Factory-built housing could help solve San Diego’s housing crisis – San Diego Union-Tribune

Factory-Built Housing Gains Ground in San Diego as Trump Tariffs Threaten to Reshape Industry Economics

San Diego's embrace of factory-built apartments offers a glimpse into housing's industrial future, but Trump's trade policies could alter the cost equation that makes the approach attractive

Bottom Line Up Front

San Diego has quietly emerged as America's leading laboratory for factory-built apartment housing, with 2,000 units installed or under development that rent for 40-50% less than new construction while delivering superior quality. The technology promises to transform housing affordability through industrial efficiency: six-week installation versus 12-18 months for traditional construction, with rents starting at $1,900 compared to $3,000+ for new builds.

However, Trump's tariff regime threatens the industry's core economics. Steel duties of 50%, lumber tariffs of 25%, and Mexico border levies could add $7,500-$10,000 per unit, potentially undermining the cost advantages that make factory-built housing viable. For supportive housing addressing homelessness, the stakes are particularly high—factory construction costs $400,000 per unit versus $800,000 for traditional methods, meaning tariffs could cut homeless housing capacity in half.

Two companies dominate San Diego's market with contrasting vulnerability to trade policies: Impact Housing's California-based operation faces lumber tariff exposure, while Domo Modular's Mexico factory confronts comprehensive border duties despite USMCA exemptions. The outcome will determine whether housing's industrial revolution accelerates or stalls under economic nationalism.

San Diego is betting on a manufacturing solution to its housing crisis. About 2,000 factory-built apartment units are already installed or under development across the city, representing a quiet revolution in how America builds homes. Yet this nascent industry faces an uncertain future as President Trump's tariff regime reshapes construction economics.

The Industrial Promise

The factory-built housing movement promises to address San Diego's acute affordability crisis through industrial efficiency. These apartments, assembled in off-site factories and trucked to neighborhoods for installation, can be erected in six weeks compared to the 12-to-18 months required for traditional construction. More importantly for a region where median home prices approach $1 million, they offer rents comparable to older apartment complexes without government subsidies.

Speed drives the fundamental value proposition. Gary Geiler, assistant director of the city's Development Services Department, said officials expect significant expansion after streamlining approval processes. "We're seeing a lot of this and we anticipate more," he said.

Andrew Ranallo's Impact Housing has built 1,200 units in San Diego, refining production from 13-14 months to seven months by importing automotive industry consultants to optimize assembly lines. His Yorba Linda factory produces modules that arrive in San Diego 90% complete, requiring only crane installation and utility connections.

Edward Kaen's Domo Modular takes a different approach. Operating from Tijuana with headquarters in Barrio Logan, the company uses steel construction to build complexes exceeding two stories. The cross-border operation captures Mexican labor cost advantages while serving the San Diego market, though tariff uncertainty now clouds this model's economics.

Tariffs Threaten the Economics

Trump's trade policies cast a shadow over the sector's growth prospects. The administration's 25% tariffs on Canadian lumber and Mexican materials, combined with 50% duties on steel and aluminum, could increase construction costs by $7,500 to $10,000 per home, according to the National Association of Home Builders. For factory-built housing, which relies on economies of scale to compete on price, such increases could undermine the fundamental value proposition.

The impact hits different players in San Diego's factory-built market unevenly. Impact Housing, which operates from Yorba Linda, California, sources materials domestically and from Canada, exposing it to lumber tariff increases. By contrast, Domo Modular's steel-frame construction relies on its Tijuana factory, where Mexican steel and cross-border logistics could face the full brunt of Trump's 25% Mexico tariffs, though USMCA-compliant goods currently receive exemptions.

"More than 70% of the imports of two essential materials that home builders rely on — softwood lumber and gypsum — come from Canada and Mexico, respectively," said Carl Harris, chairman of the National Association of Home Builders. The tariffs represent "another thing that's going to be harder for small lumber yards to handle than the big guys," according to industry observers.

Market Reality: Proven Projects

Despite tariff headwinds, major developments demonstrate market appetite. Impact Housing's $140 million Grantville complex will house 483 apartments with rents from $1,900 for studios to $3,300 for three-bedrooms—rates that city officials describe as significantly below new construction. The company's $84 million College Area project targets 323 units starting at $1,900 for studios.

Both developments reach completion during a period of intense housing demand. San Diego has approved 30,000 housing units since 2020, far below the state-mandated 108,036 units required through 2029. With housing costs surging 84% since 2020 while wages grew only 22%, factory-built housing offers one of the few paths to market-rate affordability without subsidies.

Consumer Experience: Quality Meets Affordability

For tenants, factory-built apartments challenge traditional perceptions about prefabricated housing. Modern factory-built units arrive 90% complete with paint, cabinets, appliances, and fixtures already installed, creating move-in ready apartments that often exceed the quality of comparable site-built construction.

