Veev, a startup headquartered in Beit Hatextile, near the Tel Aviv beach, is tackling an old challenge: the mass manufacture of housing. A few dozen programmers work here, at the company’s research and development center, and the walls and other components of the houses are built in a factory in the United States, ready to be assembled on-site. The company’s development team is working on the next generation of these “smart homes,” whose walls will be able to talk, or at least to report a leaking pipe. But they probably won’t be in Israel anytime soon.
Amit Haller and Ami Avrahami, the company founders, are well-known in the local high-tech scene, where they first met about 20 years ago. Haller has been in the field for a while and made his first big exit before he turned 30: He founded Butterfly, which developed a Bluetooth communications chip and was sold in 1999 to Texas Instruments for $50 million. Haller went on to found IXI Mobile, which sought to reinvent the cellphone before the iPhone era. Haller was the company’s CEO and Avrahami was the product manager. IXI never made it to the exit lane, and it shut down when the global financial world crashed in 2008.
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Haller and Avrahami continued to work in high-tech. Five years later, they were in California, and with a few million dollars in hand they decided to revive Butterfly, not as a high-tech company but rather as a real estate investment company. Flush with cash, they entered a market in crisis, with prices that had bottomed out, and invested some of their own money plus money that they raised.
“When we saw what was happening, we decided to leave the high-tech world,” Avrahami says. “We started to buy up properties in California. We went to banks and bought houses that had been repossessed when the owners couldn’t keep up with the mortgage payments. We bought them for ridiculous prices. A house in Sacramento that sold for $250,000 before the crisis sold for just $30,000-$40,000. At first we were just going to do it for ourselves, but other people we knew started getting excited about it and we started investing for them too. People came to us who understood that real estate is the only sure thing. It’s the only investment where you can eat the fruit without touching the tree.”
To help attract new investment partners, they brought in Israeli property expert Haim Levy, author of “Real Estate in Jeans” and an expert in raising small investments for real estate projects. The partnership with Levy ended a few years later with a lawsuit that was eventually settled out of court. “I can’t comment on the details. It ended on good terms. Ami and Amit are brilliant guys,” says Levy, who has since moved his business to Madrid.
When real estate prices in the United States returned to relative normalcy, Haller and Avrahami changed the name of their company to Dragonfly and focused on multifamily deals – buying rental apartment buildings, investing in renovations and property improvements by means of short-term loans with a refinancing process, converting the loans to long-term loans after the renovations and selling the upgraded property.
In recent years, multifamily deals in the United States have been attracting a fair number of Israeli developers who are prepared to get into such a complicated project, one that often entails clashes with recalcitrant tenants. “At the time, we were the first ones in California to do this kind of development, in cities like Sacramento, San Jose and Fresno,” Avrahami says. The two were later joined by attorney Dafna Ben-Porat Akiva, who formerly worked in the State Prosecutor’s Office and moved to California because of her husband’s job.
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From deals involving rental buildings, the partners moved on to flipping houses, another favorite of Israelis in the United States: buying old houses, renovating them and then selling them at a higher price. Later they also got into teardowns, where an old house is razed and a new one is built on the site.
“It started with building single-family homes and then the company evolved into a developer of four- and five-story apartment buildings,” Avrahami says. “This is the standard type of building in most small cities in America. The high-rises and skyscrapers are only in the downtowns of the big cities like San Francisco and Los Angeles. Americans don’t have any lack of open space and the smaller communities like to preserve the character of the place and are opposed to building too high.”
‘The permit process is very political’
Coming from the world of high-tech, the pair found that working in the real estate and construction business was often exhausting due to the prolonged construction process and a shortage of workers. “In the big 2008 crisis, the construction industry lost a quarter of its workers, and when the crisis ended and demand returned to the market, there weren’t enough workers to meet it,” Avrahami says. Housing shortages aren’t unique to Israel, it turns out. “In the American market, there’s a shortage of 7 million homes. In California alone, there’s a shortage of 3 million, and prices are going up,” Avrahami says.
One of the toughest problems is the long waiting period for building permits. “The permitting and zoning process is very political, and the neighbors often submit objections to the construction because they fear any changes to the environment. In small towns, the mayor doesn’t want to fight with anyone, so he sends the developers to compromise with the tenants, and that’s never simple. As soon as our plan was approved, the costs doubled – then you have to go back to the bank and ask for more credit, and you have to reconsider whether the construction project is worthwhile.”
