Q&A: Modular Construction Startup Reimagines Apartments as a Consumer Product  - The Registry

2022-06-23 00:42:16 By : Mr. James Zheng

As the housing crisis across America continues to escalate, established technology companies and startups alike – many of which are based in the San Francisco Bay Area – are looking for ways to address the mounting issue of housing affordability. San Jose-based Cloud Apartments, founded in 2020, is one such company looking to make a difference when it comes to providing modular-construction homes that are more affordable for renters. We spoke with Cloud Apartments Founder and CEO Curtis Wongabout the objectives of Cloud Apartments, how technology is changing the modular construction industry, and what might lie ahead for the trajectory of the affordable housing crisis in the U.S.

Can you tell me a bit more about Cloud Apartments, how the company originally came to be, and some of its current objectives?

Cloud Apartments is the result of a combination of my obsession with finding a solution to housing and a ten year timeline/ countdown of experiences that led me to this moment. Two years ago, I learned about the potential of modular construction to reduce that cost if key changes were made to the technology. And finally, a little over one year ago, Cloud Apartments was founded with the mission of fundamentally changing the economics of housing construction so that more people can afford a beautiful home.

How does Cloud Apartments offer a unique alternative to other myriad prefabricated housing/apartment options available in the industry? What sets Cloud Apartments apart from its competitors?

Cloud Apartments differs from other prefabricated companies with two key ideas. Firstly, the apartment should be thought of as a product with intense focus on the renter, much like luxury automotive brands with their consumers. Secondly, we partner with established builders in the industry rather than trying to reinvent the wheel.

Thinking of the apartment as a consumer product is a paradigm shift from how housing is built today. Most apartment buildings are designed from the outside in, meaning the architect designs the building massing and exterior aesthetic before laying out the units inside. This is the reason apartments are often poorly designed for renters because they are an afterthought in the process. 

For Cloud Apartments, we focus on designing the perfect product line of apartments for renters first, then using them as building blocks for our buildings – designing inside to out. Thinking of the apartment as a consumer product lets us hyperfocus on our renters while simultaneously unlocking huge efficiencies in manufacturing when we build them in an assembly line process. 

We want to avoid past mistakes with famous builders like Katerra, raising billions of dollars and trying to do everything in-house. The issue with that approach is that construction is difficult, and there is so much expertise in the industry from decades of learning that is thrown out. 

What specific need is the company filling when it comes to addressing the urgent affordable housing crisis in America?

The affordable housing crisis exists because housing developments need to run through a gauntlet of obstacles, making it seem like a miracle every time a project gets built. First off, there is not enough land zoned for multifamily housing. Even if land is zoned for multifamily housing, it has to be approved in a notoriously difficult entitlement process. Second, the project itself has to have costs low enough for the revenue from rents to justify investment. It is this second category of obstacles that Cloud Apartments is tackling. If we innovate on construction to drive down costs, then rents will follow. We believe the only path to true affordability in housing comes from finding a way to reduce the cost to build it.

How have you seen modular housing in the U.S. evolve in the last few years? What do you anticipate for this growing industry moving forward?

Modular housing in the U.S. has grown year over year, with a particular focus on affordable housing projects and hotels. Some would say that the market share is still very small, but I see modular housing being very successful when we consider how conservative the real estate industry is. What’s interesting is that modular projects are being built without expectation of any cost savings being achieved. At this point, the only benefit with modular housing is through time savings, because apartments can be built in the factory simultaneously with onsite construction of the foundation. Moving forward, more companies are focusing on this idea of productizing the apartment. I anticipate that modular housing will grow dramatically in the upcoming years when cost saving is achieved because real estate developers will have increased incentive to use this technology, which will spur the rise of more factories, and so on. 

Who in particular does Cloud Apartments cater to? In your own words, how would you define the “modern renter”?

Our definition of the modern renter includes middle-income individuals, those in the workforce, or affordable renters primarily. This could be anyone from teachers, retail workers, tech workers and working families. We are catering to any renter that wants a beautiful apartment at a reduced price from what is being offered in the market. For this reason, we use the modern renter to include practically every one of the 40 million renter households in the United States. We believe a modern renter is looking for a trusted brand in housing rather than using Craigslist and hoping for the best.

In which U.S. markets do you operate? Are there plans to expand geographically in the coming years?

We are starting in the West Coast because our network of builders are located here and regulators are more comfortable with modular housing due to past successful modular projects. We are, however, already looking to expand in new markets and are open to discussions with factories, general contractors and developers anywhere in the country where there is an appetite for what we bring.

Can you elaborate on the economic/affordability aspect of these modular apartments? Given that they seem/appear relatively high-end, how does this price-point square with the larger objective of helping to solve the U.S. housing affordability crisis?

To start, Cloud Apartments is entering the market with a higher end offering in order to flip the narrative that modular housing is inherently of lower quality. I like to think of this being analogous to how Tesla did the same with electric cars, where electric cars are now seen as cool. What I find more important to note though, is that we, as renters, are used to mentally connecting a lower quality standard of an apartment with the affordability of rents because we are accustomed to the high costs of construction that make this true. 

With our new productized approach to modular construction, however, costs are dramatically reduced, allowing us to improve the quality of our spaces while keeping rents low. When we say we want to help the U.S. housing affordability crisis, we want to do so without relegating families to old, small, or low-quality homes. Instead, we believe it’s entirely possible to build quality homes at affordable prices.

Are you optimistic about developers’ ability to continue to push the needle when it comes to solving the housing affordability crisis? Why or why not?

I speak with many developers these days, and I typically find two extreme reactions. One where focus is on the perceived risk of modular construction, and one where focus is on the upside of reducing cost and building affordable housing. At the end of the day, I’m optimistic about developers’ ability to push the needle because I want to remove the risk portion from the equation entirely. The gut reaction when dealing with modular construction and an early-stage company like ourselves is to believe that it is inherently riskier than building conventionally. 

The thing is, conventionally constructed projects have rampant delays and are often over-budget and over-schedule. Modular construction is a proven method itself with many completed projects. Moreover, our productized approach reduces risk further because our buildings use standardized building blocks that have been proven to work. We have prototypes of our modular apartments that developers can touch and see how they are installed, and these are repeated between projects so we can get pre-approval from regulators. It’s really a new approach that I believe developers will start to understand as we prove it building by building.

What are some of the challenges ahead when it comes to devising new ways to continue to advance and streamline the efficiency of modular housing as a model for the provision of housing?

We see ourselves as a modular R&D company, meaning we focus intensely on creating new technologies for reducing the cost of construction further. Additionally, we focus on our renters’ experience through user feedback, sustainability research, and building out our smart experience to make true apartments for the 21st century. The challenges ahead will lie within externalities outside of our control. In California we have a fairly mature permitting process for factory-built housing, but this process doesn’t necessarily extend outside of the state, so we will face more barriers as we expand geographically. To really use modular housing at-scale to solve for affordability, we will need cooperation from regulators who have been slow to embrace modular housing because of its perceived risk and low-quality.

Many housing advocates want to push for increased federal funding to build affordable housing and this is definitely something to push for. But the real sources of capital may be on the private side. We see a lot of appetite for green and affordable housing capital with ESG (Environmental, Social, Governance) bonds that can be a really scalable solution to building up the housing supply this country sorely needs.