Oregon Business - Modular Moment

2022-06-15 15:13:22 By : Ms. Julia Wu

Funding from the Build Back Better Regional Challenge has paved the way for a public-private collaboration to create a cheaper, more sustainable mass-housing alternative in Oregon.

When it comes to business projects, Marcus Kauffman isn’t used to leading the way.

Marcus Kauffman, 
a biomass resource specialist at the Oregon Department of Forestry. Photo by Jason E. Kaplan.

A biomass resource specialist at the Oregon Department of Forestry, Kauffman serves as an ODF representative on the Oregon Mass Timber Coalition, a project aiming to expand the use of highly engineered wood products for uses that would be impossible with regular lumber. The coalition, led by the Port of Portland, has partnered with Hacienda Community Development Corporation on a plan to build prototypes of modular housing units, a cheaper, more environmentally friendly factory-made alternative to conventional housing, inside the Port’s vacant Terminal 2.

The currently vacant Terminal 2 structure. Photo by Jason E. Kaplan.

If all goes according to plan, the terminal will reopen as the Building Innovation Hub in spring 2026.

The project has already been awarded $500,000 from the U.S. Economic Development Administration’s (EDA) Build Back Better Regional Challenge. It’s also among 60 finalists competing for $1 billion in economic-development grants tied to the Biden administration’s coronavirus relief package. If it is one of the 20 to 30 projects selected, the coalition will receive up to $100 million in grant funding. The money would be used to create modular-housing prototypes to get private-sector developers interested and involved.

“Normally this isn’t how we do business. Usually we let the private sector lead and we fill in to support them,” says Kauffman. “It feels a little odd.”

The proposed project model, called a public-private partnership, is a way to fund private-sector projects that serve the public good but have up-front costs that make them difficult for private business leaders to pursue on their own. In addition to easing Oregon’s continuing housing crisis and developing a new generation of environmentally friendly, energy-efficient homes, the project is also being developed in partnership with Hacienda Community Development Corporation and promises to bring jobs to underserved Latinx communities in Oregon.

Rendering of modular housing. Courtesy of Forterra Modular CLT Prototype 2022.

Hacienda CEO Ernesto Fonseca says the project has “an aspirational goal” to hire 20% of its workforce from communities of color, and that jobs associated with the project will “comply with living-wage requirements and then some.”

Bedroom rendering. Courtesy of Forterra Modular CLT Prototype 2022.

“We want [people of color] to be part of the growing high-technology future of the timber industry. We want to build bridges between those communities and the Portland metro,” Fonseca adds.

While no fully private entities are involved in the modular- housing project yet, the coalition believes Oregon’s proven track record with public-private partnerships will lead to its selection. The project’s success (or failure) could serve as a model for similar partnerships within the region and across the country.

Modular housing units — or “prefab” homes, as they are commonly referred to by some designers — are built indoors in a factory, then shipped in parts that can be assembled later. The scaling process cuts down greatly on time and construction costs, reducing the unit’s overall price to consumers, as well as providing more opportunities for energy efficiency in both the unit and in production.

Rendering of modular housing units being produced at Port of Portland’s Terminal 2. 
Courtesy of Forterra Modular CLT Prototype 2022.

The concept isn’t new: Buckminster Fuller developed housing with prefabricated elements in the 1930s, and there are several manufactured-home factories currently operating in Oregon. But technology has advanced in ways that make modular houses more environmentally friendly — and, depending on one’s taste, more aesthetically pleasing. The Terminal 2 facility, for example, would build houses from wood fiber, a cellulosic tree extract typically used to make paper and eco-friendly fabric, instead of old-growth timber.

“Modular housing is also going to ignite a new wave of timber production in Oregon,” says Fonseca. “There will be hundreds and hundreds more jobs up and down the supply chain. Utility, technicians, carpenters — I strongly believe this will be a changemaker.”

Fonseca estimates the facility will be able to supply between 5,000 and 6,000 housing units per year. The ability to ship housing units in bulk to any location in the state could also make affordable housing more lucrative to developers.

The Mass Timber Coalition’s members include Business Oregon and the TallWood Design Institute, and the coalition is itself a collaboration between the University of Oregon’s College of Design and Oregon State University’s Colleges of Forestry and Engineering. Coalition members believe the project checks enough community-development boxes to merit the federal investment. The crucial need for housing in the state, as well as the environmental benefits of prefabricated homes, are reasons the team believes they are good candidates for the federal aid.

Curtis Robinhold, the executive director of Port of Portland, says overseas advancements and innovations in the modular-housing sector helped inspire and shape the project.

Curtis Robinhold, the executive director of Port of Portland, at Terminal 2. Photo by Jason E. Kaplan.

“Modular housing has been going on in Europe for some time. The Swedes are really good at it; so are the Austrians and the Germans. They can custom build a home in Bergen and ship it over to London, so the concept isn’t new,” says Robinhold.

Europe is also experiencing rising housing prices. According to data from Eurostat, the statistical office of the European Union, in 2020, 12.3% of Europeans in cities — and 7% in rural areas — were considered to be “cost-burdened” by housing. In Oregon, however, a quarter of homeowners and 46% of renters are “cost-burdened” by housing, according to a 2020 housing-affordability report by the Portland Business Alliance, Portland Metro region. The European study has a higher threshold for its definition of “cost-burdened” — 40% versus 30% of household income — but Europeans also tend to pay less out of pocket for other services like health care.

