I Heard the News Today, Oh Boy.

Another architecture firm recapitalized by private equity (PE). Surprising? Not really. Designers (inclusive of all capes, berets, and black turtlenecks) are becoming the “next big thing” to be recapitalized and consolidated in the larger U.S. AE and environmental consulting industry. The PE firms and family offices that have been focused on rolling up the engineering, construction services, and environmental sectors are now—like the Eye of Sauron—turning their attention fully to the rarefied world of high design. 

1. Then (Calm Before the Storm): Architecture and AE firms (those “fully integrated” design firms that primarily lead client engagements with architectural services) make up about 30% of the firms in the larger U.S. AE and environmental consulting industry. One could reasonably expect that—all things being equal—this industry sector would see about 30% of industry consolidation. But that was not the case pre-pandemic. Prior to 2020, the architecture vertical annually represented between 10% and 12% of total industry consolidation. A primary driver of this was a lack of serious demand because the largest architecture and AE firms have not traditionally grown through acquisitions. There had been some consolidation of larger architectural brands by national and global EA firms immediately before (RTKL) and after (CallisonBurt HillVOA) the financial crisis. But the vast majority of architecture transactions pre-2020 were small. Average seller revenues were in or around $3 million. Essentially, consolidation of architecture firms consisted of smaller, founder-run firms selling their assets to a larger design firm at or close to book value. Very little cash was involved. Essentially these deals represented the death throes of firms and cheap transfers of clients, staff, furniture, and risk. There was virtually no PE involvement. 

2. Now (Riders on the Storm): The new wave of architecture consolidation began in 2020 with the recapitalization of PBK (ENR #95). Since then at least 16 top ENR 500 and leading designers have recapitalized or sold including Ratio Architects (ENR #304), Huckabee, CPH (ENR #293), EYP, Zyscovich, Foster + Partners, SB Architects, IBI Group, e4hSheehan Nagle Hartray, DGA (ENR #267), Populous (ENR #68), MOREGroup (ENR #102), LEO A DALY (ENR #191), Grace Hebert Curtis, and, most recently, McMillan Pazdan Smith (ENR #273). Of these, all but three have involved recapitalization by PE or a family office or sale to a PE-backed acquirer. In 2024, the percentage of all acquisitions involving an architecture or AE firm has jumped to a whopping 25%. And the median size deal is increasing. The architecture space is heating up and looking more and more like its infrastructure and environmental cousins when it comes to consolidation. 

3. Why now? Architecture and AE firms face the very same leadership and ownership transition challenges as their engineering and environmental peers. Firm founders or second- and third-generation leadership teams just don’t believe that the amorphous and mysterious “next generation” possess either (a) the competence or (b) the capital to pursue an internal transition or fund their ambitious shared vision. In this regard, nothing has changed since before 2020. What’s different now is that there is more demand in the form of PE and family offices. The results? More transactions, higher valuations, and larger deals. 

4. Who? Two weeks ago at our Texas and the South M&A and Business Symposium, my colleagues Nick Belitz and Jon Escobar shared a jaw-dropping piece of market intel (Figure 1). There are now 120+ PE and family office platforms in the AE, construction services, and environmental consulting industry. Many financial sponsors (another term for a PE firm or family office) are behind multiple industry platforms. For example, it’s common for a financial sponsor that really understands the ins and outs of this industry to have an engineering platform, an environmental consulting platform, and a construction services platform. These are three different branded firms representing non-competitive investments in adjacent, sometimes complementary, sectors of the industry. What you’re seeing now is those financial sponsors who have been successful in either the engineering, construction services, or environmental consulting spaces making investments in the architecture sector. And they are moving swiftly.

Figure 1: Industry PE and Family Office Platforms

5. Next: Given the inquiries that we are handling from financial sponsors already in the industry and from industry wannabes, it’s reasonable to expect that consolidation and recapitalization of the architecture space will increase over the next couple of years to reflect its 30% of the industry population. Architecture firms, more so than their engineering and environmental consulting cousins, typically have a much more difficult psychological battle with the “practice-focused business versus business-focused practice” model. Time will tell if the financial sponsors can provide them with the therapy to resolve that.

To contact Mick Morrissey, email him at [email protected] or text him at 508.380.1868.

Got a Tough Problem? Go Antique Shopping

With the amount of disruption and uncertainty in the AE industry, it’s easy to feel like the only way forward is with shiny new tools and cutting-edge solutions. Every year brings new trends, from AI-driven project management systems to blockchain-powered building information models (yep, that’s a thing). But it very well could be that the key to solving some of today’s increasingly complex business problems is hiding among the relics of the past.

Could the time be right to dust off some of those old-fashioned business principles and see how they might work? Here’s a list of some of today’s problems and yesterday’s answers.

Today’s problem—digital overload and miscommunication.

In our hyper-connected world, it’s amazing how many miscommunications happen, especially in project management. With emails, Teams messages, and texts flying back and forth, it’s no wonder things get lost in translation. Take, for example, the engineering firm that was working on a bridge project when a critical design update was sent through a long reply-all email chain. The update was missed by a key team member buried under irrelevant replies. Weeks later, the construction team discovered they were using outdated specs, resulting in costly rework and project delays—all because vital information got lost in the email clutter.

Yesterday’s answer—have a good ol’-fashioned face-to-face.

