Building Against the Wind: Why Timber Frame Prefabrication Is One of Baltic's (Europe`s?) Toughest Industries
On paper, prefabricated timber frame construction should be thriving. Europe is short of housing, climate policy increasingly favours bio-based materials, skilled site labour is scarce, and buyers want buildings delivered faster and with fewer surprises. Factory-built timber modules and panels answer all of these needs.
The reality of the past four years has been very different. To understand what is happening in our segment, we gathered the publicly available annual report data of roughly 70 timber module and panel producers across Estonia, Latvia and Lithuania. The Baltics are one of Europe's most important export hubs for prefabricated wooden buildings. The figures show a sector that has absorbed one external shock after another, and that is only now, carefully, finding its footing again.
What the numbers tell us
Looking at the companies in our study together:
Revenue fell by over 40% in two years. Combined turnover dropped from about €475 million in 2022 to €274 million in 2024. It recovered only slightly, to around €292 million, in 2025.
The sector has been loss-making every year since 2022. Combined net results were negative each year, with cumulative losses of more than €19 million. The worst year was 2024, at roughly −€9.6 million.
One in three jobs has disappeared. Total employment fell from about 3,690 people in 2022 to fewer than 2,500 in 2025.
Companies are leaving the market. Several producers in our list were liquidated or entered insolvency between 2023 and 2025, and fewer companies filed reports each year.
There is one encouraging signal: revenue per employee, after falling from about €129k to €103k, rose back to roughly €118k in 2025. The companies that remain are leaner and more productive. But that efficiency was paid for with a painful restructuring.
This is not only a Baltic story. Across Europe, the offsite construction sector is undergoing consolidation following several high-profile volumetric modular insolvencies and asset sales.
In Denmark, Scandi Byg, a major modular construction company, declared bankruptcy in January 2025 due to significant losses from two large construction projects. In the UK, administrators reported that Elements Europe had "significant trading losses" over the past three years of £80.6m, "primarily due to cost overruns and water ingress defects on various projects". And just last week a German based "Gropyus" has filed for insolvency for its subsidiaries, after a recent 100EUR million capital raise. This list is long, and there is no indication that this trend will revert next year.
So why is this industry so hard?
1. The weakest link is often the client's balance sheet
In our experience, the single biggest pressure has not come from the factory floor. It has come from our clients' finances.
A prefab manufacturer working for third-party developers depends on the strength of each client's business plan. When interest rates rose and buyers and tenants hesitated, many of those plans turned out to be far less resilient than they looked on paper. We saw the same pattern again and again:
Financing ran out mid-project, or never fully materialised.
Scopes were cut after contracts were signed, leaving factories with planned capacity and no work to fill it.
Payments were delayed, sometimes by months, while the manufacturer had already bought materials and paid its workforce.
For a factory, this is especially dangerous. The materials, engineering and labour are paid for upfront, often months before the building is installed on site. When a client's cash flow breaks, the manufacturer effectively becomes an unsecured lender to someone else's project. A few such cases in one year are enough to push a healthy company into losses.
2. We are an export industry tied to someone else's housing cycle
Most Baltic timber house factories sell abroad, mainly to Scandinavia, Germany and other Western European markets. That makes us highly exposed to housing cycles we cannot influence.
Sweden, historically our most important market, shows how sharp these swings can be. Housing starts for multi-dwelling buildings declined by 65 percent from 2022 to 2023, and although the share of multi-dwelling buildings with timber frames increased slightly, the overall decline in construction has had a significant negative impact on timber house companies.
The recovery remains fragile: Sweden's construction industry association expects 31,000 homes to be started in 2026 and 31,700 in 2027, down from 33,500 and 35,900 in its March forecast.
Germany's need for housing is undeniable. Even after a 2025 rebound in permits, the 238,500 permits approved in 2025 represent a shortfall of more than one-third; even if every approved unit were completed, Germany would still be building roughly 134,000 fewer homes per year than required. But need is not the same as orders. Demand only reaches a factory once a project is financed, permitted and contracted.
