Cost Containment Strategies: Katerra

8 min read

A Silicon Valley-style approach to housing   

A little over a century after the assembly line and vertical integration came to the automobile industry and transformed the nation, the same concepts and efficiencies are slowly making their way into the construction business. The pioneer is a company called Katerra, in Menlo Park, CA, just north of Palo Alto in Silicon Valley’s tech corridor, which, its website proclaims, “is bringing the technology, design and supply chain innovations that revolutionized Silicon Valley to the world of architecture and construction.”

“The biggest thing we’re offering is an end-to-end, vertically-integrated capability that otherwise would require multiple service providers,” states Steve Weilbach, vice president, GTM. “Traditionally, my position would be called vice president of sales,” he explains. “But since we’re a technology company, we say GTM, for Go to Market.”

“Traditionally” is not a term you will often hear creeping into Weilbach’s conversation, or that of any other member of Katerra’s executive team, except to differentiate their integrated systems methodology from the rest of the design/build industry. “Construction to us equals manufacturing. It’s a simple idea, but we’ve applied it to a sector that is far, far behind other industries in terms of innovation. We’ve done time and motion studies on construction job sites. You’d be appalled by the inefficiency – how many people are standing around waiting for something to be completed or installed. How often does a plumber have to go back to his truck to find a tool or supply? We would talk to owners who’d tell us that the job took longer and cost more than they had expected, and it was hell the whole time. We know we can improve on that model.”

Founded in 2015, today Katerra ranks as one of the top 25 multifamily general contractors in the United States, with about 1,200 employees, including more than 100 architects and engineers on staff. Its growth curve is exponential. A year from now, that population is expected to more than double, to 2,500 or 3,000. The revenue model is also projected to grow year-after-year.

“We have to deliver in scale over a long period of time. We’re doing a little bit of everything, including market-rate, senior, student and affordable housing,” Weilbach says. “We’re about 70 percent in the multifamily space because that’s where we got started. But we can do everything up to a 20- to 30-story urban high-rise, because [beyond such scale] we don’t yet have a better way to do that yet. The key for us is larger projects that can be built to a standardized template and scaled.” Company literature states the aspiration to “provide a new generation of high quality essential workforce housing.” It is also moving into construction for the hospitality industry.

24 Units in Two Weeks
Katerra’s vertically-integrated model starts with architects and engineers and essentially places material fabrication, supply chain and on-site construction all “under one roof.” At the heart of this integration is the factory that connects manufacturing directly to the job site, intended to create a seamless through line all the way to the installation stage. Katerra’s factories produce a wide range of building components and materials, including timber processing and finishing, cabinetry and countertops, lighting, structural beams and truss assemblies, roof assemblies, exterior and interior wall panels, floor structures and more. Factories currently operate in Phoenix, AZ and Spokane, WA, with plans to open others in the U.S. and abroad, and with warehouse facilities and easy access to rail lines and interstate highways.

The Phoenix factory’s advanced manufacturing lines provide the capacity to build a 24-unit garden-style walkup apartment building every two weeks. This breaks down to 600 apartments per year, as well as cabinets and countertops for 15,000 apartments per year, and 12,000 door assemblies per year. This kind of volume also gives Katerra tremendous buying leverage for materials and for assemblies it doesn’t produce in-house.

“The factory model itself allows us to address the cost and availability of labor and put it where it is most controlled and efficient,” Weilbach comments. Their studies have shown that factory work is much more productive than the same kind of work performed at a construction site.

Katerra’s origin story is already somewhat lost in myth. “About half a dozen people think they came up with the idea,” says Weilbach, “and they’re all right! People from different disciplines came together and, each from their own perspective, asked, ‘How can we get this cheaper? How can we do this better and faster?’ For example, should we get our sinks from a parts distributor, or go straight to China where most of the sinks are made? Then we figure out the logistics. You just have to know where to go and how to handle the process.”

The diverse backgrounds of the company’s three co-founders speak to its multidisciplinary approach. Chairman Michael Marks founded a private equity firm and spent several years as a partner and senior advisor at Kohlberg Kravis Roberts, after serving as CEO and then chairman of Flextronics International, Ltd., which he built into one of the largest technology companies in the world. Jim Davis is a managing partner of Silver Lake, which he co-founded, one of the largest and most successful technology investment managers. Prior to that, he was managing director of a technology-focused investment bank and venture capital firm. Fritz H. Wolff, who has several decades’ experience in institutional real estate investment, is executive chairman of The Wolff Company.

Wolff, headquartered in Scottsdale, AZ, is a fully-integrated private equity firm specializing in multifamily construction and management. It shares its DNA with Katerra, was its launch customer and is still its largest construction partner. “We’re mostly West Coast-deployed at the point,” says Weilbach, “but we will be starting projects on the East Coast in 2018, and we can work anywhere in the U.S.”

Mass Customization
Though both the company and the system approach are relatively new, Weilbach notes, “Our go-to-market strategy is to go straight to the top of the food chain in every market. The concept is so compelling and our infrastructure is so complete that the top executives are willing to try it out.”

Part of that strategy, he says, is to quickly dispel the image of “ugly, Soviet-style prefabricated housing blocks.” A glance at Katerra’s built portfolio immediately counters that image. Rather, the Katerra approach is about not having to reinvent the wheel for every project. “We’re in, what we call, the mass customization business. There are only so many ways you can design a two-bedroom apartment, so it’s repeatable. The key for us is, don’t start from scratch each time.” Working from previous experience and design and construction templates, design time is cut in half and construction is even more efficient.

A byproduct of this efficiency, the company projects, will be a significant reduction in the carbon footprint from its construction projects, with data to back the claim.

Weilbach affirms that to sustain the growth Katerra anticipates, it will have to acquire other firms and assimilate them into a new culture. “We will face common integration issues,” he concedes, but is confident that Chairman Marks can manage the challenge. “Michael Marks was CEO of a large consumer electronics firm, and it helps to have someone who’s done something at that scale and can guide [Katerra] every step of the way going forward.”

Marks and his team have raised more than $200 million in investment capital in their first three funding rounds, most of it invested in infrastructure. They expect the D round to raise more than $500 million.

In a world in which disruptive technology and product innovation is quickly copied and implemented—witness the iPhone, Uber and numerous grocery and product delivery services—isn’t Katerra worried that its systems approach will be adopted by others before the company can fully make its own impact?

No, says Weilbach. “Unlike other manufacturing industries where [those who can’t keep up] are driven out of business, construction in America is fully utilized, notwithstanding its inefficiencies. As far as copying us, there is a high barrier to entry relative to cost and building infrastructure. The largest multifamily general contractor in the U.S. has less than a one percent market share. And the market is so big that even if we got to five percent, which would be incredible, there’s still 95 percent left for everyone else.”

Instead, he says, “What we worry about is that we have such an open runway, we have so many ways to go and so many ways to build that it creates the temptation to take on too much, too fast. We are doing things we consider technologically innovative, but the basic concept is not revolutionary. We are simply applying it to the last industry in the U.S. that doesn’t have it.”

Story Contact:
Steve Weilbach
[email protected]