A Californian provider of affordable housing that has focused for years on purchasing and preserving old apartments as affordable housing and employment properties is turning to a new solution in the face of the ongoing housing shortage in major cities: building apartments in factories.
Courtesy of Avanath Capital Management/AAREP LA
Daryl Carter, Founder, Chairman and CEO of Avanath Capital Management
Avanath Capital Management is partnering with New York-based modular construction company Vessel Technologies to finance and build modular housing in key markets including Boston, Los Angeles, New York City and Chicago. Avanath founder and CEO Daryl Carter shared Bisnow Its goal is to build 5,000 housing units within five years, targeting renters earning 80% of their area's median income.
“We have launched a number of new development efforts that are really focused on building a modular product,” Carter said. “Think about buying something from Ikea and putting it together really quickly.”
Carter said he is making this new effort to combat the affordable housing crisis that has worsened over the last decade. According to the National Low Income Housing Coalition, the U.S. is short of 7.3 million affordable rental units for those whose incomes are either below federal poverty guidelines or 30% of their regional median income.
While developers delivered a record number of apartments in 2023 and 2024, most were built for high-yield rentals and the pipeline of new units has slowed significantly. According to the Census Bureau, there were 773,000 multifamily homes under construction in December, down 21.5% from a year ago. Approvals for new housing units also fell 3.1% year-over-year.
That's why Avanath partnered with modular home builder Vessel late last year. According to Carter, Avanath and Vessel design housing panels at a factory in Pennsylvania, ship them and then assemble them on site at a fraction of the cost of developing a complex from scratch.
The apartment panel system also allows the partnership to ship them across the country without the factory geographic boundaries that typically exist with prefabricated modules, Carter said.
“This panel-shaped system — think Ikea again — can be shipped on trucks and ships and trains or whatever, but it fits and assembles very quickly,” he said. “So it’s a different approach.”
Vessel's system keeps the cost of building a modular housing unit capped at $300,000 or less, Carter said, compared to units built today that could cost between $700,000 and $1 million to build. The process allows Avanath to keep rents low without relying on public subsidies.
Although it represents only a fraction of the multifamily housing industry, modular construction has increased in recent years. According to the Modular Building Institute and ConstructConnect, the share of modular construction starts increased from 2.1% of the U.S. construction market in 2015 to 6.6% in 2023.
Greystar, the largest U.S. homeowner, is also pushing modular construction and completed its first project outside Pittsburgh last month. Five more are in the pipeline.
Avanath Capital Management acquired the 146-unit Anton Arcade Apartments in Sacramento, California in 2022.
Avanath operates and owns 100 apartment complexes and 16,000 units in 15 states, most of which are targeted to renters in need of affordable workforce housing units. Its core business is purchasing existing residential communities, so the modular development efforts represent a change from the traditional model.
“The beauty of it is that they can be built very quickly – six, seven months or so,” Carter said.
Avanath has acquired two vessel communities in Connecticut with a total of 166 units under development as part of the first phase of the partnership. Beyond these two projects, Avanath and Vessel plan ten additional properties by the end of 2025 in high-rent markets such as Seattle, San Francisco, Washington, DC, Denver, Austin, Dallas and Orlando, Florida.
The company typically purchases 10- to 15-year-old properties and renovates them while maintaining affordable prices for those earning 40 to 80% of a local market's AMI.
“We are in an environment where our average rent across our portfolio is $1,600 to $1,700 per month, which is very affordable in the markets we operate in,” Carter said.
When it comes to financing, Carter said Avanath uses institutional investors to finance its acquisitions and avoids entirely using federal affordable housing tax credits, which he says complicates the business model and discourages traditional investors.
While U.S. institutional investors — which once shied away from investing in affordable housing — have increased their activity in the sector in recent years, most of Avanath's capital sources come from other countries, according to Carter.
European investors in particular have a fundamental understanding of affordable housing financing, as regulated, low-cost housing has been part of their culture for generations and is attractive to a larger number of tenants than Class A housing.
“One of the things we have learned over time is that many foreign investors, particularly in countries like the Netherlands, Germany and the United Kingdom, invest in affordable housing as a matter of course,” Carter said. “There are more people who can shop at Walmart and pay $1,700 in rent than there are people who can pay $5,000 in rent and shop at Neiman Marcus.”