Revolutionary, I know. Face-to-face meetings—whether formal or impromptu—meant that you could hash out details, read body language, and make sure everyone was really on the same page. Sure, meetings can be time-consuming, but they worked.

Maybe it’s time to be more intentional about using in-office days for regular team huddles or quick one-on-one check-ins. In today’s hybrid work environment, those few days when people are actually in the office are a golden opportunity to have those five-minute hallway chats that can save you from weeks of digital back-and-forth misunderstandings. By making in-person communication a priority during these times, you might find that productivity and collaboration get a nice boost.

Today’s problem—automation overload.

We’re all about automation these days. From CRM software to automated project updates, it seems like every interaction can now be handled by a bot. But here’s the thing—clients are feeling more and more like they’re just another data point in a system. The personal connection that once existed between firms and their clients is often lost, and clients are feeling more like numbers than partners.

Yesterday’s answer—handwritten notes and personal visits.

There’s something nostalgic—and incredibly effective—about personal touches like handwritten notes or in-person visits. Picture this: You’re a client who just wrapped up a massive project and instead of getting an automated “Thanks!” email, you get a handwritten letter from the principal of the firm. Or maybe a project manager drops by just to check in on how things are going. These small, “antique” gestures build relationships that automation simply can’t replicate. It’s the business equivalent of stumbling upon a vintage record player at a yard sale—sure, streaming music is convenient, but vinyl has soul.

The next time you’re tempted to shoot off a templated email, consider going the extra mile with a personal touch. It just might be the key to retaining clients and standing out in a sea of automation.

Today’s problem—complexity creep.

With every new software upgrade, firms are drowning in dashboards, charts, and project management tools that require their own IT departments just to function. While these tools certainly have their place, they often end up being the tail that wags the dog.

Yesterday’s answer—whiteboards and sticky notes.

Believe it or not, there was a time when project management didn’t require a PhD in computer science. Instead, people used whiteboards, sticky notes, and (gasp) spreadsheets. There’s something beautifully simple about walking into a room and seeing a project timeline laid out on a whiteboard—no login required, no software updates, just good old-fashioned visibility. Going low-tech for some aspects of project management can help teams focus on the actual work rather than the tools.

Today’s problem—over-reliance on hiring data.

Today’s hiring process can feel like running a marathon through algorithms, personality assessments, and psychometric testing. While data have their place, they can often lead to analysis paralysis, where you end up hiring someone who looks perfect on paper but isn’t a great cultural fit.

Yesterday’s answer—get to know the person and trust your gut.

Hiring decisions used to be made by gut instinct and face-to-face interviews rather than a 12-step, data-driven process. Sometimes, you just knew when someone would be a good fit, even if they didn’t check every box on the qualifications list. Sure, keep your data-driven hiring tools, but don’t forget the power of intuition. A handshake, a conversation, and a gut feeling can go a long way in finding the right fit for your firm.

Oldies but goodies.

While you should never stop innovating and pushing forward, there’s a lot of value in looking back. Some of the most effective solutions to today’s business problems might not come from the latest app or software update—they could come from the tried-and-true methods that got us this far in the first place. So, next time you’re facing a modern-day business problem, don’t be afraid to head up to the attic and sift through history’s good ideas. You just might find what you’re looking for.

Reach Mark Goodale at 508.254.3914 or [email protected].

Market Snapshot: Life Sciences

Earlier this month at the Texas and the South M&A and Business Symposium, we were lucky enough to have economist Dr. Ray Perryman on stage. We were presented not only with a crash course on U.S. and Texas economics but also with predictions of sectors expected to significantly impact the country’s economy as well as the AE and environmental industry.  

One area that was drastically changed by the pandemic and, according to Dr. Perryman, will be driving economic growth in many states in the coming years is life sciences. The sector is composed of industries and companies involved in the research, development, and manufacturing of pharmaceuticals, therapies, and medical devices aimed at improving human life. Here are a few highlights on that sector:

  • Life sciences employment is over 2.1 million. It is expected to be slightly higher at the end of 2024 than it was in the same month last year.
  • Scientific research and development, a key industry within the life sciences sector, is expected to grow at a 2% compound annual growth rate between 2024 and 2029.
  • According to Colliers, more than 50 million SF of life sciences space has been absorbed across major markets since 2015. Deliveries reached a record-high last year, with 20 million SF.
  • The largest life sciences employment clusters in the U.S. are in San Francisco, Boston, New Jersey, San Diego, and Washington D.C. Emerging markets include Houston, Minneapolis, New Haven, Pittsburgh, and Salt Lake City.
  • Life sciences is in recovery mode. Absorption has not kept pace with project completions, and vacancies are rising. Lab/R&D construction will need years to absorb the oversupply.
  • Investments in research, technology, and innovation through DARPA (Defense Advanced Research Projects Agency) have the potential to create numerous opportunities for life sciences companies and for design and engineering firms.

Sources: IBISWorld; Colliers; CBRE; UBS; PhRMA; TEConomy Partners

To learn more about market intelligence data and research services offered by Morrissey Goodale, schedule an intro call with Rafael Barbosa.

Weekly M&A Round Up

Industry M&A continues to surge domestically and globally, with a total of 11 deals: The pace of M&A activity has ticked up noticeably in recent weeks and is now running 5% ahead of last year. Last week, six domestic deals were announced in FL, NJ, MA, KS, and ME. We also reported additional transactions in Canada and the UK. You can check all the week’s M&A news here.

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