AE Industry Intelligence: Issue 48

Reading the tea leaves

It’s never been easier to lead an A/E firm — the business environment is so predictable. Wait, scrap that….wrong article. The reality is that after experiencing a run of five plus record years, the A/E industry is headed into a decidedly more challenging era. There are multiple trends at play that A/E firm leaders need to be aware of. Some of these are way over the horizon, some we are already in the middle of, some are positive and others more ominous. Here are just a few that keep us up at night here at Morrissey Goodale (where insomnia rules) as we help our clients navigate their New Reality.

• I’m here for the free lunch:  U.S debt now exceeds GDP for the first time in the nation’s history. And that’s before the upcoming round of stimulus and any potential debt financed Infrastructure package this year. There’s plenty of academic debate around whether deficits matter anymore. But talk with folks in Italy and they’ll tell you that they do. The big risk of course is that private sector investing gets crowded out. It’s hard to imagine that that could happen in the U.S. where borrowing is a core competency. However, Japan never expected to experience a lost decade. And if we learned anything from 2020, we’re in the realm of the unimaginable becoming reality. Regardless, when the piper eventually demands payment, only those A/E firms with a global footprint—particularly a strong Asian presence will thrive. This is a longer-term trend and should the on the radar for “generational firms.”
• Damn the torpedoes: But who cares about unsustainable debt when the economy this year will be en fuego! GDP growth predictions of 6.5%, 6.8% and over 10% are being thrown around as the nation gets inoculated and all of the extraordinary savings accumulated over the past year flow into the economy. The issue for the A/E industry is that not all firms will benefit from this economic bacchanal.  
• A rising tide won’t lift all boats: To help clients set post pandemic strategy Morrissey Goodale undertook a major market study. We looked at a set of fundamentals on a state-by-state basis. Specifically, we assessed population change, employment, credit worthiness, deficit, industry/market sector composition, and pre-COVID CAGR. Two headlines emerged. The first is that a state’s future performance will be primarily determined by population growth, employment, industry mix and creditworthiness rather than its COVID-induced deficit. The second is that certain industries/market sectors will see dramatically more investment and growth post pandemic than others. Firms that intentionally position themselves in preferred regions with growing industries/market sectors will see stronger sustained performance and increased value over the next decade.
• It’s complicated – the A/E industry’s future relationship with cities:  Cities and towns – particularly those hardest hit by the pandemic – have a challenging road ahead. City budgets are getting squeezed as commercial property values fall while expenses related to COVID have risen. And while the most recent jobs report was encouraging overall – it was miserable for state and local governments adding to the one million jobs shed in the sectors since the start of the pandemic. A growing number of cities will outsource more services going forward and A/E firms will be big beneficiaries of this trend.
• A slow recovery for architects:  2021 will be feel like Napoleon’s retreat from Moscow for many A and A/E firms. It’s likely another 12 months of pain after a miserable ten months in 2020. The pain will be dispersed regionally with generalist firms in the Sunbelt faring much better than their peers in the Northeast and West Coast. It will also be dispersed by market. Smaller design firms will be buoyed by a continuing boom in residential work. Indeed, many owners of smaller firms saw record personal income in 2020 and can expect to top that in 2021. Design firms serving healthcare and higher education will feel the winds of change from dispersion in both sectors. Architecture firms in the Life Sciences, Research and Laboratory sectors will thrive as will those with e-commerce clients. Retail will continue its move toward the phygital model. Watch out for private equity and family office roll-ups of architecture firms this year through 2023.
• The Millennials are not coming to save you or your firm:  Millennials own just 3% of the nation’s wealth. In comparison, Boomers owned 21% when they were the same age. Looking at it another way– in 1989 people under 40 owned 13% of the wealth in this country. In 2019 — before the pandemic — they owned just 6%, despite representing nearly the same share of population. The “next generation” or “rising leaders” that employee-owned firms rely on for future leadership and capitalization are strapped. While they for sure will be the future leaders, they are far less likely to be leading employee-owned firms.
• Headwinds for DE&I:  The business imperative for diversity is clear. The A/E industry is not unique in its struggle to achieve greater diversity at all levels. However, the pandemic has made things even harder. Nearly 3 million women have dropped out of the U.S. workforce over the past year. Unlike the Great Recession, the pandemic has disproportionately impacted women – particularly working mothers. Indeed, a PwC study suggests that gender equality in the workplace has been pushed back to 2017 levels. A/E firm leaders and Chief People Officers will have to work even harder and smarter to achieve their DE&I goals. And studies are showing that men are more likely than women to return to the physical workplace. 
• Your HR Director will need a raise:  And very possibly should become your firm’s CEO. Work will be reimagined over the next decade. (Haven’t we had enough reimagining over the past year?!) Work trends will likely include shifting from managing the working experience to the life experience of employees, a shift in the focus of flexibility from location to time, increased focus on wellness and mental health, and more use of contract employees. On the latter, I’m really looking forward to the Uber app for the A/E workforce. Imagine using your iPhone to schedule the talent you need for your project (from anywhere in the world – let’s drive those production costs down and draw on talent beyond the confines of your “firm”!), assign responsibilities, insert the appropriate client QA/QC requirements and get notifications when deliverables hit the client portal. All while sipping a cocktail overlooking the ocean.  

