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Financing the Mobile/Modular Sector -- Why the Time is Now!

Date: Nov 13, 2013 @ 07:00 AM
Filed Under: Modular

There’s a frequently overlooked and misunderstood industry that’s at the core of some major missed opportunities. Although rarely in the spotlight, the relocatable mobile and modular business is a $3 billion industry that’s proved unusually resilient through the Great Recession years. Got your attention yet?

First, let’s define the mobile and modular industry of today. It was once associated simply with the rectangular trailers used as mobile classrooms, storage units or temporary construction offices. Now, the industry is much broader than that. In the U.S. alone, there are an estimated 600,000-plus mobile and modular units, utilized for purposes as diverse as daycare centers, correctional facilities, healthcare centers and multi-story residential complexes.

There’s ready opportunity in the mobile and modular sector for those willing to see the possibilities. Many of the key industry players are privately held, meaning that data can be hard to come by. However, the recently released 2013 Relocatable Buildings Industry Annual Report from the Modular Building Institute has shed helpful light on the many ways that the industry's economics continue to improve. With a broad range of potential end users and the agility to capitalize on demand when it happens, the industry is well-positioned for a boost as the general economy keeps recovering.

Flexibility Means More Security

Because of the diverse options for using mobile and modular units, this industry tends to remain relatively protected from certain economic fluctuations. It’s quick, simple and generally affordable to move units between cities (to follow changing pockets of development) or from one project to another in the same geographical area (when a region’s industry trends give way to others). This type of flexibility can prove incredibly attractive for investors.

Commercial modular buildings, which are non-residential and factory-built, are used for two main purposes: relocatable buildings and permanent modular construction. Examples of relocatable buildings include mobile offices (trailers), temporary classrooms and modular buildings.

Mobile offices and relocatable classrooms (single-unit structures) are generally leased on a short-term basis, up to several years, while modular buildings (multi-unit structures) are typically leased for longer time periods. Additionally, almost all industry participants offer portable storage units, typically made from restored ocean freight containers.

With these types of units, the mobile and modular business serves four key industries: education, general office projects, healthcare and construction. But with that said, the options for fulfilling other industries’ needs are many. These units are also used for government facilities, daycares, banks, high-tech fields, military projects, disaster relief, in-plant structures and much, much more.

Both durable and flexible, mobile and modular units can be transported easily to react to changing market needs, even in remote locations. Accordingly, economic slowdowns in other sectors aren’t singularly devastating to this industry and most likely wouldn’t have significant adverse effects on sales and leasing. Industry participants face competition at the local or regional level (due to the need to respond quickly to customer demand, specific transportation fees and building-code variations), but the trade offers plenty of opportunities for success.

Smart Inventory Management Adds Protection

Even as industry needs for mobile and modular units have changed over time, the evidence has shown that inventories generally have been managed diligently to capitalize on demand when and where it exists. In recent years, the most significant trends have been shifts from classroom and storage-unit markets toward mobile-office and modular-complex units — though the former two usages remain popular.

This inventory flexibility has been especially helpful for the public school system as mobile and modular units offer price-effective flexibility for bubbles in class size. As an especially large class of students travels through elementary, middle and then high school, districts can react to changing needs without uprooting their entire building structures. As for modular providers, businesses can react quickly and competitively to these local needs, and then move on when the opportunity passes.

Few businesses want to build brick-and-mortar structures in the middle of a bubble or in the middle of a costly project. Recently, a major healthcare provider completed a large, ongoing kitchen renovation that could have either disrupted in a very big way services or cost a fortune to accommodate. During the many months needed for the project, the business chose to set up modular units in a parking area allowing for seamless and sanitary food preparation, equipment usage and storage. When the project was done, the units left.

Key industry players are used to fast-paced changes and fluctuating trends. Inventory figures from the past few years show a wisely managed industry, quick to react. From 2004 to 2008, inventory steadily expanded, until the entire building industry began to adjust. Inventory shrank considerably from 2008 to 2010, which reflected a rapid response by modular building industry players. While the industry worked quickly to reallocate inventory resources, demand modestly increased from 2008 to 2010.

Interestingly, the industry is starting to place more inventory emphasis on larger-sized projects. Although mobile-office units have amounted to a consistent one-third or more of the industry total, the share of modular-complex units has grown from 16% to 27% over the past several years.

