From Projects to Process

The Promise of Service-Oriented Housing Development

The housing development industry faces a fundamental cost challenge. Since 2010, development costs have surged 75% while median household incomes have grown just 27%. When costs rise faster than incomes, projects can't secure financing, meaning fewer developments move forward and housing supply stagnates. The disconnect is in many ways a reflection of a fragmented development process and represents a serious threat to the economy and quality of life for millions of people in the US.

I've spent over a decade in housing development, working with traditional builders, building a modular housing startup called Blokable, and navigating all manner of financing sources and public agencies. What I've observed is a repeated pattern of cycling through the same failed patterns while expecting different results. It’s difficult for innovation to find a foothold in the built environment.

During a tour of a Blokable modular apartment in 2019, Bill Gates proclaimed, “This changes my perspective of the level of housing quality that can come out of a factory.” Then he asked, “Why has technology not been able to bend the cost curve in housing?” That question continues to echo in my mind.

Since the end of the Second World War, we've held on to an idyllic belief that if we shift construction from the field to the factory, we'll find elusive productivity and fix the housing crisis. But adding factories has not made a difference. Factories have added, not removed, complexity. The lack of interoperability between the stages of housing development - architecture, regulatory approvals, engineering, supply chain, and construction - has maintained a baseline level of friction and stymied innovation.

Though housing development is complex, technology has evolved to a point at which increased interoperability and service-oriented development can bend the cost curve of housing development.

Today's letter will outline service-oriented development and explore how new, interoperable approaches have the opportunity to transform housing development. We’ll explore topics such as:

• Why construction technology alone consistently fails to solve the housing crisis

• How integration across finance, regulation, and construction creates a competitive advantage

• The role of AI in optimizing previously disconnected development processes

• The $1 trillion opportunity in narrowing the growing gap between housing costs and incomes

Lessons from Phoenix Rising and the Limitations of Modular

This pattern of pursuing technological solutions for housing without addressing the entire process isn't new. "The same enterprise, skill, and speed that went into the construction of the modern plane in which he fought should go into the house in which he has a right to live," said John F. Kennedy in a 1946 campaign speech on the national housing crisis. "For years, the quality products of American factories were channeled into the war effort. They must now be channeled into building the American home."

This simplified analogy—that housing production should work like airplane manufacturing—has persisted for decades, yet it fundamentally misunderstands how housing development works. Policymakers and industry leaders continue to pursue the same technical solutions while ignoring the fragmented process that prevents those solutions from succeeding and scaling.

In 2020, I led the development of an affordable housing community in Auburn, Washington, 45 minutes south of Seattle, called Phoenix Rising. The project leveraged modular construction to deliver housing for 30% AMI individuals at roughly half the cost of traditional development and construction. It was financed by the State of Washington using an "Innovative Housing" budget that was created to fund new affordable and scalable housing ideas.

Due to a lack of familiarity and in many cases outright resistance from stakeholders, including the non-profit services provider, State and local regulators, the general contractor, and project financiers, the project faced a series of existential challenges. Despite these, we ultimately delivered the project for 50% below market cost, moved vulnerable people into high-quality housing, and operated at 30% lower cost thanks to the high-quality design and engineering.

Despite these successes, we ended up building the very thing we were fighting against: a one-off, unrepeatable project that couldn't scale into a systemic solution. We built a wonderful project that would not have existed had we developed and built conventionally, but it was our last project.

Beyond Construction Technology: Breaking the Cycle

The graveyard of industrialized housing initiatives and startups offers critical lessons about why technological approaches repeatedly fail. Operation Breakthrough, Katerra, Rad Urban, ZETA Communities, and Blokable all manufactured buildings into a development process that wasn't structured to purchase buildings. Pre-development, financing, regulatory, architecture, engineering, supply chain, site work, inspections, and approvals - all these steps have evolved over decades to maximize profits and minimize risk on a project-by-project basis. Assuming sufficient initial capital investment, modular factories can scale up to build a steady output of high-quality products, but there may not be sites and contractors ready to accept them. The failure points for modular and prefab factories can be found at the points where off-site production meets traditional development:

• Building manufacturing capacity without securing predictable project pipelines

• Focusing exclusively on construction budgets which represent only a portion of total development costs

• Investing millions in factories and equipment before validating product viability

• Attempting to navigate regulatory fragmentation without sufficient standardization

• Misunderstanding development and construction financing, which does not align with the needs of the manufacturing supply chain and purchasing

• Product development slows or stops when the complexities and financial obligations of project delivery demand the full attention of the product team

The typical development process map reveals the true complexity. Each housing development requires coordination between the owner, developer, multiple contractors, dozens of subcontractors, and a constellation of consultants, financiers, and government agencies. Every connection point represents a potential delay, miscommunication, or cost overrun. For every project, we draw the map again and fill in the boxes.

