I thought I would drop this article in here to see what some of you guys think about this construction company. After looking at their website, it looks like a tech based vertically integrated construction company. Do you think this is the future of construction? And, if so, do you think this can bring down building costs? Just some food for thought..
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I'm no expert on construction, but based on what I've heard from friends in the industry, the business has consistently been very inefficient, marred by a lack of technological innovation and a general desire to stay within the boundaries of old-fashioned practices. For example - the sheer amount of waste left over after construction is completed can add up to millions of dollars in spare parts, most of which is just thrown away.
Vertical integration makes sense. A tech- and data-driven supply chain, mass production of common parts (panels, windows, doors, etc.) for every new building (just put together in different configurations), and full ownership of the building process from design through completion. No more settling multi-day arguments between the drywall guy and the architect on whether or not the window should be 2 feet or 3 feet off the ground.
Curious to hear opinions from people who know the industry better though.
Exactly! Great points..
It all makes sense until the next economic downturn, and then you're left with a bunch of unproductive overhead.
What I've learned in my relatively few years in this biz--there is usually a rational reason things are done the way they're done today.
urrrrggghh...I have a few thoughts from looking at their site and that NYT article. First of all, I am in the Bay Area and I have never heard of these guys. Their founders seem to have zero construction experience as they come from PE/investment groups so IDK how the fuck they all just go start a GC or why even? Also, the article doesn't say what or how these guys are any different to any one else. The only differentiation I see is that the article hints that they will utilize pre fabricated or modular pieces. That's not new, pre fabrication has been around for a while and there are plenty of people who use it. Life science/Medical labs (e.g.Stanford) utilize this method a lot. The comment above about wasting millions of dollars of product, I am sorry but no one is wasting millions of dollars away on any project. Sub contractors bid very specific quantities based on detailed take off on the plans. Utilizing technology, pre fabrication techniques etc, will depend heavily on the user/owner. My example above - Stanford - they pay a premium because they can. Guess what though, multi family projects are the complete opposite. They are built out of wood the cheapest way possible with piece workers! In construction, its basically the nastiest way to build anything. Vertical integration is basically whats known as the Design Build method. All major stakeholders taking part in the development of drawings and construction collaborating in one set of base CAD files. edit: read the last part of the article, its definitely a pre fab company, that is what the money is being used for
I think design-build is still different in that traditional contractors in those cases will still use subcontractors, while Katerra removes all layers of friction and does ALL of the work, from architectural design to putting the windows in, by themselves.
Secondhand information on the waste, but large construction sites (my friend was quite emphatic about this point, and there's no reason why he would lie although honestly I was in disbelief as well) would often leave a large number of freight container-sized bins full of spare parts (drywall, pipes, hammers, ladders, etc.) that would not be consumed by the end of the project. I guess the GC figures it's easier to buy in bulk and then have some go to waste, rather than procure fewer than necessary and have to wait as a new shipment of supplies comes in.
With regards to pre-fab - it sounds like they only pre-fab modular components of each building instead of the entire building itself. Not sure if that's a conventional technique or widely utilized, that's outside of my wheelhouse. I'm sure it's more efficient than custom-building and shipping a hundred different kinds of doors for a hundred different kinds of buildings (which seems like what the traditional guys are doing, but I could be wrong).
Again - cost savings because all of the work done under one single entity. No issues with subcontractors, no friction in the supply chain. A fully integrated process married with technology to manage it could very much result in lower costs, and that could be passed on to customers. There has to be a reason they're able to secure such a robust pipeline of business.
"hammers, ladders" - these are tools, not spare parts. Why on earth would a builder throw away tools?
Operating at a loss is a great way to get a lot of construction work, but I don’t know how sustainable that really is in this industry.
Part of the reason for the GC/subcontractor divide is the flexibility in work it allows. If there are trades that are less busy in the specific projects these guys are doing, those workers aren’t going to stick around unless the entire market for those trades is also less busy and I don’t see this company positioning itself as an everything subcontractor in addition to its other roles.
As far as construction waste goes, no one wants to waste anything, but if waiting for another shipment is going to slow down something on the critical path, it would be a lot more expensive in terms of time to hold up the project for that instead of just ordering more materials.