M&A Update:  By the numbers, industry consolidation in the U.S. is down 12%. However, we are approaching the anniversary of the COVID Freeze when deal-making essentially stopped last year. This year we will power through March and we fully expect 2021 to set a record for deals.

Congrats to our friends at CivilTech!   Headquartered in beautiful Cypress, TX, fast-growing infrastructure engineering firm CivilTech announced their merger with pioneering AEG firm Woolpert. We’re glad we could help bring these two great firms together!

Something to consider:  Giving time off to employees to either receive–or recover from– their vaccine shot. At Morrissey Goodale we’re giving every employee a day’s paid leave to get or recover from the single-jab J&J vaccine or two days if they get the Pfizer or Moderna vaccine.

March VR and Livestream events:  In March we’ll be hosting the first ever combo Virtual Reality and Livestream events for the A/E industry. On Tuesday, March 23 it’s our New Reality: 2021 Edition Broadcast and on Thursday, March 25 it’s our Q1 M&A Symposium. Grab your Oculus headset to fully immerse yourself in the presentations and meet with the Morrissey Goodale team and the other attendees in our VR Auditorium. Or catch the Livestream on your laptop or mobile device. But hurry, VR registration closes March 15 (just in time for St. Paddy’s Day).  

June VR CEO Conference:  This June we’ll be hosting our third Virtual Reality CEO Conference with new content, format, and even cooler VR features. This two-day conference will focus on Strategy + Execution and M&A/Capitalization. Registration opens soon. Click here to be kept updated.

Who we’re following on Twitter this week:  @EdZarenski Ed really knows his stuff when it comes to construction forecasting and spending.

Questions? Comments? Trends that excite or concern you? Email Mick Morrissey @ [email protected] or call him @ 508.380.1868.

Four Factors to Watch

1. Infrastructure Stimulus  

Congress is still in the process of passing Biden’s $1.9 trillion COVID relief measure, which is expected to head to the president’s desk next week. But Democrats are now focusing on a President Biden’s “Build Back Better” infrastructure initiative, and the system of 44 energy industry tax breaks is in the crosshairs. Sen. Ron Wyden’s (D-OR), who leads the Senate Finance Committee, goal is to replace those tax breaks with three— one each for clean energy, clean transportation fuel, and energy efficiency. GOP lawmakers, however, are signaling to Democrats that their “go-it-alone” strategy on the COVID relief bill damage prospects for collaboration on future legislation.

2. COVID-19 Case Numbers  

In the last week, the seven-day average of COVID cases has dropped from about 68,500 a day to 62,900. This compares to 300,000 cases per day in early January. The seven-day average of fatalities continues to remain relatively steady. Seven-day averages of COVID cases dropped slightly in California, Texas, and Florida:

• California: 5,500 to 4,700
• Texas: 8,000 to 7,300
• Florida: 6,100 to 5,400

3. Jobless Claims  

According to the Labor Department, first-time weekly claims totaled 745,000 which was lower than the 750,000 estimate from economists surveyed by Dow Jones but slightly higher than the revised number of 736,000 the previous week. Continuing claims dropped by 124,000 to approximately 4.3 million.

4. COVID Vaccine Update   

According to information collected by Bloomberg, 291 million doses in 111 countries have been administered, compared to 236 million doses in 101 countries the week before. The average number of daily doses increased from 6.67 million to 7.23 million.

To date, 85 million doses have been administered in the U.S., up from 72.8 million last week. An average of 2.08 million doses per day are now being administered, which is up from the daily rate of 1.65 million last week. Across the U.S., 25.6 doses have been administered for every 100 people and 74% of the allotment delivered to states thus far have been administered, compared to the previous week of 21.9 doses per 100 people and 78% of the allotment.