There are two very different approaches a developer can take when considering where to put a modular or prefab building system solution box on the map:

1. The new solution adds a box to the diagram, and the previous boxes all stay in place

2. The new solution adds a box to the diagram, resulting in the reorientation and resizing of the boxes

In either scenario, adding a new box to the process diagram results in more connecting lines representing communication, integration, and complexity. The impact of Scenario 1 is limited as it results in added competition for scope and margin. The boxes have no incentive to reorient themselves. Scenario 2 can work, but it introduces risk, which must be mitigated by utilizing the same process design over multiple projects. Scenario 2 reconfigures the ecosystem and requires the developer to solve for new interdependencies. As the ecosystem shifts, only the developer has the necessary incentive and control to redraw the process map. Considering the functions represented in the boxes as services and focusing on the interoperability between services opens the development ecosystem to new possibilities.

Prior to working in housing development, I spent over a decade building software businesses. In the early 2000s, enterprise software faced many of the same challenges we see in real estate development. Unique, bespoke projects were often risky, expensive, and time-consuming to build, difficult to maintain, and lacked sufficient responsiveness to business conditions. The term “service-oriented” refers to a technology architecture paradigm that evolved in the early 2000s as enterprise software developers sought solutions to increasing complexity, leveraging emerging standards protocols like HTTP, XML, and SOAP. Prior to the availability of service-oriented systems, it was challenging to connect software applications on different networks so they could communicate with each other. Standards evolved to facilitate the connection of disparate systems, enabling them to communicate securely with each other. With the rise of interoperability, siloes began to vanish. Many of the most important interoperability protocols evolved under the stewardship of Microsoft, with Bill Gates as CEO, when the company bent the cost curve for the adoption of enterprise software. His question regarding technology and the cost curve of housing development was only natural.

Service-oriented architecture (SOA) laid the foundation for SaaS (Software as a Service) and marked a shift from on-premises software to the cloud. SOA led to the development of APIs and microservices, ultimately helping to create the architectural mindset and technology patterns that enterprises now leverage to incorporate AI into their technology ecosystems. This quantum shift from bespoke, siloed enterprise software to interoperable cloud computing and AI took less than twenty years.

A service-oriented model will require developers to identify opportunities to standardize repeatable elements of the development lifecycle rather than treating each housing project as a bespoke challenge. The good news is that there is a lot of room for improvement. Each box in the development process diagram represents a service that could be made programmatically available as the development process becomes more standardized and programmatic. Even small shifts towards a service-oriented model can result in significant time and cost efficiency. The evolution will not happen overnight, but it has already begun.

Standardization doesn't mean cookie-cutter buildings that ignore site-specific context and requirements. Every site is different, with unique topography, parking requirements, and local regulations. Service-oriented development acknowledges these realities while standardizing the elements that don't need to be reinvented with every project, similar to how the solar industry standardized installation processes while adapting to different roof configurations, resulting in a stable, manufacturable product and then a 90% cost reduction over a decade. In the generic SOA diagram shown above, there is total flexibility in how the system will be presented to the user. User interface design is more flexible, not less, using an SOA model.

Redrawing the housing development process map and shifting to a service-oriented model is no simple feat. This raises the question: Is now the right time?

Three Forces Creating Today's Opportunity

Housing innovators are at a crossroads where three critical forces converge to create unprecedented opportunity:

1. Industrialized Production Has Matured Beyond Experiments

Today's industrialized housing technologies have evolved through multiple generations of market testing. While there have been high-profile failures, there are innovative companies that are breaking through. They've completed dozens of projects and documented real-world advantages through repetition rather than theoretical claims.

The key difference? Focus on standardization across the entire development lifecycle, not just construction. These companies don't merely prefabricate building components—they make the development process easier.

2. Strategic Regulatory Reform

The housing crisis has raised pressure on legislators, and many States have responded by removing regulatory barriers. State-level policy innovations are creating predictable development landscapes that make systems approaches viable. California's SB-35, Washington's HB-1167, and Oregon's HB-2001 represent a new wave of state-led efforts to streamline housing production through:

• Third-party review and inspections

• Pre-approved design permitting

• Industrial building code standardization

• By-right development

• Density bonus and lot-splitting programs

These regulatory shifts don't just reduce friction—they enable completely different development approaches by creating consistent rules across multiple jurisdictions.