Oops, perhaps those layers they removed had been helpful…
Subsidiary of Wolff, a multifamily investment firm. Targeting synergies or tax shelter for their GP position perhaps?
These Katerra guys are interesting but I don't know a ton about them. As someone pointed out above, this is not the only pre-fab builder and it isn't really new.
I saw a hospitality project pretty recently built by these guys:
http://www.guerdonmodularbuildings.com/
It is insane how fast they can put up a building with these things. I think this process literally cuts the construction timeline in half (or more) but they are challenging logistically (you need to pay to truck them in from wherever they are made and then usually need an off-site staging area). I didn't get all of the cost information but time is money. Whatever the hard cost premium is over traditional construction, I'd think you make up for by pushing the delivery date way up. I do think for Multi-family and hospitality projects this will become much more common. Office would be hard as I think you need/want a lot of flexibility and retail is even more problematic.
I know these guys pretty well and visited their AZ fabrication facility to meet with some senior reps quite recently. As others have mentioned they are quite new. Their senior leadership has an extensive amount of experience, both on the principal investing and GC side. To date, they have not done a ton of institutional work, and have primarily worked on deals for Wolff, who is also a significant investor in the company.
The concept is that Katerra vertically integrates design and construction into a single package in order to consolidate schedule and reduce costs. They hold the architect's contract including all of their major subs, and drive the design according to the initial concept. Structural systems, unit layouts, finishes, etc. are customized to fit within a fabricated module, so that the owner can generate savings from a) a cheaper typology with better QC on important stuff like waterproofing, and b) using wholesale materials that Katerra can source at a discount.
Like any new product it has its challenges/hurdles to overcome, but I think they could be big. Construction cost inflation in the current market is simply making new development deals unachievable in a lot of urban areas. If Katerra can figure out a way to significantly reduce a cost input that can account for 70%+ of a project budget, and deliver it successfully, they will be crushing it.
Glad to hear.
So sick of people immediately brushing off new innovative ideas when the company is really in the infancy stage.
My favorite response- "This is nothing new! This has been around for a while"!
Like no shit, do you want every entrepreneur to come up with an idea that has never existed since the dawn of time? Some are inventors and some are innovators. Not everybody is an inventor.
Numerous successful start up founders have told me that they love to work on an idea that the market has already validated. It means that it might be a problem worth solving. Somebody else has also found the problem worth solving, so thats why you also have VC's invested in that idea and company. Its pretty scary to not have your idea or concept exist at all. That is not a good thing. It typically means that it is either very expensive to implement or it is just not a worthwhile problem solving.
In the words of Peter Thiel, "Don’t try to create a new market prematurely. The only way to know that you have a real business is to start with an already existing customer, so you should build your company by improving on recognizable products already offered by successful competitors"
To Thiel there are two types of innovation. If you take something that exists and improve upon it you go from 1 to n. However, if we create something new on the other hand, we go from 0 to 1.
However, there is a “0 to 1” trap that a lot of people get stuck on.
When you get caught up in the sexy of creating something new, which is more difficult than people expect, your competitors might be going from “1 to n” and eating your lunch.
I just want to know what it will be like in an economic downturn. We've had such a long period of slow but steady economic expansion that it becomes easy to forget that recessions happen, and that we have a real estate depression every 20-25 years in this country.
To me, this model is interesting but I can only assume it leaves you completely exposed in an economic downturn.
Agreed - although they key differentiator here is when you're backed by Softbank you can probably whether a 3-5 year downturn versus a typical real estate developer.
I'm not saying that they can't weather the storm; what I'm saying is that it raises the question if the investor--regardless of who it is--can build more profitably over the long run by integrating vertically. Just because they can weather the storm doesn't mean they should necessarily put themselves in a position to have to.
The founder is one of the co-founders of silverlake tech investors. They are one of the most successful tech PE firms in history. That being said, this is a disastrous boondoggle and will end in abject failure. Just like prop 10, katerra fails to address/realize what the biggest issue to affordable housing/supply is......planning depts in California city aka ceqa.
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