Is Silicon Valley Going to Change the Way We Build CRE?

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From the end of World War II in the mid-1940s until just a few years ago, there was a surge in productivity throughout the United States economy, giving rise to what has often been called the “productivity miracle.” Throughout this period, nearly every industry in the US -- from retail to manufacturing to agriculture -- became not only less expensive, but also much more mechanized and faster, leading to increased efficiency.

One industry, however, failed to come on board with this trend - construction. In fact, productivity in construction has not only not increased, but it is also actually lower today than it was in the late 1960s.

In other words, the way that most commercial real estate buildings are built hasn’t changed much in the last 50 years or so. The process goes by the name “design - bid - build” - but it isn’t nearly as simple or straightforward as it sounds. First, the developer or owner needs to hire an architect, who drafts a rough design. In order to do this, he or she must bring in various outside consultants, such as structural engineers and landscape architects. Next, the owner puts the design out for bids from various general contractors and then hires one (usually the least expensive bid). From there, the general contractor subcontracts the work out, with the architect and the general contractor working together closely to make sure the project is completed as close as possible to budget and on schedule.  

If the system sounds complicated, well, that’s because it is. Having so many cooks in the kitchen, so to speak, often leads to misunderstandings, placing blame on others, or worse. The combination of volatile prices for materials and an observed shortage of skilled labor has created an industry that is primed for disruption.

And Silicon Valley has taken notice. Earlier this year, Katerra, a Silicon Valley company, began announcing its acquisition of a number of architectural firms, including Michael Green Architecture (Vancouver, British Columbia) and Lord Aeck Sargent (Atlanta, GA). With the industry ripe for disruption, Katerra is on a mission to streamline what has always been a notoriously unwieldy and frustrating process.

While the design-build model has already been catching on in the United States, Katerra is differentiating itself in a couple of ways:

1. Its goal is ambitious and groundbreaking - a complete vertical integration of design and construction from start to finish. The company sources supply directly from China and has a factory in Arizona that makes various elements, including cabinets, roof trusses, wall panels, and more.

2. Katerra has brought on board Michael Green, one of the world’s most well-known designers of tall wood buildings. Green works with mass timber, a new line of incredibly strong and fire resistant wood products. With Green in the mix and a new factory in progress, Katerra is making a move to corner the market in mass timber.

Of course, the real measure of success will be whether or not the company’s methodology will work for a number of building types. Katerra is working to “strike the perfect balance between standardization and configuration.” If the company can manage to crack the construction code, major industry changes will follow - making this a trend to watch.