3. AI-Driven Process Optimization

Perhaps the most underrated transformation is happening between traditional development steps. Advanced technologies now optimize:

• Site selection criteria matching

• Supply chain optimization

• Permitting acceleration & transparency

• Construction sequencing

• Financial and investment analysis and modeling

AI has dramatically transformed software development by significantly reducing both costs and time requirements. For example, AI tools can now automate the tedious process of code review, finding potential issues in building permit applications before submission, and reducing approval times by weeks. In one recent project, we used AI to analyze hundreds of State and local codes to identify common patterns for a standardized design approach and rank markets based on their fit with the client’s building system roadmap. What previously would have taken days or weeks took seconds with a well-structured AI prompt.

Modern AI tools now automate many labor-intensive aspects of development, from generating designs to detecting issues early in the development process, allowing developers to focus on higher-level design and innovation rather than repetitive tasks. This automation has cut development cycles that once took months down to weeks or even days, while simultaneously reducing the number of human developers needed for projects. By standardizing information flows between previously siloed systems, developers eliminate costly delays and errors, creating a substantial competitive moat through accumulated organizational learning. As housing development rules stabilize and shift to a services model, AI will have a major impact on how developers work.

Overcoming Industry Paradoxes and Constraints

The opportunity is for service-oriented developers to thrive by acknowledging and addressing fundamental industry paradoxes. Rather than fighting these contradictions, developers can leverage them to create a competitive advantage:

The Construction Efficiency Paradox: Although individual construction projects have become more efficient due to improved management and technology adoption, industry-wide productivity continues to decline. The McKinsey Global Institute found that construction productivity has actually declined by 13% since 1995, while manufacturing productivity doubled over the same period. Service-oriented developers bridge this gap by optimizing onsite and offsite activities, scaling efficiencies across projects rather than within them, and creating standardized processes that generate cumulative learning.

The "Missing Middle" Financing Challenge: Missing middle housing—duplexes, triplexes, townhomes, and small apartment buildings—represents an enormous market opportunity and public benefit but fits poorly into conventional financing structures. Most institutional capital is structured for either single-family subdivisions or large multifamily projects, leaving the middle stranded. Developers with standardized deal structures and performance data can leverage regulatory advantages to unlock institutional capital for these product types by demonstrating predictable returns. Identifying metrics and improving performance with repetition and scale.

The Regulatory Contradiction: Government regulation has simultaneously exacerbated the housing crisis through barriers while holding the key to unlocking solutions through standardization. Local jurisdictions often resist density and innovation, but forward-thinking states are creating predictable regulatory environments that enable systems approaches. This shift from local to state leadership in housing policy represents a fundamental realignment and attracts needed innovation.

Service-oriented development addresses these contradictions through standardization and integration. By treating housing as a repeatable process rather than a bespoke service, developers can navigate paradoxes while creating moats. As the ecosystem evolves, there will be disruption.

In early projects, improvements may seem modest—perhaps no savings and minimal time reduction. However, accurately capturing the right metrics can point the developer toward significant cost reductions at scale as standardization takes hold. Success is more likely when the architect, engineers, contractors, and investors are aligned on reducing time and cost with repeatability. The learning curve for service-oriented development is steep but rewarding, with each project building on the lessons of the last.

The Economic Impact of Modest Cost Reduction

It has become almost unimaginable to project a reduction in housing development costs. After decades of relentless increases, industry veterans scoff at the notion that housing could come down. Given the severity of the housing crisis and the need for more resilient housing, the twin goals of housing innovation should be to improve performance and reduce costs. We cannot accept that inflation beats innovation. Even modest improvements through service-oriented development could create transformative economic impacts.

Consider these 10-year impact projections for the US:

• Even a 1% improvement expands the buyer pool by 325,000 households, contributing $39 billion to GDP

• A 2% reduction still creates access for 650,000 new potential homeowners, generating $78 billion in economic impact

• A 5% reduction in development costs would bring homeownership within reach for an additional 1.6 million American households, creating $192 billion in new economic activity

For developers, these improvements translate to dramatically improved returns or the ability to serve previously unattainable price points—potentially the difference between a project penciling or not in today's challenging environment. Cost reduction results in more attainable housing and more opportunities for the workforce.

Most importantly, service-oriented development creates greater elasticity in the housing market. When housing can be produced more predictably, quickly, and efficiently, supply can respond more quickly to demand, reducing the boom-bust cycles that plague the industry and stabilizing prices for consumers.