Developers position these apartments to compete directly with older housing stock rather than new construction. Rents at factory-built complexes typically match those of 40-to-50-year-old apartment buildings, but with contemporary amenities and energy-efficient systems. Domo Modular's steel-frame construction enables multi-story buildings with open floor plans impossible in traditional wood-frame apartments, while smart building features through their mobile app allow tenants to manage leases, monitor energy consumption, and access building amenities.

The factory construction environment produces superior quality control compared to weather-exposed site construction. Factory-built homes use 15-20% more wood per square foot than conventional construction, making them structurally stronger. A Federal Emergency Management Agency study after Hurricane Andrew found that modular housing "performed much better than conventional residential framing."

Energy efficiency represents another consumer advantage. Factory-built units can achieve up to 50% greater energy efficiency than traditional construction through precise insulation installation and high-performance windows and doors fitted in controlled factory conditions. Residents typically see lower utility bills while enjoying consistent indoor comfort.

Style-wise, factory-built apartments have evolved far beyond the utilitarian aesthetic of earlier prefabricated housing. Impact Housing's developments target professionals like nurses, teachers, and city employees with class-A luxury finishes and amenities. Units feature modern kitchens, spacious living areas, and luxury bathrooms with finishes comparable to high-end site-built apartments.

However, some limitations persist. Factory-built apartments offer less customization than traditional construction, working within standardized modules and floor plans. While manufacturers provide extensive finish options—flooring, cabinetry, countertops, fixtures—the fundamental layout constraints of modular construction limit architectural creativity.

Addressing Homelessness Through Industrial Efficiency

Factory-built housing's cost advantages make it particularly attractive for addressing San Diego's homelessness crisis, where traditional permanent supportive housing has become prohibitively expensive. San Francisco's pioneering use of modular construction for homeless housing demonstrates the potential: Factory OS can build supportive housing units for under $400,000, compared to typical costs of $800,000 per unit for traditional site-built permanent supportive housing.

The scale of savings could be transformational. The average cost to build permanent supportive housing in California reaches $650,000 per unit, rising to $1.1 million in major cities. San Francisco's Tahanan project, using modular construction, achieved $580,000 per unit—about 20% less than comparable developments while completing construction 30% faster than traditional projects.

San Diego's Housing First strategy, which directs $79.7 million toward creating 3,000 permanent housing opportunities for homeless individuals, could potentially serve more people through factory-built approaches. The city currently spends approximately $14,000 annually per person in supportive housing, while communities average $83,000 yearly in emergency services, medical care, and incarceration costs for each chronically homeless person.

Factory-built supportive housing offers several advantages beyond cost. Units can be designed specifically for formerly homeless populations, with 260-380 square foot studios that include all necessities while maintaining dignity and privacy. The controlled factory environment ensures consistent quality and faster delivery—critical when addressing urgent humanitarian needs.

Labor Relations and Industry Transformation

The shift to factory construction transforms traditional construction labor relations. Factory wages typically run below unionized site construction, creating tension between efficiency and established trade structures. Some unions adapt while others resist.

The Northern California Carpenters Regional Council pioneered "wall-to-wall contracts" training workers across multiple trades—electrical, plumbing, carpentry—within factory settings. "We have a culture and a philosophy at the Carpenters of NorCal that when technology advances happen, we don't try to fight it," said organizing director Jay Bradshaw.

San Diego's recent embrace of Project Labor Agreements complicates this picture. The city's 2024 seven-year PLA requires union labor on projects exceeding $5 million initially, dropping to $1 million thresholds. Industry groups estimate PLAs add 30% to project costs, potentially offsetting factory-built housing's efficiency gains.

Transportation and Operational Complexity

Factory-built housing's viability depends heavily on transportation economics. Modules wrapped in weather-resistant plastic travel from factories to staging areas near construction sites, where cranes position them with Lego-like precision. Delivery costs range from $5-10 per square foot, making factory location crucial.

Domo Modular's Tijuana operation faces particular complexity. Cross-border transportation requires customs clearance and international trucking regulations, adding layers to an already intricate process. While current USMCA exemptions shield many Mexican goods from tariffs, the administration's unpredictable trade policies create planning uncertainty.

Specialized transportation companies like Bennett Truck Transport and Specialized Transportation Enterprises handle the heavy-haul requirements, securing permits and arranging escort vehicles for oversized loads. The six-week installation period, while disruptive with street closures and crane operations, compares favorably to traditional construction's year-plus timelines.

Financing Challenges and Market Acceptance

Despite factory-built housing's operational advantages, financing remains a significant hurdle that could limit broader adoption. The lending landscape for factory-built housing reveals a complex mix of opportunity and skepticism among financial institutions, with critical distinctions between different types of prefabricated construction affecting borrower access to capital.

Modular apartments built to local building codes—like those developed by Impact Housing and Domo Modular—typically qualify for conventional mortgages once permanently affixed to foundations. "These homes are considered no different from a site-built home," according to industry experts. Lenders appraise modular homes using the same criteria as traditional construction, meaning buyers can access standard mortgage products including FHA, VA, and USDA loans with competitive interest rates.

