Construction Giant Katerra Is Shutting Down

Katerra, the construction giant that was going to revolutionize the industry, is shutting down. According to The Information, the construction startup, which was founded in 2015, will "let go of thousands of employees and is likely to walk away from dozens of construction projects it had agreed to build."

The Information reports:

"The company has been informing employees Tuesday about the shutdown. An executive told employees on a video call that the firm didn’t have enough money to pay severance packages or unused paid time off, a person who attended the meeting said. The executive said the effects of Covid-19, as well as rising costs of labor and construction materials, contributed to its latest cash crunch."

The Katerra pitch was that they were going to bring Silicon Valley thinking (and money) and disrupt the construction industry. The company stated: "Katerra is bringing fresh minds and tools to the world of architecture and construction. We are applying systems approaches to remove unnecessary time and costs from building development, design, and construction."

With $2 billion funding from Softbank, Katerra went on a shopping spree, buying construction companies, manufacturers, architectural practices, and engineering firms. It invested about $200 million in a cross-laminated timber factory in Oregon. Fritz Wolff, one of Katerra’s co-founders, described how it was going to change the industry back in 2017, not long before he bailed on the company.

According to The Spokesman-Review:

"Traditional building construction is mired in processes similar to having a custom-made, or “bespoke,” shirt sewn by a tailor or ordering a one-of-a-kind automobile, Wolff said. For Katerra’s customers, choosing a building is similar to ordering a new car with custom features, Wolff said. “We’re taking a controlled manufacturing approach to construction versus a bespoke approach, where every building throughout the world is (one of a kind) with no repetition.”

This was a big red flag, coming from one of the few people in the company who actually knew something about construction. I noted at the time:

"When it comes down to it, a building is much closer to a bespoke suit than it is to a car. If buying a building was like “ordering a new car with custom features” they would all be roughly the same size, every city would have the same zoning bylaws and parking requirements, you could park them anywhere in a moment, and you wouldn’t have NIMBYs."

As Lanefab co-owner Bryn Davidson notes, it is hard to scale prefab when every site and city is different.

I was not alone in having reservations. John McManus, who writes for a number of construction-related sites including The Builders Daily, claims "more than a few home building, construction, real estate investment, product manufacturing, distribution bright lights" could have told Katerra employees four years ago that this moment would come. He says Katerra didn't build relationships, thinking it could do everything itself.

"Katerra blundered by striking a go-it-alone because we'll do it better, smarter, and with more resources than anybody else," wrote McManus. He thinks a lot of people are going to be saying "I told you so."

He is right. The collapse of Katerra is not exactly a surprise: Some, like Scott Hedges of Bygghouse, have been calling it since it started.

After many years in the architecture, development, and prefab business, I had my doubts. Construction goes through violent cycles, which is why so many companies stay lean and subcontract everything they can to minimize risk. This is the opposite of Katerra's plan, which was to simply own everything down to the bathroom faucet manufacturer.

I wrote four years ago:

"I will say this again: I really, really want Katerra to succeed. I really want their CLT construction to take over the world. I am a huge fan of Michael Green. But I have seen this movie before. In fact, it gets remade every generation."

Michael Green, whose practice was bought by Katerra, says he will be fine.

Katerra says COVID and rising costs did it in, and there is no question that the price of lumber going up 400% is gonna hurt when you are building out of CLT. But you could see this coming years ago.

I wrote earlier about how H.L. Mencken once said, “For every complex problem, there is an answer that is clear, simple, and wrong.” If anybody comes to you with a menu of solutions for housing that are clear and simple, they’re probably wrong.

Katerra tried to do everything: it bought companies, it bought deals, it thought it could reinvent the industry, it burned through $2 billion, and it ran out of money. It is not the first and it will not be the last.