3. Interest rates hit us twice
Higher rates freeze the developers and investors who buy our product. They also raise the cost of the working capital a factory needs to build ahead of payment. The ECB has since eased considerably, lowering the deposit rate from 4% to 2% overall. But there is a long lag between cheaper money and new orders, because shelved projects need new feasibility studies, financing and permits before they reach a production line.
4. High fixed costs and rising wages
A traditional contractor can scale subcontractors up and down with demand. A prefab factory cannot do this as easily. Its strength is a controlled, repeatable process with trained teams and specialised equipment, and that same structure becomes a burden when volumes fall. Industry analysts point to high fixed costs, elevated interest rates, planning delays, weak housing starts, and stricter warranty requirements as the factors that have challenged speculative manufacturing models.
At the same time, Baltic wages kept rising even as order books shrank. In the second quarter of 2025, wages in Latvia rose by +8.5%, while wages in both Estonia (+10.3%) and Lithuania (+9.4%) rose by a larger amount, compared with 3.6% growth in hourly labour costs in the euro area. The Baltic cost advantage is narrowing, so the industry must now compete on productivity and quality rather than price.
5. Energy, raw materials, geopolitics and regulation
The past few years also brought pressures that have nothing to do with the housing market. In Estonia, the economy faced difficulties due to its past dependence on raw materials from Russia – such as wood, metals, fertilisers and energy products, and costs rose as imports halted. Timber and energy prices swung sharply, which is dangerous for fixed-price contracts signed months before production.
On top of this, every export market has its own building codes, fire regulations and certification requirements. Some target markets show "no experience and culture of wooden construction at all or it is low, the awareness of factory buildings is low, and there are various regulatory challenges." For small and medium-sized manufacturers, each new market means costly engineering and approvals.
Why we chose to change our business model
Taken together, these pressures led us to a clear conclusion. For a company of our size, location and know-how, being a subcontracted manufacturer for third-party clients is not a sustainable long-term model. Too much of the risk sits with us, while too much of the control sits with someone else.
This is why Nordic Homes has pivoted to become a fully vertically integrated real estate developer. Instead of producing buildings for other people's projects, we now control the whole chain:
Land and project development. We decide which projects go ahead, based on our own feasibility and financing discipline.
Architecture and engineering. The design is optimised for factory production from day one, not adapted afterwards. Working with our sister company NH Engineering, we control the drawings from first sketch till commencent of the buidling.
Factory production. Our modules and panels are built under controlled conditions, with a stable pipeline we plan ourselves.
Installation and completion. One party is responsible from foundation to handover.
Sales and ownership. The value created by efficient prefabrication stays in the project rather than being lost in the chain.
For investors, banks and partners, this means one accountable counterparty, transparent project economics, and a factory that is no longer at the mercy of a client's missed payment date. Stable, self-generated demand is the most important thing a prefab factory can have.
A cautiously hopeful outlook
The past few years have been difficult, and it would be unrealistic to expect a sharp rebound in 2026. Housing starts in our key markets remain well below their earlier levels, and the effect of lower interest rates is only slowly reaching the market.
Yet the underlying drivers have not gone away. Europe still needs hundreds of thousands of new homes, climate policy increasingly favours timber, and the shortage of skilled site labour makes factory production more relevant every year. The industry emerging from this downturn must be smaller, leaner and more productive.
We believe the companies that thrive next will be those that control their own pipeline and their own risk. That is the path Nordic Homes has chosen. The wind has not stopped blowing, but we are learning to build against it.
Disclaimer: This analysis has been prepared by Nordic Homes SIA and does not necessarily reflect 100% of the entities active in this segment within the Baltic states. Readers are advised to use this data at their own discretion and to formulate their own analyses and conclusions independently.
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