Modest Utilization Is Starting to Rise

Today, an estimated 70% of available mobile and modular units (including storage units) are in use. On paper, that’s one of the lowest levels in the past 16 years, but industry utilization has begun to increase modestly as dealers curtail capital expenditures and prune fleets of older, less desirable units. This can create new potential for industry players and investors alike.

According to the MBI, this decline in usage is a result of the nation’s overall economic dip, which has had a significantly negative impact on the construction industry. Mobile and modular industry players have tended to take a conservative approach in the face of new economic conditions. This has resulted in significantly lower equipment spending for 2013, with many companies indicating that minimal to no equipment additions were made.

Different sources within the industry are reporting different results about current usage. Last year, industry-wide utilization increased by about 2% over 2012 figures. Within the sector, some companies have reported utilization in the high 80% range, though others report rates of less than 50%. Local economic factors, geographic market needs and equipment composition all play key roles in these totals and are critical for investors to understand in context.

The potential in this sector is still very real overall. Many companies are recognizing the speed and cost-saving benefits of mobile and modular buildings. Last September, a 12,000-square-foot childcare center at New York’s Lehman College was assembled with modular units in just three days. The units arrived 99% complete (with floors, windows, lighting, wiring and more) and simply needed to be hoisted into place, then finished and painted.

In cities far and wide, these  types of buildings are looking more and more attractive. A 49-unit apartment building (expected to take seven months to erect) will become downtown Seattle’s first modular construction project. New York City currently has more than 17 modular projects in development, according to Crain’s New York Business. One of them will top out at 32 stories, making it the new tallest modular building worldwide. But that, soon, will be topped by Changsha, China’s Sky City — a projected 202-story modular building set to be completed in April 2014 after ten months of work.

Higher Rents Help Business

In the case of the mobile and modular industry, higher rent is a good thing. With the exception of storage and other miscellaneous units, average monthly unit rent has tended to increase over time. For all units, rent increased an average of 4% annually from 2004 to 2010, versus 2.3% per year for inflation. That offers the potential for a sizable revenue increase for mobile and modular suppliers.

Specific opportunities are emerging as a result of these rent increases. Mobile-office monthly rents spiked 24% from 2004 to 2012, while classroom and modular-complex rents jumped 14% during that time. Only storage units ended with a lower monthly rent, down 15%.

Mobile offices and modular complex units have become dominant in recent years, where annual rental revenue is concerned. In 2012, these two unit types offered more than 70% of that revenue, whereas classroom units contributed just 15 percent — down from 28% in 2004. The industry is changing, and so are the revenue streams.

Leasing economics as opposed to unit sales are the primary driver of industry profitability. Approximately 48% of dealer gross revenue came from rental income in 2012, compared to 27% from new unit sales; and 25% from installation, service and other value-added products.

Sale Values Are Staying Impressive

Although rent remains the highest driver of dealer gross revenue, unit sales are a viable option to increase funds. In 2012, the average equipment age of existing mobile and modular units was 8.5 years, with units still selling for approximately 103% of original cost, according to MBI. From 1997 to 2012, the 16-year average equipment age was lower, at 8.04 years, with a mean average selling price of 105% of original cost.

These are promising numbers made possible by the diverse and ever-expanding uses of mobile and modular units. As key providers looked to diversity through the economic downturn, they quickly capitalized on medical, military, healthcare and other uses to keep business strong. And the budget sheets reflect this.

The Outlook

Mobile and modular building has become an increasingly attractive option over recent years. Because of this growth potential, industry players can be seen as solid acquisition targets for investors. With cash flow and costs managed carefully, companies in this sector can bring in noteworthy ROIs. As the economy continues to improve and commercial construction continues to rebound, the industry is poised to experience another period of growth.



Bob Gaudiosi
Vice President | AccuVal-LiquiTec
Bob Gaudiosi, vice president at AccuVal-LiquiTec, has studied the modular building industry for 20 years and has appraised dozens of companies in the sector, including all major industry players. He co-authored a groundbreaking study for the Modular Building Institute’s Educational Foundation that benchmarked the return on investment of relocatable buildings. The findings were presented at the World of Modular Conference in 2012. Bob can be reached at rgaudiosi@accuval-liquitec.net.
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