THE TIMES THEY ARE A CHANGIN’
National Industry Insights
- Immediate and short-term A/E industry markets CREATED by COVID-19. Think of it – in the last 90 days, the crisis has given rise to new market opportunities for the industry including: (1) FAST repositioning/renovation of facilities to treat COVID patients, (2) logistics and space planning for firms returning to offices from remote working, (3) environmental health & safety re: facility decontamination (4) renovation/repositioning of storage facilities for surplus oil, and (5) risk management consulting for workforces returning to the office.
- The crisis has also accelerated demand for “non-traditional services”. Firms that understand and can deploy/offer virtual reality (VR), augmented reality (AR), digital transformation, big data, and remote monitoring and sensing solutions are seeing strong demand curves for their offerings.
- What types of A/E firms are accessing these markets and opportunities? The “strategic thinkers” – that pushed themselves to see the industry for where it was headed. The firms that invested in systems and technologies during the good times. The firms that listened to their clients and their “next-generation” leaders. The firms that possess the agility to adapt to market changes and reposition their business. The firms that can collaborate with contractors and vendors. The risk-takers.
- Beyond the short-term, the pandemic sets the table for massive industry change. As firms continue to burn through backlog and leadership teams look for clues about how to be successful post-pandemic, some patterns are easier to see than others.
- Every sector of the buildings and infrastructure environment will change. The design and operations of every building type – from healthcare to education to workplace to entertainment will be impacted. Infrastructure will be reimagined. A/E firms with sector expertise that are prepared to contribute to part of the change will be rewarded. Generalists will be further marginalized.
- How the A/E industry “works” will change for ever. Significantly more design and environmental professionals and technical staff will work remotely some or all of the time. Most new hires will be recruited and onboarded without ever visiting an office. (It’s happening already!) Office expenses will be slashed. Internal overhead travel will be cut. These dollars will be reallocated to investments in collaborative technologies, human capital development (there will be an even greater emphasis on engagement, communication and performance), branding, and digital marketing.
- The new reality will see winners and losers. To thrive in this new reality, firms must EXCEL in the following four arenas (1) sustaining a culture of continuous improvement, (2) delivering digital and VR/AR solutions, (3) strengthening client and employee relationships in an increasingly remote and digitized environment, and (D) collaborating with vendors and contractors. Currently, most A/E firms do not have the organizational or capital models in place now to successfully navigate the post-pandemic world. There will be significant, dramatic, and fast change ahead for each and every industry professional.
- Skeptical about a digital future for the industry? Take a tour through the websites of the largest industry firms and see how many have an executive reporting directly to the CEO with some variation of the title “Chief Digital/Technology Officer”. Also, as we have been highlighting in our M&A Symposiums over the years, the larger industry firms have been transforming themselves into technology and systems providers through non-traditional acquisitions.
- Public Works markets holding up well. From South Florida to Maine and from Maryland to Oregon, public works markets in general remain solid. For the most part, backlog on the books is holding. And in many states, firms are reporting new work is still being bid and won. But everyone is trying to figure out the capital budget pain ahead for states and municipalities, and when it will begin to show up in the AE industry.
- Other markets not so much. There is much pain being experienced by design firms serving the hospitality, retail, and entertainment sectors. Another sector being challenged is the religious market. With houses of worship of all faiths deemed non-essential, capital investments are being put on hold or scrapped; congregations are financially strapped.
- The “We are one unified firm” mantra is being challenged – again. This is particularly the case for those EA firms that have a robust public works horizontal infrastructure business (transportation, water) and a buildings or facilities business that has exposure to retail, hospitality, and/or entertainment. In most cases, the horizontal business is thriving, but the vertical business has stopped. After the PPP loans run out there will be some hard staffing choices to make as demand is not likely to return in the short term.
- Industry consolidation has slowed. Year-over-year the pace of A/E M&A is down 11%. Click here> As the pandemic hit, M&A cratered in March and April, as many buyers hit the pause button and deals fell back to levels not seen since 2013.
- But deals have bounced back in May. U.S. design firm sales in May are right on pace with 2019. As buyers and sellers are gaining more transparency on the market, they are feeling more confident about moving forward.
- Deal meetings by video becoming the norm. Buyers have moved quickly and smoothly to screening M&A candidates and planning/implementing operational and cultural integration via Zoom (or pick your favorite video platform).
- PPP loans puzzling buyers. The popular CARES act loan is providing an additional level of complexity for buyers in terms of financial assessment and legal documentation.
- Was your PPP loan below $2 million? For the many design firms that received PPP loans below $2 million, this week’s guidance from the SBA provided some welcome transparency.
- If you’re in the $2 million plus PPP loan club: Make sure you have good counsel and financial advisors, particularly if you’re considering a firm sale any time soon. The sugar high of the cash infusion may not be worth it in the longer term.
- The pandemic has changed how deals get done in the industry. The M&A landscape is in flux and questions abound. To get the answers to those questions – whether you’re a buyer, seller or industry investor – join us for our special livestream U.S. A/E M&A Symposium: Deal-making in turbulent times on June 11.
- We were saddened to learn this week of the passing of Jaquelin “Jaque” Taylor – architect and urbanist. His was a life well-lived to the fullest.
If you have questions about this week’s “Word on the Street”, need help navigating the new reality brought about by the crisis, or positioning for the future, call or email Mick Morrissey @ 508.380.1868 or [email protected].
To see last week’s report click here>.
STATUS OF STATE REOPENINGS
According to state government web sites and local and national news outlets, below is the latest on the reopening status of all 50 US states and coronavirus cases before, during, and after stay-at-home orders…