Is prefab construction the solution to Canada's housing supply woes?

Off-site construction draws new interest as Canada grapples with a lack of affordable housing, skilled labour shortage

“It’s like putting together an Ikea set,” said Craig Mitchell, principal of BlackBox Offsite Solutions Ltd., an expert in off-site construction, while explaining the simplicity of prefabricated housing construction.

“You can build the building and model it (in a factory) and then you can break it down into individual panels or components. All those panels can be sent on the back of a flatbed truck and then erected on site.”

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Prefabricated modular construction isn’t a new idea: Its origins trace back to the Gold Rush in the United States and Winston Churchill’s plan to tackle the housing shortage in the United Kingdom after the Second World War.

But it’s an option that is drawing new interest as Canada grapples with a lack of affordable housing and a skilled labour shortage that is constraining attempts to build more quickly.

Approximately 90 per cent of construction companies report that the shortage of skilled labour or trades is adversely affecting their ability to bid on projects and meet project deadlines, according to a recent survey by KPMG Canada. They also believe incorporating digital technologies can enhance the effectiveness of their workforce in mitigating those labour shortages. Prefabricated or modular construction has been touted as one of the technologies with the potential to reshape the industry by providing an approach that minimizes the reliance on traditional on-site labour.

“Technology can help the construction industry address Canada’s housing and infrastructure challenges,” Tom Rothfischer, partner, and national industry leader at KPMG Canada, said in the report. “Digital tools, if used smartly, save time and money, reduce waste and improve worker safety and productivity. In short, they help get projects done on time or ahead of schedule and on budget.”

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Prefabricated construction entails the off-site manufacturing of building components in controlled factory environments, which are then transported to the construction site for assembly.

According to Mitchell’s 2022 landscape study commissioned by Forestry Innovation Investment on prefabrication in Canada, wood prefabrication — which combines mass timber, panels and volumetric modular construction — is gaining attention due to its sustainability benefits and ongoing technical and market developments.

The Canadian mass timber industry is still progressing in terms of production capacity and market penetration compared to Europe, but there is growing market awareness and acceptance fuelled by public-sector demand, government support, research and industry project profiles.

But even with growing acceptance by consumers and government support, the construction sector is grappling with a skilled labour shortage, which hinders any swift transition to new methods.

“The problem is that there’s all this new construction technology because it’s sexy right now, but from an adoption standpoint, it’s very difficult to get it adopted into the traditional construction process … because the labour isn’t there,” Mitchell said.

Amid the country’s housing supply crisis, there was a significant decline in construction employment in July, with 45,000 fewer jobs, a decrease of 2.8 per cent. This follows a more modest reduction in June, when 14,000 jobs were lost. Employment in construction has shrunk by 71,000 since January. This downturn has offset the cumulative growth of 65,000 jobs from September 2022 to January 2023.

At the current pace of construction, Canada’s housing stock will grow by about 2.3 million units by 2030, reaching a total of nearly 19 million units. But the Canadian Mortgage and Housing Corp. (CMHC) has calculated that approximately 3.5 million units on top of that will be needed to achieve housing affordability targets.

Mitchell said that a transition to alternative methods of construction could allow projects to be delivered more efficiently and expeditiously.

Earlier this year, Mitchell and his team completed construction of a four-storey wood prefabricated apartment building in the Prairies within 12 months, while the traditional construction approach would have typically taken 14 to 16 months.

“Four months of design. A month or two of ordering all the materials. A couple of months of building the project in the factory, and then three to four months to finish it off on site,” Mitchell said. “So, the actual site work portion of it is actually less than six months from start to finish, foundations through to finishing off the building.”

Utilizing prefabricated materials appears to be a logical solution for addressing some of the challenges in the housing market, but the adoption of this technology faces an additional obstacle, said Kevin Lee, chief executive of the Canadian Home Builders’ Association (CHBA): the instability of interest rates.

“With low interest rates, we got a lot of housing starts in 2021 and 2022,” he said. “In 2022, interest rates went up and so in 2023, we’re seeing … fewer housing starts. When you don’t have the consistency, it makes it harder to invest all the capital that is required to have more factory-built.”

Housing starts in July dropped 10 per cent 254,966 starts from June, the year’s strongest month so far, and 11 per cent in urban areas where the need for more housing is more acute, according to CMHC. But it also said the pace of construction remained 7.4 per cent above the five-year seasonally adjusted average.

Lee said the CHBA is exploring opportunities for collaboration with the federal government to address these challenges. The goal is to facilitate increased industry investment and strategically allocate those investments to enhance the capacity for accelerated housing construction.

This approach safeguards against economic downturns and prevents company bankruptcies resulting from idle equipment or suboptimal production levels in factories.

“It’s not as simple as, ‘Factory-built makes all kinds of sense, so we should just build that way,'” he said. “There are some very real investment challenges to doing a lot more housing this way.”

According to Lee, adopting this construction method also tends to be more expensive compared to traditional methods. However, its main advantage lies in its efficiency and speed.

There are some very real investment challenges to doing a lot more housing this way

“Right now, you pay a little bit more, but you get the time benefits,” said Marlon Bray, a cost consultant at global real estate software and advisory firm, Altus Group. “It’s whether or not that time is worth the money.”

However, he said the higher costs are attributed to the manufacturing process and lack of demand. A significant commitment to manufacturing is necessary for modular construction to gain more market share and become more cost-effective.

“Just like optimizing car production requires a high volume of units, the same principle applies here,” Bray said. “Take the example of Ford’s F150 truck: since they produce a large quantity, the price per unit is around $65,000 to $75,000. If they produced half as many trucks, the price would likely increase to $100,000, and with only 10 trucks, it could reach $150,000.”

Bray said that if a provincial government, for instance, decided tomorrow to address affordable housing and provided a contract to build 10,000 affordable modular units across 10 sites in Toronto, the manufacturer would scale up production, resulting in reduced costs per unit and faster construction.

In the meantime, he’s firmly advocating for prefabricated construction as the definitive long-term solution to the nation’s housing challenges.

“It will be the long-term solution,” he said. “It’s just a matter of getting the endgame commitment from the different levels of government and large-scale orders that prioritize repetition.”

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