BETTER GET READY FOR THE NEW REALITY
National Industry Insights
- Much of the A/E industry continues “on plan”. Multiple reports from management teams around the country include two or all three of the following: (a) they are on track to meet 2020 budgets through the first five months of the year; (b) backlog is holding, and (c) sales are ahead of projections year to date. For many, it’s as if the boom times of 2019 never ended. In general, the situation synchs with recent monthly construction spending reports.
- But at the same time, many designers have run into a buzz saw. Project backlog and opportunity pipelines have been shredded for many firms serving the hospitality, retail, and entertainment sectors. National and regional architecture and A/E firms with exposure to these sectors are moving from first rounds of “furloughs” to a grimmer sounding second round of layoffs. Many small, local A/E firms serving these sectors are trying to figure out how to stay in business when their PPP loans run out.
- Everyone is looking out 12 months. It’s unclear how bad the impact of lost tax revenue will be on state and municipal capital spending – but it’s sure to impact the A/E and environmental industry. Management teams are putting in place their plans for this New Reality to identify and occupy the growth niches in a smaller, more competitive, more digitized, and virtual market for design and environmental services.
- Known and unknowns. We know that post-pandemic – with or without a vaccine – design and construction of every building type and most infrastructure will change. This will create untold opportunities for designers. What we don’t know is the timeline, scale or scope of the economic trauma facing the industry.
- Baby boomer CEOs and management teams are concerned about the mixed signals they are seeing. After having weathered the Great Recession, the post-9/11 recession, the slowdowns of the early 90s and in some cases early 80s, they’re not looking forward to what may lie ahead. Many are considering selling or shutting down their businesses with neither the appetite for more adversity nor an internal transition plan.
- Millennial CEOs and management teams are more optimistic. Many view the crisis as accelerating the industry changes they advocated for and anticipated. They’re looking for ways to deploy technologies to connect with clients, talent, and opportunities. They are raising capital to move beyond a “sell time for money” business model.
- The return to the office has been front and center this month – with many wondering why. For firm leaders, the potential liability of office re-openings is causing them to lose sleep (as if they needed the full four hours a night they’ve been getting since this crisis started). For firm managers, it’s been an eye-opener to realize a whole cohort of the workforce has no interest in returning. For planners, it’s been a three-dimensional chess game of physical staging/spacing, staggered in-office hours, and COVID-mandated flourishes such as temperature testing. And there is no standard best practice, period.
- Firms are already planning to slash space costs, saving between 2% to 4% of revenues in lease expenses. They’re anticipating that their future workforce will be spending a lot more time working remotely.
- The private sector to the rescue? It depends where you are. Not surprisingly, the Telecom and Utilities markets continue to be strong. Solar and wind continue to be robust in the West and South – but with some softening in the Midwest. Surprisingly, homebuilding and mixed-use development appear robust. The shortage of the former and long-term demand for the latter are providing many architects and multi-discipline engineering firms with a strong second quarter despite April national housing starts down 30% over the same period last year. But the situation varies by region. In the West and South, there’s activity and demand. In the Midwest? Not so much. Also, retail sector leaders such as Walmart, Amazon, Target, and Dollar General continue with expansion as they plan to emerge from the pandemic stronger.
- Is this another East Coast versus West Coast thing? Hiring freezes and concerns about backlog are more prevalent among firms in the Northeast, Mid-Atlantic, and Midwest than they are for those West of the Mississippi and south of the Mason-Dixon line. Indeed, hiring activity continues briskly for many infrastructure and environmental engineering firms in the West and the South. Firms in these regions continue to invest in surveying and other equipment; they see continuing demand for services. Regional development markets in the West and South continue to show strong, while commercial markets in the Northeast are slowing.
- Your public sector client check is in the mail. But it’s likely going to get to your office 15 to 30 days slower than pre-crisis. It turns out many public agencies, including DOTs, have struggled to adapt to working remotely. (Pro tip – get paid via ACH or wire transfer).
- Industry consolidation continues to slow down. Year over year, the pace of industry M&A is down 12%. March and April deal activity was barely 40% of what it was for the same two months in 2019. May deals are tracking at approximately 70% of where they were last year.
- Acquirers and investors are sharpening their pencils. Overall, we are seeing downward pressure on valuations and buyers are placing more consideration in earnouts instead of cash or notes.
- They’re also looking for “sure things”. Examples include Texas infrastructure firms that have funded backlog of two to three years and structural and mechanical/electrical/plumbing firms that can meet the surging demand for renovation and repositioning of facilities. Architecture and A/E firms with life sciences and pharmaceutical expertise are also being targeted; a move to repatriate to the U.S. production in both sectors is expected.
- The pandemic has changed how deals get done in the A/E 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.
If you have questions about this week’s “Word on the Street” or if you 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…