According to modular-housing resource website Modular Homeowners, prefab homes tend to be 10% to 20% less expensive compared to conventional, “stick-built” homes. But the real savings is time. In a 2018 article from The Washington Post, a Seattle prefab homebuilder estimated prefab builds are constructed in half the time as stick builds.

Kauffman described Oregon’s lack of affordable housing as a “failure of the market.” Housing experts estimate the state needs 110,000 additional units to keep up with demand — a shortfall created in part by a lack of new construction during the 2000s.

It is this type of market failure public-
private partnerships are intended to correct. As much as a home developer may be interested in getting involved in prefab homebuilding, Robinhold says the initial cost of setting up a facility and the relatively slimmer profit margins compared to luxury high-value homes can frighten developers away from modular.

“The question you always hear from homebuilders when it comes to projects like this is, ‘This sounds interesting and could be a great idea, but will it pencil?’” says Robinhold.

The proposed partnership would require the private-sector partners to bear significantly less cost on a project at the outset, but would eventually take over once the Building Innovation Hub is up and running. Given the lower financial risk, Kauffman claims there is already interest in the project from the private sector.

Rendering of the proposed Building Innovation Hub. Courtesy of Oregon Mass Timber Coalition.

“The only reason there isn’t a private party involved in the project now is because those are the EDAs,” says Kauffman. “There are already private-sector actors who want to participate. But we can’t break the rules.”

Public-private partnerships are not universally popular.

A 2014 paper by Public Services International, a global federation of trade unions that represents public-sector workers, notes that “so-called public-private partnerships are coming back in fashion.” But it argues that such arrangements “conceal public borrowing, while providing long-term state guarantees for profits to private companies.”

Oregon does have a track record of public-private partnerships that have, so far, had some success. The Oregon Solar Highway Program, which began in 2008, brought together the Oregon Department of Transportation, Portland General Electric and U.S. Bank to install 594 solar panels along Interstate 5 and Interstate 205 south of Portland.

According to data from ODOT, the panels offset more than 33% of the energy needed for lighting on freeways.

Although the panels sit near ODOT-
managed freeways, PGE owns and operates the solar plant. The success of what was then the nation’s first solar highway project led ODOT and PGE to explore further opportunities to put renewable energy onto Oregon’s grid while also adding value to the transportation system. In 2011,ODOT and PGE began construction on the Baldock Solar Station, a 1.75-megawatt solar array off I-5 near Aurora, which has now been in operation for a decade.

According to the Department of Energy, 36 states have contacted ODOT for help developing similar projects.

But there are key differences between the solar highway program and the Terminal 2 project. First, ODOT agreed to purchase 100% of the energy generated by the plant; it’s not likely a government will make a similar promise with modular-housing units.

The scale is also drastically different. The original ODOT-PGE highway construction cost $1.28 million. The Terminal 2 project could cost much more: So far, stakeholders have requested more than 100 times that amount of money. The Port of Portland estimates design, construction and site improvements to cost $121 million. Of that total, they hope to receive $60 million from the EDA grant, $28 million from the Port and $32 million from other private and public entities.

If the modular-housing concept doesn’t catch on, the effect of the project could be minimal and possibly viewed as a waste of public money. If the project does pay off, public-private partnerships could become more of a norm in Oregon — and the United States.

Michael Andersen, senior housing researcher at the Sightline Institute, a regional think tank with a focus on social and environmental justice, says much will depend on how the houses are received by homebuyers.

“I know there’s been this great promise of modular housing. Modular is more likely to be scalable, and in the urban context, you can use it to compete with landlords,” says Andersen. “The big debate is whether it will result in hundreds of new homes or thousands of new homes.”

 The currently vacant Terminal 2 structure. Photo by Jason E. Kaplan.

He wasn’t aware of the Terminal 2 proposal until OB brought it to his attention, but after we explained the coalition’s plan, he said it sounded exciting. For Andersen, lowering housing construction costs is one of the most appealing elements of the Port-Hacienda project. He says even a small amount of fresh housing competition in the middle housing market could have a significant impact. Having publicly subsidized alternatives could have ripple effects across the market.

“If you can lower the price point of the new constructions, you can reduce the power landlords have over the market. Any sort of efficiency we can bring to housing is hugely important. It will indirectly impact all the other stuff,” says Andersen.

He says modular housing could be coming to Oregon at an opportune time. His organization lobbied for the passage of Oregon’s HB 2001 in 2019. The law did away with single-family unit zoning and allows duplexes and townhouses where, just four years ago, only single-family homes could be built. While zoning changes are necessary to create more middle-income housing units, modular housing allows the newly zoned areas to put in housing and develop the area quickly.

“I think generally if something is going to make money, the private sector is going to get involved somehow, and the public sector doesn’t need to intervene. It’s rarely the government’s specialty to start a new business enterprise,” says Andersen. “But Hacienda is already an entrepreneurial organization as a nonprofit, and I’m sure they have good ideas too. Maybe it’s not such a bad thing if one of their investors is the public.”

Editor's note: An earlier version of this story included a reference to the Build Back Better Act as the origin of funding for this project. The funds were made available through the Build Back Better Regional Challenge, a provision in the American Rescue Plan. Oregon Business regrets the error.

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