Word on the Street – A/E Industry Mid-Year Review

PLEASE MAKE IT STOP – IT’S TIME FOR A MID-YEAR INDUSTRY REVIEW

  • Wait, it’s only June? For most industry leaders, these have been the longest six months of their careers. January and February flew by on the way to a record 2020 that never materialized. Then March hit hard and felt like it lasted for about three months. April flew by (was there really an April this year?) Since then, it’s been full-steam ahead for infrastructure engineering and environmental firms, but a much choppier ride for many architecture and buildings engineering firms.
  • Plenty of challenges lie ahead in 2020 as firms look to position themselves for the New Reality facing the industry post-pandemic. So, we thought this week we would pause and reflect on where things stand now for the A/E and environmental industry. Taking advantage of our viewpoint as we work with firms all around the country, here’s a snapshot of where the industry is— both nationally and regionally— at the mid-point of this extraordinary year.
  • National transportation firms are having a great year with most firms in this sector seeing revenue increases of 10% plus over last year. Robust state markets, like Texas, and regional markets, like Southern California, are driving strong performance. The most successful firms in this space are benefitting from a multi-state business model with core competencies in highway and bridge design, construction management, and or transportation technologies.
  • March and April construction shutdowns in states like Pennsylvania and New York reduced 2020 revenues between 10% and 40% in national and regional firms that serve those markets. However, infrastructure work has since roared back in those states and A/E and environmental firms are, by and large, back up and running close to where they were before the shutdowns.
  • Architecture, MEP, and structural firms with exposure to hospitality, entertainment, travel, and leisure markets have been hit hard— nationally and regionally. Those firms that had a balanced practice across select public, private, and institutional sectors have fared better.
  • Haircuts are in demand, not just by long-haired industry professionals but, also by clients who are increasingly looking for A/E and environmental firms to cut their fees. This will continue through the next two years. The most vulnerable and desperate firms will agree leading to a downward spiral in fees. Commoditization cometh once again— we are our own worst enemies.
  • Infrastructure and environmental firms in the West are enjoying a strong 2020, for the most part. And new projects continue to come online in both the public and private sectors. But there is a sense of an inexorable movement toward a cliff when public sector capital spending eventually falls— with or without support from Washington. It’s just not clear when that will occur or how far it will drop.
  • A return to “normalcy” in the Southeast. Engineering firms are open and adjusting to the New Reality— hitting their stride while practicing social distancing and taking other safety precautions in offices and at client meetings.
  • But the “optics” continue to be surreal with major metros and suburban office parks half empty as Fortune 500 corporations and project owners are in no rush to move their employees back into offices. They just don’t see the need and they are facing internal resistance. The remote working model will likely be the default going forward for clients of the A/E industry, so why are we in such a hurry to “get back to the office?”
  • Southeast residential development, overall, is robust with very strong sales in May. Pent up demand continues to drive development compared to the Great Recession when housing was overbuilt. And much like ten years ago, there is plenty of overseas money— from Europe, Asia, and South America that is being invested in U.S. housing with a long-term view. Lenders are concerned, however, about an immediate short-term bubble being created by low interest rates, stimulus funds, and PPP loans.
  • But it’s a mixed bag for development in the Southeast with some developers and builders ramping up while others have effectively shut down operations. Bricks and mortar retail development remains slow. The higher education market is consistently inconsistent— with capital expenditures varying from institution to institution.
  • Southeast development project delays are being felt most by A/E and environmental firms that have exposure in commercial markets with some firms seeing topline hits as much as 10% to 20% and subsequent impacts to the bottom line.
  • Meanwhile, industrial markets in the Southeast have slowed with capital investments being deferred. A/E firms are bearing the brunt of the slowdown – with revenues and backlogs taking hits. Environmental firms in the sector are faring better given on-going maintenance needs and EH&S initiatives.
  • And there are growing concerns for the public sector in 2021 with A/E firm leaders across the Southeast trying to figure out how big the hit will be to state and local capital spending.
  • Midwest firms are working through their backlogs and overall are faring well year to date in 2020. Like A/E and environmental firms around the country, the New Reality of remote working has translated into higher utilization and higher profits for many. However, while the current year’s financial performance is encouraging, most firm leaders are worried about how their public sector clients will hold up in 2021. Nevertheless, at least for now— particularly in the public infrastructure sector—  2020 has been a good year.
  • Mountain states infrastructure firms are holding their own with 2020 transportation and water infrastructure markets continuing to be strong currently and looking good for the balance of the year. And mixed-use development markets in Colorado and surrounding states are also seeing strong demand.
  • Texas reflects the overall state of the industry – 2020 public-sector buildings and infrastructure markets are holding up and firms are enjoying a very good year overall. Indeed, backlog for many infrastructure engineering firms in the state is at record levels and growing. However, architecture, MEP, and structural firms are seeing layoffs and backlogs being challenged in the hospitality, travel, and leisure sectors. And firms with exposure to the oil and gas markets are seeing some challenging headwinds.
  • Industry M&A is down 18% and back to 2016/2017 levels. But buyers are reentering the market and restarting transactions, and we expect to see an uptick in deal activity.

