Faster, Cheaper, Superior

Construction of real estate is expensive and slow

The construction industry, with an estimated turnover exceeding $11 trillion in 2022,¹ plays a vital role in fostering economic growth and infrastructure development worldwide. In the EU alone, the industry employs roughly 25 million people and provides more than $1,100 bn  in value added (9.6 percent of the EU total), making it the second most important ecosystem after the retail ecosystem.² However, the industry is facing challenges on multiple levels, spanning from an inefficient operating system to a high amount of material waste and emissions, rooting in a segmented and small-scale structure with low customer focus, old-fashioned ways of collaborating, and low adaption of digitalization and automation. 

According to a study from the Institut der Deutschen Wirtschaft, or IW (German Economic Institute), the top 20 percent of households with the highest income in Germany cannot afford even half of the single-family homes advertised.³ Part of that is due to the high manufacturing and construction costs, because the industry lacks major technological advancements and has only achieved incremental process improvements. This becomes clear when comparing the construction industry with other industries. While, for instance, the manufacturing industry in Germany was able to increase productivity about 91 percent compared to 1990, the construction industry in Germany is still working at the same productivity level as 30 years ago — even worse, in fact. Similar trends can be observed in other national contexts and geographies. The Canadian construction industry was able to achieve a productivity increase by 10.09 percent from 1997 to 2021, while in the same period the general economy increased by 33.31 percent and the manufacturing industry increased its productivity by 39.64 percent.⁴

This low productivity is reflected in missed project deadlines and extended costs — often by more than 200 percent (€20bn to €60bn as seen at the Three Gorges Dam in China.⁵) In addition to these mega projects, nearly all construction projects miss their initial targets on time, cost, and quality. The reasons for the low productivity are diverse, yet a major driver is the traditional operating model: singular project approaches, on-site construction, and a highly fragmented value chain with 99 percent consisting of small and medium enterprises.² The traditional model is trapped in a vicious circle. Low productivity ultimately leads to low and unsteady project margins, resulting in decreased budgets for research and development for major technological advancements and innovations, and then circles back to the starting point of the low productivity.

The construction industry is wasteful

Building operations and construction are responsible for 55 percent⁶ of global electricity use and 37 percent⁷ of global carbon emissions. Furthermore, the industry was responsible for 37.5 percent of the waste generated in Europe in 2020.⁸ Although there are initiatives to reuse material, it is currently used primarily as filler material, e.g., in road construction. Furthermore, it has been shown that the approach of a circular economy is still at a very early stage. The 2022 Global Status report predicts that with its current setup, the construction industry will not be able to reach the net-zero target for carbon emissions by 2050.⁹ However, this is not only a question of gaining a competitive edge in the market but rather an obligation to behave according to the law. The European Union agreed on the European Green Deal, whose objective is to reach “nearly zero” emissions for all new buildings by 2030.¹⁰ In addition, it is planned to at least double — or even triple —  the renovation rate of building stock, which at present makes up just 1 percent.¹¹ The need for change is not only forced by politics, but also by society, compelling the industry to develop more ecological solutions along the entire value chain, not only within key material categories and segments.

The customer is not in focus in the fragmented value chain

As living is a basic need, the demand is given. Nevertheless, there are different levels of desire regarding design, layout and size, services, and smart home features. However, for two main reasons, the construction industry has a weak customer orientation. First, the value chain consists of many fragmented and unstable stakeholders, each with their own goals (e.g., investor, developer, designer, general contractor). Second, the final customer, i.e., the tenant who rents or buys a building or apartment, has different preferences and needs than the first customer: the investor or owner — except for buildings in proprietary possession, e.g., single-family homes.

The tenant is often left out of the process of creating the real estate product, which should be customized to their wishes regarding layout, size, materials, smart home applications, etc. As a result, there is little incentive or practice to create superior buildings that benefit both the investor’s business case and the tenant’s individual value. 

Other industries, such as automotive, recognize the importance of understanding and meeting customer needs and offering them personalized products. They follow a standard procedure of customer research, feedback loops, technical specifications, product development, and market launch. This procedure has become standard in most industries and leads to high-quality products with various configuration options and efficient production. However, this is not the case in real estate and construction.

Industrialized construction as a viable solution

Affordable living is a priority for many governments around the world, and they have set ambitious targets to achieve it. For example, Germany aims to produce 400,000 new apartments every year, including 100,000 social housing units.¹² Canada needs to build 3.5 million homes above the current rate of construction to make living more affordable for its inhabitants.¹³ Industrialized construction offers a way to meet this demand in a sustainable way, not only in terms of cost, quality and time, but also in terms of value for the tenant and investor.

Industrialization begins with translating the customer’s desires and demands into customizable products to match ("productization"). This includes the optimal layout of a building or apartment, the best solutions for design and materials, smart home applications and services, and brands under which the real estate is developed and promoted. This process of developing superior products also enables the sustainable use of materials and the circular economy. By addressing those desires and demands, the value per square meter as perceived by the tenant can be increased by up to 25 percent. This also impacts willingness to pay and thus the business case for the investor.

Artificial intelligence plays a key role in that part of this process. In the early design stages, AI can find the best solution of the real estate to maximize the overlap of requirements coming from all stakeholders on topics including architecture, materials, structural designs, sustainability, smart home applications, business cases, and layout. The decisions made at this stage have a major impact on the entire life cycle of the building, ranging from material sourcing, production, logistics, and assembly to operations and end of life. AI applications help to ensure constructability and efficiency by linking each decision point to any available option and the consequences throughout the value chain to provide transparency about the implications of each decision.

Another major benefit of industrialization is the improvement of cost, quality, and time achieved by increased automation with robotics in a controlled environment — usually an off-site production facility. The use of robotics can boost productivity and quality of the production facility to a new level. For instance, robots can be used to fully automate the production of individualized walls with windows and doors or the assembly of walls to a room module, ensuring a high-quality result. This technology allows companies to close the skilled labor gap, reduce costs by 30 percent, and save time by up to 70 percent compared to traditional on-site construction.