June 1, 2020
TIME WAITS FOR NO ONE
National Industry Insights
- Even with unemployment at Depression era levels, universities and schools closed, and the travel, hospitality, entertainment and retail sectors of the economy all but shut down since March, the A/E and environmental industry has continued to hum along relatively unscathed. This speaks to the industry’s resiliency— it moved to a remote working environment without missing a beat with many firms actually becoming MORE efficient. It also speaks to the essential nature of the industry itself.
- Of course, necessary layoffs and cost-cutting happened in March and April in A/E firms serving the hardest hit sectors of the economy. Those designers who lost jobs are quickly finding positions with other firms. (Our industry still has a shortage of quality talent.)
- And selective layoffs have also taken place over the past 3 months as firms have used this crisis to trim “B” and “C” players. (Note: Those folks are also being recycled into other firms— so beware— the “hire slowly, fire quickly” adage still applies, even in times of crisis.)
- But by and large the A/E and environmental industry has, for now, weathered this pandemic-induced national economic crisis. Even in those states with the most stringent stay-at-home regulations and in those hardest hit by the virus, design and environmental firms have continued to stay busy and sell work (see bullets 15 through 20 below for regional reports). Declines in revenue, where firms have seen them, have been offset by overhead reductions. In cases where projects have been put on hold, they have either restarted or been replaced by others. The stock prices of the industry’s publicly traded firms have held up well.
- Indeed, some firms are thriving in 2020. We know of firms that are paying bonuses based on Q1 performance. We know of firms that are returning their PPP loans because management determined they didn’t need them and believe giving the money back is “the right thing”, so funding can be accessed by firms that are in desperate need. Firms with Federal contracts continue to power ahead, by and large. Many firms are seeing a surge in work as states and local governments lay off staff.
- But a reckoning is on the horizon for the A/E industry at large. The capital budgets of state and local governments and agencies – which combined are one the largest purchasing blocs of A/E and environmental services, will be hit hard. The institutional, industrial and commercial sectors will also face challenges as they deal with their post-pandemic operating environments. While there will be opportunities as sectors recover and transform, the overall market for A/E services in 2021 will undoubtedly be smaller, much more competitive, and dramatically different.
- The market contraction could well last into 2022, depending on the size of the hole the pandemic blows in state and municipal budgets, and timing of a COVID vaccine. Today, scenario planning ranges from equally weighted worst cases to vaccine-delivered normalcy, and everything in between. (Warning: Don’t click the link if you like your Mondays filled with certainty.)
- Competition will be fierce – with former “friendly competitors” poaching each other’s clients and low-overhead firms under-bidding every project. QBS will once again be subject to interpretation (as it was during the Great Recession); the public sector will be running austerity budgets. The downward pressure on margins will be approaching Mariana Trench levels.
- The winners will be tech-enabled and tech-savvy. Clients will demand reliable, cost-efficient, user-friendly, forward-looking, and scalable digital solutions for the design, construction, and management of their infrastructure and environment assets. This trend was already in play and the crisis will accelerate it. Going forward, it will be acquisitions like this by Tetra Tech and investments like this by Ghafari that will separate the winners from the losers in the upcoming New Reality.
- Compounding the challenges ahead for the industry will be the fact that the economic pain in the country will be felt in every household including those of A/E and environmental professionals and technical staff. This will result in internal ownership plans failing as stock purchases will fall short— crowded out by other personal financial needs. The slow decline of the employee-owned A/E firm will accelerate over the next two years.
- How long does the industry have before the New Reality is here? It depends. The largest firms tend to have biggest projects, the longest-funded backlogs, and access to better credit facilities. Their management teams have one to two years to make the necessary changes and investments to survive the downturn and thrive on the other side. At the other end of the spectrum are smaller firms that in the good times may have had 90 days of backlog, although by now, it may have dwindled to just 60 days. That, plus a PPP loan that has almost expired plus cash in the bank, buys them to the end of 2020 until their New Reality is upon them.
- Now officially a “thing” is firms paying for employees to adapt their houses or condos or apartments to make remote working smoother. If you’re an A-player there’s never been a better time to get some home remodeling done – courtesy of your employer.
- Virtual project interviews, team meetings, and reviews are now the norm and will likely be a big part of the post-pandemic project winning and review environment. If you have not made this mind shift, you’re already losing out. Learn best practices for virtual project interviews. Click here for tips to up your personal Zoom lighting setup and an interview with Larry David.
- Digital marketing and business development represent the next frontier for many – since it’s going to be hard to take clients to sporting events or meet them for dinners. Smarter firms have already embraced the digital marketing and business development world, recognizing that young decision-makers and owners use the Internet to find, engage, and work with their A/E consultants. Google will become increasingly vital to your digital marketing (in addition to researching what “digital marketing” means.)
- West Coast vibes are trending positive. Infrastructure and development backlogs remain strong and firms are hiring— in some cases, aggressively. Many firms are reopening offices over the next couple of weeks in Arizona and Northern California. Positive reports also in civic/government, life sciences and technology, and education sectors.
- Mountain and Plains states development, power, renewables and water infrastructure markets continue with a pioneering sense of optimism. Architecture and engineering firms are busy and hiring.
- Many Midwest markets report a similar strong business environment with public-sector clients taking advantage of lower funding and construction costs to advance capital projects.
