Katerra shutting down, ending highly-funded dream of high-tech integrated modular construction

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Ontario Construction News staff writer

Katerra, just a few years ago described as the future of the architectural, engineering and construction industry, is shutting down, despite more than $2 billion invested in the SoftBank-backed company.

The company, founded in 2015 sought to revolutionize the building process by integrating design and modular factory-built construction processes in an end-to-end order-to-delivery model.

The Information reported on Tuesday (June 1) that the company had told employees it plans to shut down, and this news was confirmed by Bloomberg News. The Seattle Times reported that Washington State’s employment department had received a WARN notice that it was laying off 117 employees on June 4.

SoftBank – also the primary investor behind the troubled WeWork group office service – had reportedly poured $1 billion into the international company, with modular construction factories and construction projects in various areas of the US and internationally from India to Saudi Arabia.

“Katerra “had promised to shake up the construction industry with its efficient factories, prefab parts and modular construction units,” Bloomberg reported.

Katerra failed despite a last minute infusion of $200 million from SoftBank. The COVID-19 pandemic didn’t help, but the company was under stress before the coronavirus tore into the international economy.

Before things turned sour, industry observers including building materials marketing consultant Mark Mitchell believed Katerra would reshape the industry in manners similar to the way Uber tore apart the local taxi industry and Craigslist decimated local newspapers.

“In its own way, I predict this will have as much effect on residential and commercial new construction,” Mitchell, based in Boulder, Colorado wrote in 2018. “Lack of efficiency will make the way (building products) manufacturers do business now irrelevant in new construction. They may be relegated to competing with each other in the repair/remodel, big box and smaller high-end custom construction.”

Of course modular building has been around for decades, serving several niche markets, and variations of the concept are thriving in Canada, notably Element5 based in Ontario and Western Quebec.

Factory-built mass timber projects provide a cost-effective and environmentally-friendly option for developers and builders, and are rapidly finding applications in many new sectors.

Katerra sought to take things to a higher level with a massively funded integration on a multinational level between technology, design, manufacturing and delivery.

The start-up purportedly had a valuation of about $2.5 billion, according to PitchBook Data, and at one point was perceived to have $4 billion in value.

By 2018, Katerra said it had about 1,000 employees in four countries and was among the top 25 general contractors in the U.S.

“Katerra is bringing fresh minds and tools to the world of architecture and construction,” the company said in a corporate outline. “We are applying systems approaches to remove unnecessary time and costs from building development, design, and construction.”

“With the latest technology at our fingertips, efficiency no longer has to come at the expense of quality or sustainability. Led by a team that combines expertise from the most groundbreaking technology, design, manufacturing, and construction companies, we are transforming how buildings and spaces come to life.”

“The way we think about a construction site is to turn it into an assembly site and make it a factory like we used to do at Flextronics,” former CEO Michael Marks said in a published report. (Marks led Flextronics in the 1990s and early 2000s.) “The thing that is so messed up in the real estate business is how many different parties are involved in getting anything done.”

In a newsletter, Mitchell – who provides marketing consultancy services to a diversity of building product manufacturers – said the coming construction technology/manufacturing revolution envisaged by Katerra would take place when the company approaches “builders and developers with an offer they can’t refuse – to design and build for them at a lower cost with higher quality, and to do it faster.”

“What if the builder could eliminate the need for designers, estimators, installation labor, and materials sourcing,” he wrote. “Just like Nike or Apple, builders will become brands who don’t need to actually make anything themselves.”

Mitchell suggested the integrated, technology-based modular construction process would uproot the traditional new construction market with these changes:

  • The builder, Katerra, will be ordering truckloads of products to be delivered to their factories. No more need for distributors, dealers or contractors;
  • Labor shortages and installation errors will be a thing of the past;
  • The builder will be taken out of the equation when it comes to product sourcing. There will be no more rebates. Katerra will want the best bottom line price, period; and
  • Katerra will be able to look at making really big changes in how homes and buildings are built. Because of their scale and process, it will be easy for Katerra to consider big changes like changing to metal framing in residential construction.

Mitchell predicted Katerra’s industry changes would happen fast. “And just like the taxi industry, the National Association of Home Builders (NAHB) and some builders may try to push back with legislation that may slow but won’t stop this change,” he wrote.

Writing to building products manufactures, Mitchell says: “In two to three years, or sooner, you will feel the effects of this change as your larger builders will no longer be buying from you. It will also happen to you in the commercial area.”

All of this never happened.

Complaints abounded in Katerra’s factories and offices about mismanagement and discordant work practices. There were also complaints about shoddy construction and failures to meet delivery schedules.

Soaring construction and labour costs, in part associated with  COVID-19, pushed the company to the wall late last year.

The Information reports that Katerra has told its employees there isn’t enough money to pay severance. The company’s recent woes also have included US Securities and Exchange Commission (SEC) investigation into its accounting practices, and the ouster of original CEO Michael Marks last year.

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