QSRs Turn to Modular Construction as They Downsize

Last month in Brooklyn Park, MN., Taco Bell broke ground on what it billed as one of its most innovative restaurant designs yet — Taco Bell Defy.  Set to open its doors to the public by summer 2022, the 3,000 square-foot, two-story model features four drive-through lanes. Taco Bell is not alone in this trend; in general, QSRs are paring down their footprints, especially the single-tenant drive-through tenants.

But Taco Bell Defy represents another, quieter trend in the QSR and net lease space — one that equally promises to have a significant impact as the increased use of drive-throughs and smaller footprints. And that is the use of modular construction. 

Modular or manufactured buildings have long been associated with residential prefabricated homes, but this building technology is now making its way into commercial retail development.

In order to get more information on the subject, I reached out to Donn Kaebisch, the Business Development Manager of RJ Russo in Phoenix Arizona. The RJ Russo company is an established provider of metal manufactured products that is at the forefront of this movement towards modular construction for retailers. Some of the retailers RJ Russo is currently working with are Dutch Bros., Checkers and Rally’s, Bikini Beans, and Mutts K-9 Cantina. They are in discussions with six other national QSR brands as potential clients.

There is something that these tenants have in common. The size of their buildings are all roughly 1,000 square feet. Based on the engineering restrictions faced by modular manufacturers, logistically, smaller is better. Fortunately, this fact lends itself to the shrinking footprints we’re seeing in the QSR section of commercial real estate. 

One of the limitations of modular constructions is transportation. RJ Russo manufactures their product onsite in Phoenix, AZ and their customers are spread across several states. Unlike traditional construction where the framing takes place at the build location, once the modular units are manufactured, they have to be transported to the location to be erected. Although there is no federally imposed height restriction on highways, individual states may set their own limits.

Per the DOT website, most state height limits range from 13 feet, 6 inches (4.11 meters) to 14 feet (4.27 meters). This translates into a height and sizing cap for modular construction since each piece of the manufactured unit cannot exceed this height restriction. In order to combat this height limitation in construction, RJ Russo is currently working on a prototype for a module without a floor that can be stacked on top of another module in order to increase the ceiling height of the building. When asked how these height restrictions affect square footage capacity, Donn says that the most suitable range for modular construction is 300 SF to 2,400 square feet.

RJ Russo considers themselves to be a manufacturer, not a construction company. When asked about manufacturing versus construction, Kaebisch says, “We have always believed in driving the future of manufacturing. As a result, the RJ Russo team is taking a step forward and focusing efforts on manufactured buildings”.  

Another aspect of RJ Russo’s business that sets them apart is their ability to monitor quality control. Since all manufacturing is done at their Phoenix location, Kaebisch oversees all manufacturing. When considering cost, RJ Russo is finding a 12% – 15% savings with modular manufacturing when compared to traditional construction. Another benefit of modular is timing to completion. In traditional construction for buildings of a similar size, from prototype development through construction completion, a typical timeframe is roughly 18 to 20 months. RJ Russo’s timeline for the same steps is 22 weeks. 10 weeks can be shaved off this timeline after the initial unit is completed by removing plans, state approval and designs.

Once the product is completed at the production facility in Phoenix, shipping takes one to two days. Once the manufactured product is on the construction site, installation takes three to five days where RJ Russo works with the GC and subcontractors in an advisory and assistance roll. 

An important distinction to make here is that the described timelines don’t account for city permitting and entitlements since plan approval for modular products is done through state agencies. In order to get a site prepared for modular installation, the developer or GC still has to go through the city permitting process for grading, laying concrete, permitting and entitlements for the project as a whole. After accounting for these differentials, RJ Russo is estimating that a business can open 8 to 16 weeks earlier than with traditional construction.

According to Kaebisch, there is a crossover in green building technology into modular manufacturing. First, there are no wood products being used in RJ Russo’s manufacturing. The materials are 99% recyclable and consist mostly of steel. RJ Russo is also in the process of developing a prototype with solar panels. This prototype is still in production with an estimated launch date of December 1, 2021. It is because of these advancements in modular building and awareness of the growing trend in green building that RJ Russo won the Arizona Business Innovation Award in 2020. 

It will be interesting to watch the modular trend develop. Will there be an effect on exit cap rates? Will the buyer pool for modular single tenant NNN investment properties shift? What other tenants and use types will gravitate towards modular construction. These are just a few questions that come to mind when considering possible impacts that modular construction can have on the industry.

Nicholas Corbell is president of Catalyst Retail.