- Texas infrastructure and development markets continue to be as “hot as a biscuit” with A/E firm workloads, backlog, and balance sheets strong.
- Southeast markets also remaining sunny with good activity in many sectors, including residential, mixed-use development, and healthcare. Senior living markets in Florida continue to be robust— if somewhat changed— as more seniors are looking to live alone rather than in communities. Phased returns to offices are proceeding. Many firms plan to have at least 50% of their workforce back in offices by end of July.
- New England, New York, and Mid-Atlantic transportation and water infrastructure firms are busy and winning plenty of new work. This infrastructure work cannot be delayed any longer in many cases. Multiple reports of commercial and residential development projects continuing on track and new projects out to bid.
Mergers & Acquisitions Insights
- Industry consolidation has slowed. Year-over-year the pace of industry M&A is down 12%. But this slowdown is totally different than what we saw happen during the Great Recession.
- Expect an uptick in deals this Summer as economies reopen, buyers get a better read on the market and close on deals that they deferred in March, and sellers can refocus on deals after moving their employees to a remote working environment (and in some cases back again). Our current reading is that deals may fall 20% this year— back to 2015 levels. However, valuations are continuing to hold up in general.
- Expect to see more deals in states that have not been hit as bad by the pandemic. So, we’re expecting to see relatively more deals in states this year and next in states like North and South Dakota, Montana, Wyoming, and Idaho.
- The pandemic has changed how mergers and acquisitions 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.
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>.
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 Northeast states and coronavirus cases before, during, and after stay-at-home orders:
Hair salons and barber shops reopen today. The second phase will begin June 20. Gyms, hotels, personal services, indoor restaurants (no bars) will be allowed to reopen, as well as some educational and community services later this summer, like select youth sports, day camps, summer schools, and graduate programs.
Today, short-term rentals open up and out-of-state visitors can return to the Delaware beaches. Large gatherings outdoors of up to 250 people (e.g., including weddings and graduation ceremonies) are allowed with social distancing protocols and face-masks.Planned public events of more than 250 will be allowed with prior approval. Restaurants and retail stores are allowed to open at 30% capacity; social distancing protocols and face-masks are required.
District of Columbia
Washington, DC’s stay-at-home order, which had been extended until June 8, was lifted on May 29. Restaurants are allowed to open outside seating areas outside with seating and spacing protocols. Non-essential retailers are allowed to offer curbside pickup. Barbershops and hair salons are allowed to accept customers by appointment.
Today, Maine eases the restrictions on certain gatherings from 10 to 50 as well as some restaurants. The distinction between essential and non-essential businesses has been phased out.
Restaurants are allowed to open for outdoor dining. Youth sports leagues, day camps, outdoor pools and drive-in movie theaters are allowed to resume.
Phase two of the Commonwealth’s opening starts June 6. If the public health data shows that it’s safe, restaurants will be given a date to open, but it will be outdoor dining only at first. Gov. Charlie Baker is expected to issue an executive order later today that will provide a more detailed list of businesses that will open in Phase 2. There will be at least three weeks between the remaining two phases.
Gov. Chris Sununu extended New Hampshire’s stay-at-home order until June 15, but some restrictions are easing. In-person religious services are now allowed to resume in facilities at 40% capacity. Hotels and inns with fewer than 20 rooms can rent out at full capacity. Those with more than 20 rooms are required to limit occupancy at 50 percent. Day camps may open June 22.
Elective surgeries and invasive procedures, both medical and dental, are allowed to resume. Childcare services will be allowed to operate beginning June 15. Organized sports will resume on June 22 and youth camps, including municipal summer recreation programs, on July 6.
New York City is expected to begin its reopening on June 8. Five regions that initially reopened on May 15 have now entered Phase 2 of reopening.
Eighteen mostly rural counties across northern Pennsylvania have moved into the “green” phase. A dozen additional counties in the western and central parts of the state will move into green on Friday. Also on Friday, the remaining “red” counties — Philadelphia, Berks, Bucks, Chester, Delaware, Lackawanna, Lancaster, Lehigh, Montgomery, and Northampton — will move into “yellow.”
Today, hair salons and barbershops, gyms and fitness studios, and a range of outdoor venues are allowed to reopen as part of the state’s planned second phase of opening. State parks and beaches and other outdoor entertainment facilities are allowed to open. The state’s limit to social gatherings is increased to 15 and travel restrictions are largely lifted. Restaurants are allowed to provide indoor dining at 50% capacity. Gyms and fitness studios are able to open with restrictions. Two casinos will begin a limited, invitation-only reopening June 8.
Gov. Phil Scott says the entire state will be approximately 25% open today. He hopes to announce plans to allow indoor dining at restaurants fairly soon. The state is currently studying how and when it can open to tourism from neighboring states that have been hit much harder by the Coronavirus.
Source for COVID 19 case charts: New York Times
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June 11, 2020 • Livestream Event
Deal-making in turbulent times:
For AE and environmental buyers, sellers and investors navigating the new normal.
The Webinar for A/E Firm Leaders
Tuesday, June 23
Join the A/E industry’s leading business experts, Mick Morrissey and Mark Goodale, as they discuss today’s uncertainty and the coming new age in this timely, insightful 60-minute webinar.