So when we brought the plans that had been vetted by the state and approved by the state, the city said, just give us a few weeks to process this. They had a few questions, but at the end of the day, because the product was so solid due to the test case conducted in Cambridge, there were no hurdles aside from some of the aesthetics and cladding requirements the city looked for.
Julia
Okay.
Justin
From a design perspective, it was clean.
Julia
Great, yeah. I guess it really helps to have that sign-off on a state level so that the local building department can review it and add anything that might be of local pertinence, like the aesthetics on the outside of the building.
Justin
Yeah, of course.
Julia
So, how did this project's overall cost and timeline go? I should say that the project is almost 99% near completion at this point, so I think we can speak of it as almost completed. How did your initial expectations on cost and timeline compare in the real world as the project played out?
Justin
Well, the nice thing about modular is that unless you mess something up in the field, your costs will be very close to what you initially budgeted. Before you even begin construction on a modular, you have a price breakdown from the manufacturer so your construction costs are laid out prior to moving forward on anything. The budgeting aspect of this project was fairly simple because we had a lot of upfront numbers from the modular manufacturer. Unless we moved away from the aesthetic designs, we knew we would be on target. If we had made a mistake in the field, we would have seen the budget increase, but because we had experience in the area, I own a project across the street, so we were familiar with the soil, we were familiar with the sewer design, electrical requirements from the electrical supplier. We knew we'd be running overhead power lines, so we were fairly certain about our costs.
The only thing we would have changed going forward was the site selection. We selected a site that was predominantly on ledge, and getting through that ledge took a little more time than we anticipated. So, getting the foundation in was a cost that we hadn't anticipated. But we ended up fairly close, and as far as our timeline, it exceeded my expectations. For example, we were able to close down the street over the course of two days, and in seven hours, they had set all 12 modules. That is, they rolled up in front of the lot, were craned off the truck, were set onto the foundation, and then stacked.
Justin
I sat across the street and watched these modules be set over the course of seven hours. It was just incredible. So, it exceeded all timelines significantly.
Julia
To return to the idea of predictability with construction costs when using a modular process, you and I discussed the total project costs briefly before this episode. And it really worked out that roughly two-thirds of the total construction costs were the modular boxes.
So, seeing two thirds of your construction budget go up in seven hours and suddenly materialize on the site does sound special. Also, I just wanted to bring in the role of the construction manager who worked on this project and knowing that their piece of the puzzle between the button-up of the modules and the exterior of the building and the foundation and the site work, all of that represents another roughly one-third of the construction costs of this project, right? And so how was your experience working with that sort of subsequent third of your budget, but several months of your timeline working to tie up all those pieces after the modules were delivered?
Justin
One thing I cannot stress enough is the importance of a competent general contractor. I'm a licensed general contractor, but I know my strengths and weaknesses, and they're certainly outside of modular construction. Gwen and I selected Performance Building Company out of Chelmsford, Massachusetts to do the button-up work. And because they have experience in modular, they have the systems in place to coordinate their subcontractors. And because they took the time before the modules were delivered to get to you the project, they had everything under control from the get-go. So the idea that you could just go to a modular manufacturer and order the boxes and then sort of wing it is something that is just not feasible if you're trying to meet a budgetary goal or timeline. These guys are excellent, and this is evident in the products that they've produced.
Julia
Yeah, amazing. It seems that partnerships are really what make the modular system come together.
So Justin, do you think you'll be doing more double, single, or maybe even triple triple-deckers in Lowell using the GreenStaxx process and the modular process?
Justin
Right now, it's my focus. My focus is on finding sites that I can use this design on. So, from early in my career, my goal has always been to tailor a site or, sorry, tailor a building to a site. What I'm working on now is tailoring the site to the building. And it's much easier because you know what your budget is. Now you just have to go out and find that perfect site that meets the size requirements. And from a portfolio and rental perspective meets those cash flow requirements to cover your debt service. So, it makes things a lot easier.
