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Katerra Tells Workers It's Shutting Most Operations. Expect Conflicting Analyses on What Went Wrong

Katerra's original factory in Phoenix. It was closed in late 2019 just two years after opening. (Katerra photo)

Katerra, the multi-billion-dollar company created to revolutionize construction, is closing the bulk of its U.S. operations, the company told employees in a June 1 memo.

"Following a thorough review of strategic business alternatives, Katerra has determined that it must wind down the majority of its U.S. business operations, effective immediately," said an e-mail to employees signed by "The Katerra Management Team."

"This decision impacts the majority of Katerra’s U.S. operations, and the company is demobilizing crews in many states and in Canada," the e-mail added, noting later: "The rapid deterioration of the company’s financial position is the result of the COVID-19 pandemic, inability to procure bonding for construction projects following the unexpected bankruptcy filing of Katerra’s former lender, and unsuccessful attempts to secure additional capital and business. The impact has been severe – with cash reserves reduced to the point where the current business model can no longer be sustained. As a result, we’re in the process now of starting to demobilize crews."

The e-mail added that "Members of our financial advisor firm have assumed officer roles of the company and are working with regional business unit leadership to manage day-to-day operations. The company and its advisors are evaluating the preferred path forward, which may include, among other things, suspended operations, asset sales and divestitures, in- or out-of-court restructuring alternatives and other possible actions."

In what might be related news, the Seattle Times reported that Washington State's Employment Security Department was notified that Katerra is laying off 117 workers in Seattle.

Veterans of both construction and construction supply have followed Katerra with interest since it was founded in 2015 with the intention, as its website declares, of "transforming construction through innovation of process and technology." The company raised $2 billion from investors with a claim it could combine factory-based modular construction, mass timber, smart sourcing, and visionary planning to build better homes at lower cost. For instance, it expected to save costs by designing products that could be used on multiple projects. It also planned to load those goods onto trucks in such a way that they would be offloaded at the jobsite in the exact order they were needed, thus saving construction time.

But things never worked out as planned. Stories about dysfunction have surrounded the company for years, including my own October 2019 ProSales column. A March 2021 article in The Information reported that employees were fiddling with the project and financial reports they sent bosses and investors. At the same time, the company "repeatedly stumbled on construction projects" that "repeatedly underestimated the costs of construction," the report said.

Skyrocketing lumber prices also might be contributing to Katerra's problems. A source familiar with the company said he has heard of conflicts between upper and mid-level management regarding bids and contracts that didn't account for lumber's soaring values. One side wanted to sell repeat jobs at original lumber prices, the source said, while the other wanted to stop production and wait for lumber prices to drop.

There's some speculation that what ultimately felled Katerra involved a $440 million injection of funds made by Softbank into Greensill Capital that apparently was meant to back up a loan of the same amount that Greensill made to Katerra. Both Katerra and Greensill were backed by Softbank's Vision Fund.

According to The Wall Street Journal, Softbank's $440 million was supposed to pay off investors in a fund managed by Credit Suisse. Now Greensill has plunged into bankruptcy, and Credit Suisse says the $440 million that ultimately went to Katerra is among $2.3 billion worth of problem loans that were in funds Credit Suisse ran with Greensill.

Katerra also is likely to have been hurt by COVID. The pandemic has reduced demand for two of Katerra's specialties: Multifamily (especially high-rise multifamily) and commercial construction.

Given Katerra's prominent place among construction trend-setters, you're likely to see conflicting views as to what its reported closure means.

"... Unfortunately, the Katerra team was trying to do too much," Margaret Whelan, founder and CEO of Whelan Advisory, told The Builder's Daily. "There was a lack of focus, boiling the ocean addressing a couple of key low-hanging-fruit opportunities successfully, then building on that expertise and trust with customers. ... They failed, but others are succeeding with more deliberate and discreet efforts."

John McManus, editor of The Builders Daily, offered several takeaways. "Only highly-collaborative, concerted, multi-stakeholder-designed initiatives will be capable of a transformation to 'the future of housing,'" he wrote. And while pushing technological solutions may be the right idea, "the digital thread must begin at the consumer household – buyers journey – level, and weave in local land-use accommodations to truly develop a real-world digital twin. Otherwise, the viability of the structure on a specific piece of ground remains questionable."

Here's my take:

Some critics will blame Silicon Valley attitudes: think big, run fast, try lots of stuff, and be willing to sink lots of money into ideas that ultimately fail in order to find the innovations that will spin cash. You'll sense schadenfreude in obituaries that suggest building homes isn't like building software.

Other analyses will say Katerra was a good idea that fell victim to bad management. They'll cheer the fact that investors were willing to invest billions in that idea, and will hope this experience won't cause them to give up the dream.

Still others will look at what Katerra achieved, both physically (a cross-laminated timber plant near Spokane) and organizationally (extensive plans to build multiple structures efficiently). They also may be inspired by Katerra's wholistic approach to planning and execution--something that another much-ballyhooed company, Entekra, has made a core part of its operating philosophy. For this group, Katerra will be neither a pipe dream nor a case study in bad management. To them, it might well be a stepping stone to better construction.

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