How Costco Broke Into a Surprising New Market: Modular Housing (2024)

The way this worked, historically, was that a developer would first propose a project that complied with all existing rules. After the city determined the project checked all the boxes, it would still spend years being reviewed by the planning commission, city council and members of the public.

Recent reforms, though, have created alternative processes. If a project meets specific criteria, it's able to jump tracks and avoid the yearslong public debate. Developers demonstrate compliance with the rules and then get to start building, no further discussion required.

In the case of Costco, building ~400,000 square feet of housing to qualify for the alternative track was easier than dealing with the legacy process.

But Wait, There’s More

Costco’s current plans show modular housing, and the reason for that is kind of interesting.AB2011— the specific legislation Costco is invoking — has aprevailing wage requirement. This sets a minimum for construction worker pay and ensures union labor remains cost-competitive. If developers aren’t allowed to pay less than what union labor costs, nonunion workers can't undercut them.

The rub here is that, for AB2011, this requirement only applies to on-site labor. Work done off-site can be paid at whatever rates the developer can negotiate. Costco seems to be planning to buy prefab modular units that are built at a factory somewhere else. This will let them save on labor costs. It will also result in housing that looks like a stack of shipping containers.

The Shape of a City

While Costco regulatorily arbitrating itself into becoming a housing developer is amusing, it speaks to a larger truth about regulations and urban development.

In the first place, it shows how land use regulations restrict supply in the face of demand. American cities have a chronic undersupply of housing, and this causesall the problems that any YIMBY will be happy to recite at the drop of a hat.

Secondly, it shows how land use regulationsshapethe form in which supply manifests.

Imagine hypothetical future housing as a fistful of Play-Doh and land use regulations as thepasta-maker-mold-thingyou put the Play-Doh through to get specific shapes. That mold rate limits the amount of Play-Doh that can go through at any given moment. At the same time, it forces whatever does get through into specific shapes.

In our Costco example, AB2011 is a mold with a larger aperture, allowing more housing to go through. At the same time, it’s also forcing that additional housing into a particular kind of shape (i.e. shipping containers attached to a Costco).

Taking an additional step back, land use regulations are just one example of how rules impact the ways that cities function and grow. We should think of laws, regulations, jurisprudence and even culture as types of invisible infrastructure. They're all systems that influence and govern the way people live together. Taken as a whole, they start to form something that looks like software guiding the way a city's hardware — physical people and places — looks and functions.

So, 20 years from now, when someone wonders why there’s a bunch of apartments that look like shipping containers nestled around that one Costco their parents used to shop at…you’ll know why.

Membership