I don't want to say it's turning the industry on its head quite yet, but it's something that in the last few years, I've fielded hundreds of phone calls from small developers or even private individuals who said, can I do this? What do I do now? So it's taken hold, and people are noticing.
Julia
Wow, yeah, it seems like they approach the problem from the opposite direction as the industry has typically done. And what do you expect in terms of the ability to replicate this same product and process again? GreenStaxx is all about finding those savings in the design and engineering costs, and all the decision-making that goes into creating a one-off building is something that we seek to remove with our standardized process., Where do you think you can reduce costs if you were to do the same project again on another site in Lowell?
Justin
Again, site selection is key. So if there is a site that is, I would say, more conducive to excavation, perhaps there isn't as much ledge before acquiring the site if we were able to conduct additional due diligence by not only surveying the site but digging test pits, that sort of thing. That would bring costs down significantly.
There are some elements of the design that, depending on where we do our next version of this product, we might be able to save, for example, we have a panelized cladding system that may be a little more expensive than a vinyl-clad building. But realistically, it's the time and the costs associated with that time where you find the real savings. So I think we could speed up the time by several months, which would reduce your carry costs and interest costs, which make up a large chunk of the budget.
So, your savings will not necessarily be in the actual materials or the building itself but in the site and the carry costs.
Julia
Great. Justin, what do you feel are the biggest challenges affecting small—to medium-sized developers like yourself?
Justin
I'd say right now, it's financing. Lenders are being very careful. And we had to sell this product to our lender because they weren't familiar with modular construction. So, to get a lender on board with a traditional stick-built product, you just have to go to them, ensure that you're meeting your debt service requirements, and take out a loan. I don't want to simplify that process too much, but realistically, that's it. With modular, the bank wants to know when we should lend you the money. Do we lend you the money when the product is being fabricated? Do we lend you the money when it arrives on-site?
Those aspects of modular construction can be difficult to navigate. We've worked with several lenders in the area who have familiarized themselves with modular in their conversations with us, so going forward, I think that will be easier. Today, the lending market is tough overall, not just from an industry lack of knowledge but also from an actual interest rate perspective and the cost of borrowing.
Julia
Right. So, aside from becoming more familiar with how modular works in terms of, when do you need to pay a deposit to the modular manufacturer, and when are other sources of capital required along the process? Aside from that, is there anything else that sort of the financial sector can do to increase the ability for small to medium-sized developers to do this kind of, I would say like, infill project or projects that lend themselves to improving the quality of life and walkability and density of cities like Lowell.
Justin
I believe so. I think, eventually, lenders are going to have to see or look at modular as a means of improving cityscapes and have the desire to engage with developers to bring life to the community. So we work with many regional banks, banks that are either headquartered in the city of Lowell or in the greater Merrimack Valley region. They know how important it is to bring housing, new housing, and diverse housing opportunities to the city.
So, eventually, these institutions are going to have to understand that they can't require a developer to put up the majority of their cash upfront. It's going to have to be more of a partnership going forward where the banks say “Okay,f you put down a certain amount, we'll match it accordingly.” Right now, banks are hesitant to make funding available for construction that is ongoing but offsite. So if they can't see it, in their minds it doesn't exist. So until that product is on site, they don't want to honor applications for payment, which puts a lot of strain on developers.
Justin
So, going forward, creating a stronger partnership with these lenders will reduce the developer's upfront equity requirements. I think that is what we'll have to focus on going forward: selling lending institutions on that idea.
Julia
Yeah, well put. Well, Justin, thank you so much. This brings us to the end of our episode. But it's been great to chat with you about all that went into using a standardized design in your new project. Congratulations on having the project 99% finished.
In our next episode, we're going to hear from the architect who worked on this project in Lowell, as well as the original design in Cambridge, and we'll go even deeper into those savings on time and cost from a design and architectural and engineering perspective. So, this is a great context to set us up for that.
Thank you for listening to the GreenStaxx podcast, Thinking Inside the Box. Please remember to subscribe if you enjoyed this episode and leave any comments or questions below.
The future is modular.
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