Modular Building Institute
Modular Building Institute

Overview of the Relocatable Buildings Industry

By Robert Gaudiosi, Director - Heritage Global, INC.

According to the Modular Building Institute, there are approximately 600,000 buildings in the domestic mobile/modular fleet. Commercial modular units are generally non-residential factory-built units that are capable of being transported from one location to another and are built to meet federal, state, and local codes. There are basically three types of modular units as defined by the MBI: mobile offices, relocatable classrooms, and modular buildings. Mobile offices, also referred to as trailers, are single– or double-wide factory-built temporary units that are generally leased on a short-term basis. Relocatable classrooms are generally single or double wide units built to serve the educational market. Modular buildings, on the other hand, are multi-unit (three or more) factory-built complexes typically leased for longer periods of time.

Mobile offices are utilized in a variety of industries for construction site, government, corporate, educational, in-plant, workforce housing, and general commercial purposes. Mobile offices are often built based on a standard floor plan with standard features. Section modulars differ from mobile offices in that they can be designed and built specifically for the initial end-user. Historically, section modulars have been used as hospital and diagnostic healthcare facilities, banks, commercial office buildings, educational facilities, daycare centers, and correctional facilities, as well as in a variety of high-tech, fast-growing industries. The major markets served by the industry are primarily general office, healthcare, workforce housing, and retail/commercial.

One of the key drivers to industry growth over past years has been the workforce accommodations market. This market centers on energy extraction activities prevalent in certain regions in North America, specifically Northern Alberta, Alaska, North Dakota, and Texas. Due to a decline in oil prices over the last few years, this market a significantly depressed but has seen some growth over the past year as oil prices have begun to rebound.

Another key driver to industry growth has been the healthcare industry. This market has grown significantly over the past few years and accounted for approximately two percent of industry revenues in 2017. The units used in this segment are a bit more specialized given their application.

Due to the mobile nature of the assets and their durability and in some cases flexibility, the modular industry is able to target a number of different end-user markets. As economic slowdowns occur within various industry segments, however, there is some ability to redeploy assets to more active and viable regions and/ or applications as alternative opportunities arise. As units become larger, more fixed in their installation, and/or more specialized in their design and construction, some of this flexibility is lost. Competition typically occurs on a local or regional level due to the need to respond quickly to customer requirements. The cost of transporting and installing units as well as variations in state, regional or local building codes are other factors affecting value.

According to the MBI, in 2017, the average equipment age was approximately 12 years, with units selling for approximately 110% of original cost. Over the period from 1997 to 2017, the 21-year average equipment age was 8.5 years, with a mean average selling price of 107% of original cost. Profitability within the industry is primarily driven by leasing economics rather than unit sales.

The industry traditionally attempts to recoup the initial capital investment of a new unit within four years. Average lease terms have been approximately 24-28 months. Historically, units remain in the lease fleet for approximately seven to 10 years and have subsequently sold for approximately the original cost of the unit. Due to tighter economic conditions, fleets are aging and more refurbishing/rebuilding of units is being done. This is due in part to slower of industry growth.

Industry growth is driven by a confluence of macroeconomic factors. General population shifts and demographic trends generate the need for temporary space. Local and state government regulations regarding classroom space and capacity, as well as the increasing acceptance of modular classrooms and buildings as flexible and cost-saving space solutions, are among the factors driving the growth of the industry. Class size reduction initiatives tend to bode well for the modular industry.

Industry utilization, while currently at one of its lowest levels in the last 21 years, has begun to increase modestly as dealers curtail capital expenditures and reduce fleets of older, less desirable units. Utilization in 2017 exhibited an increase of approximately 2.3% as compared to 2016 Some companies have reported utilization rates in the high 80% range, while others report rates below 50%. The local economy, geographic markets served, and equipment composition play major roles in equipment utilization.

According to the MBI, the U.S. market for relocatable buildings exhibited mixed results in 2017. Some regions and markets appeared to do very well while others continue to struggle. The educational market appears to have lost some traction while support structures for various energy developments exhibited a decline as a prominent part of the overall industry in 2017.

As the cost to construct new relocatable units increases, due to higher material and labor costs and increased building code requirements, some companies have opted to refurbish older units rather than purchase new units.

The following figure illustrates the 21-year utilization rate trend of the mobile and modular industry. As can be seen from the following figure, the growth in utilization has been minimal over the past five years.

According to the MBI, with nearly one-third of industry owned assets “on the sideline.” construction of new units is not anticipated to be material in the near future. Additionally, more stringent code requirements will add to the cost of newly constructed units, without a corresponding increase in rental rates. This will encourage owners to spend more on refurbishing, which can be a frame up restoration or variations of upgrades or replacements of components; or more extensive repairs to extend the useful lives of existing assets, and to continue to challenge regulations that unduly limit revenue generation on their assets. These factors have resulted in some cases in higher resale values of the more desirable units. These values are at approximately 107% of original cost in 2017, which is up slightly from 2016.

Overall, the industry is in a period of modest to limited growth, the average fleet age is increasing, capital is being conserved, and demand for idle units is limited. Recent observations by HGV have been that some companies are experiencing increases in utilization and average rental rate as demand continues to increase due to a growing U.S. economy and infrastructure spending. Some companies with mixed fleets of modular units and container units seem to be experiencing more growth on the container side of their fleet. The improvement in the price of oil is creating activity in that sector, but its long-term stability is still in question, with the global supply of oil exceeding current levels of demand.

Two recent acquisitions by Williams Scotsman, a leader in the industry, have highlighted the renewed demand for fleet units. In December 2017, Williams Scotsman announced the acquisition of Acton Mobile for $235 million and subsequently, in June 2018 announced the acquisition of Modular Space Corporation for $1.12 billion. Both of these acquisitions represent significant multiples and reflect a positive outlook for the industry

This article originally appeared in the Modular Advantage Magazine - Third Quarter 2018 released in September 2018.

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