If you have questions about this week’s WORD ON THE STREET or if you need help navigating the New Reality call or email Mick Morrissey @ 508.380.1868 or [email protected].

To see last week’s report click here>

Note: Look for Morrissey Goodale’s next WORD ON THE STREET on Monday, July 13th.


FOUR FACTORS TO WATCH

1. Covid-19 Case Numbers 

As the coronavirus continues to work its way through the country, it’s one step up and two steps back for some states.  Almost 40,000 new cases were reported in the US on Friday.  Florida reported nearly 9,000 of them.  Texas reported nearly 6,000 cases the day before.  In response, beaches in Miami-Dade County will be closed for the July Fourth weekend, less than a month after reopening. Gatherings of 50 or more will be prohibited, as well. In addition, the Department of Business and Professional Regulation suspended on-premises consumption of alcohol at bars statewide. In Texas, where hospitalizations have surpassed 5,000, Gov. Greg Abbott ordered bars to shut down and restaurants have been told to limit indoor dining. Bars had to close by noon on Friday, though they can continue to offer delivery and takeout. Restaurants can operate at half their indoor capacity.

2. Jobless Claims 

Jobless claims have held steady at about 1.5 million each week so far in June.  The number of people receiving benefits fell below 20 million for the first time in two months. Claims fell by 767,000 to 19.52 million.  For perspective, the weekly peak was 7 million in late March.  But the current level of weekly claims remains well above the pre-pandemic record of 695,000  set in 1982.

3. Infrastructure Stimulus Developments 

House Democrats’ $1.5 trillion Moving Forward Act for infrastructure and stimulus investments will be voted on before Congress’ July 4th recess. At the bill’s core is nearly $500 billion in highway and transportation funds, but the bill is quite broad and includes a myriad of other areas. Some highlights of the bill include:

  • $300 billion for road and bridge repair
  • $100 billion for transit
  • $100 billion for public housing infrastructure
  • $100 billion for low-income schools
  • $100 billion for broadband infrastructure
  • $70 billion for clean energy
  • $40 billion for new wastewater infrastructure
  • $30 billion for healthcare infrastructure
  • $29 billion for Amtrak
  • $25 billion for postal infrastructure
  • $25 billion for drinking water

The bill is likely to pass the Democrat-led House but will face greater resistance in the GOP-led Senate.

4. Vaccine Developments 

Dr. Anthony Fauci told Congress last week that he’s “cautiously optimistic” about the development of a coronavirus vaccine and says he believes one could be available as soon as the end of this year, or the beginning of 2021. Drug manufacturers are attempting to speed up the process by risking investments in manufacturing before drug trials are performed, making the accelerated schedule possible.  Despite the unprecedented speed for a vaccine-development process that would otherwise take years, Fauci and FDA Commissioner Stephen Hahn vowed that safety reviews of the vaccines won’t be compromised.

According to BBC News, volunteers have begun being immunized with a new UK coronavirus vaccine. About 300 people will have the vaccine over the coming weeks, as part of a trial led by Professor Robin Shattock and his colleagues, at Imperial College London.  Tests in animals suggest the vaccine is safe and triggers an effective immune response. Experts at Oxford University have already started human trials. The trials are among many across the world – there are around 120 vaccine programs under way at the moment.

About the Author

Morrissey Goodale
Morrissey Goodale is a management consulting and research firm specializing in the architecture, engineering, and environmental consulting industries; offering executive search, mergers & acquisitions, financial advisory, leadership training, and strategic planning services.

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