However, many lenders remain unfamiliar with factory-built housing distinctions. "The challenge is many lenders are not familiar with the difference between a manufactured home and a modular home and mistakenly assume they are the same," notes USModular. This confusion creates artificial barriers for borrowers seeking financing for legitimate modular housing projects.

For San Diego's rental-focused factory-built developments, financing challenges differ significantly. Developers like Impact Housing and Domo Modular must secure construction and permanent financing for entire apartment complexes, not individual unit mortgages. "It'll be easier the longer we go, the more builders of this type there are out there," said Shawn Harris of San Diego Commercial and Business Financing, highlighting how the industry's relative novelty creates lender hesitation.

Specialized lenders have emerged to fill market gaps. Companies like Capital Home Mortgage, Vanderbilt Mortgage, and 21st Mortgage Corporation focus specifically on factory-built housing, offering competitive terms for borrowers who understand the sector. These lenders recognize that modular construction can actually reduce loan risk because "our product is delivered further along in the completion process, and once set, the lender has more value on the foundation than the money they have paid out," according to USModular.

Resale value represents another critical financing consideration. Recent research by the Urban Institute found that manufactured homes "appreciated in value at essentially the same rate as site-built homes" between 2000 and 2024, contradicting traditional assumptions about factory-built housing depreciation. For modular homes built to local codes, "there's no difference in resale value and appraisals between modular and stick-built homes," according to Quicken Loans analysis.

The distinction proves crucial for San Diego's apartment developments. Since factory-built rental complexes are permanent installations built to local building codes, they should theoretically maintain value like traditional apartment buildings. However, limited market history for large-scale factory-built apartments means appraisers lack sufficient comparable sales data, potentially creating valuation challenges for refinancing or sale.

Government-sponsored enterprises increasingly support factory-built housing financing. Fannie Mae now purchases loans for manufactured homes titled as real property, while the FHA's Title I program provides specialized financing for manufactured housing. The VA offers loans for modular homes on permanent foundations, and USDA programs serve rural factory-built housing markets.

For individual buyers of factory-built housing, credit requirements generally mirror traditional mortgages: minimum FICO scores around 620-640, debt-to-income ratios below 43%, and down payments ranging from 3.5% (FHA) to 20% (conventional). However, specialized factory-built lenders often offer more flexible underwriting for borrowers with non-traditional credit profiles.

The financing landscape creates a bifurcated market. Well-capitalized developers like Impact Housing can secure institutional financing for large rental projects, while individual buyers face more limited options despite improving loan products. This dynamic could constrain factory-built housing's expansion if smaller developers cannot access affordable capital for mid-scale projects.

Banking sector consolidation adds complexity. Large national lenders often lack expertise in factory-built housing, while smaller regional institutions that historically served this market face increased regulatory pressure. The result is a financing ecosystem that works for established players but may exclude innovative smaller developers needed for industry growth.

San Diego's factory-built housing experiment will likely influence broader financing trends. Success in delivering quality rental housing at scale could demonstrate to institutional lenders that modular construction represents a viable asset class worthy of expanded financing support. Conversely, any performance issues could reinforce traditional lending skepticism about factory-built housing investments.

San Diego officials work to streamline regulations while maintaining quality standards. The city held meetings with factory housing developers and state officials to optimize approval processes, with additional discussions planned to improve inspection efficiency.

Factory-built housing falls under dual jurisdiction: California's Department of Housing and Community Development oversees factory construction while San Diego handles site-built elements and connections between modules. This regulatory split requires careful coordination but offers faster approval paths than traditional development.

Some critics worry developers won't pass savings to tenants, instead capturing higher margins in expensive neighborhoods. Others fear factory-built units could become short-term vacation rentals rather than addressing the housing shortage. City officials counter that streamlined production and reduced labor costs inherently support affordability.

Policy Framework and Regulatory Adaptation

Housing expert Gary London of London Moeder Advisors sees "significant long-term potential for lower rents if developers manage to scale up production and install larger buildings." Universal building codes for factory-built housing could further reduce costs.

Yet tariff policies introduce variables that could reshape the industry's trajectory. Steel tariffs particularly impact Domo Modular's model, while lumber duties affect all construction methods. The administration's promise to address housing affordability through deportations and tariffs creates conflicting pressures: tariffs raise costs while potential labor shortages could increase factory-built housing's relative attractiveness.

Councilmember Sean Elo-Rivera acknowledges factory-built housing could displace traditional construction jobs but considers concerns "overblown based on how strong demand for housing is in San Diego." The city's housing deficit suggests room for multiple construction approaches.

As San Diego pioneers factory-built housing at scale, the experiment offers lessons for other high-cost metropolitan areas. Success depends on maintaining cost advantages that justify the industrial approach—advantages now threatened by an unpredictable trade environment that could determine whether housing's industrial future arrives ahead of schedule or falls victim to economic nationalism.

The outcome will influence not just San Diego's housing market but the broader question of whether American manufacturing methods can solve American housing problems in an era of global economic disruption.

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