The Role of States in Creating Conditions

States play a vital role in enabling service-oriented development through policy innovation. While local jurisdictions often prioritize existing homeowner interests, states can establish consistent standards and incentives that create predictable environments for development at scale. States possess the necessary authority and responsibility for housing and workforce development.

Forward-thinking states are implementing:

• Pre-approved design standards that streamline permitting

• Density bonuses for standardized housing types

• By-right approval processes for projects meeting specific criteria

• Industrial building code pathways for factory-built components

• Third-party inspection programs that reduce staffing and approval bottlenecks

However, policymakers must move beyond the misconception that simply shifting from construction to manufacturing will address housing affordability. The history of industrialized housing efforts reveals the risk inherent in this fundamental misunderstanding.

Operation Breakthrough, HUD's massive 1969 initiative to industrialize housing production, allocated $72 million ($550 million in today's dollars) to establish housing production factories across the country. Despite impressive technical achievements, the program failed because it focused almost exclusively on manufacturing while neglecting the difference between architecture and product development, construction and manufacturing financing structures, and integrated delivery models. As a result of the program structure, architects designed components for factories that changed the products for manufacturing and delivered them to developers, who changed them again to conform to regulatory requirements and site conditions..

Today's elected officials and investors often make the same mistake, believing that off-site construction—essentially building conventional projects in a factory—can immediately reduce costs. A recent National Renewable Energy Laboratory (NREL) study concluded that manufacturing learning effects can reduce construction costs by 10-20%, but only with a stable and standardized product.

For a factory, multiple years and millions of dollars of research and development stand between constructing custom projects and manufacturing a stable product. Industrialized housing builders that survive this phase and cross the chasm from construction to manufacturing will be valuable suppliers in the service-oriented development model. States will play a crucial role in establishing conditions to attract or repel innovative producers and service-oriented developers who create new housing supply.

Strategic Implementation for Developers

For developers considering this transition, the organizational transformation requires a fundamental shift in mindset and operations:

• Replacing a project mindset with a services mindset

• Investing in process documentation and standardization

• Technology and AI first approach to operations and development

• Incentivizing interoperability

• Revising deal structures to reward repeatability

• Creating new land acquisition and financial models that capture multi-project efficiencies

This methodical approach allows developers to build organizational muscle around standardization without overwhelming capacity. Early adopters report that documentation is often the most challenging aspect, requiring teams to codify previously tacit knowledge and create feedback loops that generate continuous improvement.

AI technologies prove particularly valuable in this transition, creating connections between previously siloed systems. Machine learning algorithms can optimize site selection, automate permitting workflows, manage supply chains, and optimize construction sequencing. AI is good at identifying patterns and matching resources to opportunities when the rules are known and clear. As developers standardize their processes and identify opportunities for interoperability, AI will become increasingly useful.

Developers, not known for being first movers in technology, may be fast followers, adopting AI and building new models and workflows that turn simple innovations into major economic and public good. AI works most effectively in the gaps between traditional development steps and benefits from the availability of interoperable services.

Breaking the Cycle

The convergence of mature production technologies, regulatory reform, and AI-powered optimization creates a unique inflection point where service-oriented development can finally deliver on the long-promised potential of industrialized housing specifically and built-environment innovation broadly.

First movers who embrace this approach stand to capture significant market share while addressing a critical economic need. By creating greater elasticity in the housing market, service-oriented development may begin to resolve the fundamental supply-demand imbalance that has contributed to our housing crisis.

The transformation requires creativity and resolve. New legal structures must emerge to enable standardized development across jurisdictions. Innovative financial models must recognize and reward the reduced risk profile of service-oriented approaches. Technology platforms must connect previously fragmented stakeholders into integrated teams. However, the projected cost increases using the traditional approach demand reform and offer ample economic benefits for developers who act.

Industry stakeholders face a choice: continue with traditional project-based approaches that struggle to meet escalating costs and complexity, or start moving towards a service-oriented development model that creates predictability, efficiency, and scalability. The evidence suggests we've reached an inflection point where the latter approach isn't just preferable—it's essential.

The greatest opportunity isn't in revolutionary construction technology but in reimagining how the pieces of the puzzle can talk to each other—creating interoperability where there was previously disconnection, standardization and rules where there was inconsistency, and certainty where there was risk. By applying service-oriented thinking to housing development, we can bend the cost curve and deliver more housing.

—Aaron Holm