So Haller and Avrahami decided to look for ways to shorten the building process and to reduce the reliance on a traditional workforce – one that is steadily disappearing, in part due to America’s increasingly strict immigration policies. Immigration was once a major engine of growth in places like California. “There have always been modular construction solutions on the market: prefab walls that were brought to the site and assembled on the spot. The problem is that if you want to use modular construction you’re limited in the design of the project and in how you adapt the manufacturing process. We had to find a method that would enable us to control the entire design and manufacturing process and reduce the labor costs, which in the U.S. accounts for 80% of construction costs.”
The solution was to develop a system that could manufacture houses that could be built according to any architectural design, using materials suitable for industrial manufacturing. At this stage the partners concentrated their construction, development and high-tech businesses in their new company, Veev, which developed a program for designing a building down to the last detail, relaying the manufacturing instructions to a factory where the components are produced and coordinating the construction process so that the construction time from start to finish is minimized.
You’re talking about a construction cost of $250 per square foot. That’s 20% higher than the cost of quality construction in Israel.
“The reason is that labor costs in Israel are relatively low. In California, the cost of building by traditional methods is $500 per square meter, so in comparison, we’re at half the price. Also, our construction time is only half as long. I can build a building in eight months. That saves additional financing costs for the project, so our construction costs ultimately come in at just 40% of what a project with traditional construction would cost. We’ve made houses an industrial project, and the quality compares to what you only see in very upscale buildings.”
Why is that?
“Because the quality is completely different. We come from the world of high-tech and manufacturing. Every product that comes out of the factory undergoes industrial quality control. The materials we work with are the most advanced: The ceilings come with lighting built-in, and there are sensors for various controls, such as for heating and cooling. The plumbing and electricity systems are preassembled, and the bathrooms come ready. There’s no drywall. Drywall is great when you’re working on-site. When I build in the factory, I can use much better materials.”
A key material used by Veev and its competitors is Corian, the popular composite used for kitchen and bathroom countertops and sinks. Veev also uses it for interior and exterior doors and walls, where it can be made to resemble wood or exposed brick.
How does this kind of construction affect homebuyers who might later want to redesign their home, to convert a living area into a child’s bedroom, for example, or alter the use of the space in another way?
“It’s possible in the houses we build but we haven’t run into that so far. In the United States, it’s not so common to start moving walls, and in some places it’s actually prohibited. The Americans only do it with very old houses.”
Industrialized construction has been around for a long time, and there are other companies in the U.S. that do similar things. If it’s so great, why is most construction still done the traditional way?
“Our problem isn’t a shortage of demand, it’s that we don’t have enough factories to meet the demand. For the project to be economical, the plant has to be located just a half-hour drive from the site, otherwise all the savings is eaten up by transportation costs. Each of these plants costs several million dollars. The project also has to be big enough to justify the construction of the plant.”
Are you only able to build low-rise buildings?
“The technology is suited to any type of construction. Originally, we developed and built the factory for the projects we were building – four- and five-story apartment buildings or single-family homes. At this stage, we don’t have a system that’s set up for high-rises. But the construction of office buildings is a lot simpler, and it’s already industrialized. As developers, we chose to stay away from commercial construction. That’s a field that’s the first to be hit in a crisis, and the slowest to recover.”
How many apartments have you built so far?
“About 150. We completed our biggest project not long ago. The city of San Jose decided to get the homeless off the streets because of the coronavirus. They came to us, allocated a plot and within three months we built 79 new apartments for them. We think it’s an American record for quick construction. Next year we expect to built about 800 apartments. Lennar Corporation, the largest construction company in the U.S., is one of our investors, and it wants to commission projects from us, so we won’t need other clients.”
You have a development center in Israel. Shouldn’t we expect to see some projects here as well?
“Not in the foreseeable future. Israel is less suitable for us. A lot of the new construction is high-rises that are 10 stories or more, and our construction isn’t yet right for that. The construction industry in Israel is still very conservative and the costs of traditional construction are low, so we don’t have a big advantage there. We’re also a small company operating in the American market, where we think the potential for us is very big.”
Are you raising more capital?
“I can’t comment on what we’re doing currently. Last year, we raised more than $100 million from Lennar and venture capital investors, I can’t say at what valuation. I believe that within a year we’ll be a unicorn,” worth more than $1 billion.