Wall Street Journal: Startup Backed by SoftBank Pours Money Into a Bid to Reshape Construction

In the outskirts of Las Vegas, nestled between a low-rent office park and an AutoZone, construction crews are fitting together a new apartment building that a prominent roster of tech investors is betting will be the future of real-estate construction.

If all goes according to plan, the three-story building designed and built by Silicon Valley startup Katerra Inc. will rise from its concrete floor to completion in 90 days. The rapid pace is possible because custom panels of walls and cabinets are built by an Arizona assembly line and stitched together on-site.

Katerra hopes it can be a one-stop shop for buildings like this, saving developers time and money. The process is intended to be so simple that developers starting later this year are slated to be able to custom their own designs for similar simple buildings online—rather than the lengthy process of custom design and construction that dominates the sector today.

Backed by more than $1 billion from investors including SoftBank Group Corp. and electronics manufacturer Foxconn, Katerra has raised more funds than numerous other startups seeking to shake up the construction industry.

The company had $850 million in revenue last year and a $4 billion backlog of bookings, according to Michael Marks, the company’s executive chairman. Katerra is on track to be a major builder of housing for the government of Saudi Arabia, and he expects it to be profitable next year, he said.

“We are a manufacturer—that’s how we think about it,” said Mr. Marks, who was the longtime CEO of electronics manufacturing giant Flextronics.

The building industry typically puts scant investment in research and development compared with other sectors, in part because of its cyclical nature. The result: limited innovation and productivity improvements and continued high costs.

The Katerra factory in Phoenix, where custom panels of walls and cabinets are built, to be stitched together at the construction sites.

In the labor-heavy residential sector, high costs have contributed to the shortage of affordable rental apartments and single-family homes in many parts of the U.S., economists say.

If Katerra succeeds in making it cheaper and faster to build housing, that could lead to more new supply and lower rents and home prices. “The cost savings we provide to the developers are going to get more units built,” said Mr. Marks.

The theory is that Katerra can save time and money by cutting out middlemen—stitching together architects, cabinetmakers and plumbers in one company—and mechanize construction with robot-filled factories that build panels of walls.

But the market has yet to see if Katerra can deliver on its vision and numerous questions remain. Since it was founded in 2015, Katerra has largely been constructing buildings designed by others, often without the ideal geometry that makes its factory-built wall panels and bathrooms efficient, unlike the Las Vegas building.

The company lost money or broke even on some of these jobs, Mr. Marks said, as it tried to win credibility in the market.

Hurdles also come from construction unions, which are influential in many large cities and tend to oppose companies like Katerra that reduce workers or replace union members with lower-cost labor. Building and zoning codes tend to vary city to city, meaning that an off-the-shelf design that works in Phoenix could need big alterations in Oakland, Calif.

By attempting to rethink so much at once—Katerra is making its own lights in China and manufacturing its own windows and cabinets—the company risks spreading itself too thin, said Margaret Whelan, founder and chief executive of Whelan Advisory, which advises the home building industry. “What I’ve observed is that those companies that are really narrow in their focus are more successful than companies that are all over the place,” she said.

Many other, if lesser-funded, companies have tried similar construction strategies. Prefabricated walls are common in Europe, and a number of startups are trying modular housing—entire pods of housing in factories—without much breakout success.

Still, investors envision billions of dollars in potential business if Katerra can deliver cheaper and faster construction. SoftBank’s $98 billion tech-focused Vision Fund last year led a group of investors that put $865 million into the company, and now it is planning to lead another investment of an additional $700 million, according to people familiar with the deal.

Katerra’s Phoenix plant is filled with robots as the company tries to cut out middlemen in the construction process.

The coming investment deal, reported by the news website the Information, is expected to value the company around $5.7 billion. That is above the roughly $4.8 billion market capitalization of Aecom, one of the world’s largest architecture, engineering and construction firms that had $20 billion in revenue last year.

Jeff Housenbold, managing partner at the Vision Fund, said the opportunity for Katerra is far larger than existing large construction firms. By lowering construction costs, the firm will attract billions of dollars in business, and have room for healthy profit, he predicted.

One of Katerra’s clients is Dean Henry, chief executive of Bay Area-based Legacy Partners, who is planning to use the company for at least four projects. He said one of the most appealing concepts was that Katerra can guarantee the cost of a project for a year as he lines up financing, giving him more certainty.

“They tell us they can build faster,” he said. “That remains to be seen. We believe they will, but they haven’t done it yet.”

Margaret Whelan