Word on the Street: Issue 248

In observance of the July 4^th holiday, there will be no Word on the Street next Monday. Our next issue will hit your inbox on Monday, July 14.

NOTE TO READERS: This week’s Word on the Street is a little different. Instead of our usual format, we’re bringing you a special mid-year check-in.

Mid-Year Industry Assessment: Despite Uncertainty, Things Are Still Looking Up

We’re halfway through 2025, and while the headlines are filled with uncertainty, the AE industry continues to show resilience. In this issue, we take stock of where things stand, what’s changed since January, and what firms like yours should be watching for as we head into the second half of the year.

Macroeconomic & Policy Backdrop: Uncertainty at Every Turn 

AE and environmental consulting firms are entering the second half of 2025 under a cloud of economic uncertainty. The Federal Reserve has paused its interest rate cuts, holding the benchmark rate around 4.25%-4.50%, but policymakers remain divided on the next move. Fed projections paint a “modestly stagflationary” outlook for 2025 with growth slowing to 1.4%, unemployment ticking up toward 4.5%, and year-end inflation (PCE) around 3.0%.

The bond market has grown increasingly volatile, with the 30-year Treasury yield surging past 5%—a level not seen since 2007—as investors weigh the potential for fiscal expansion to drive both economic growth and rising deficits.

Despite historic federal funding bills, bureaucratic bottlenecks have slowed the flow of dollars to projects. By late April, state DOTs were still waiting on about $38.5 billion—over half of their FY 2025 highway and transit formula funds—due to delays in federal appropriations and agency staffing gaps. This setback came just as the spring construction season began, leaving many states scrambling to finance projects. Despite the administrative hiccups, these funds are expected to come through.

Last year, the run-up to the U.S. presidential elections created a noticeable “wait-and-see” slowdown in parts of the industry—particularly for privately funded developments. More recently, shifting policies, tariffs, and geopolitical conflicts have led some to pause. As a result, the industry will experience shifting patterns and moderate overall growth. There is an additional layer of uncertainty that senior AE and environmental consulting leaders must factor into scenario planning, but altogether, the good times in the AE and environmental consulting industry are poised to continue.

Market Outlook: What’s Hot, What’s Not

The outlook across sectors for the rest of 2025 is uneven but promising. After two strong years for construction spending (nearly +20% in 2023 and +6% in 2024 in nonresidential building markets), industry forecasts for 2025 have softened. ConstructConnect’s summer forecast (published in May) projects a modest 3.3% increase in construction spending, down from the 4.1% overall increase forecasted in the previous quarter.

As far as construction starts (the total value of projects that have begun construction during a specific period), the reduction is more significant, shifting from an expected 5.2% increase to a 1.8% contraction in total U.S. starts.

But within this tepid headline, certain sectors are charging ahead while others plateau or decline. The latest ACEC Research Institute Engineering Business Sentiment Q2 2025 Report showed continued short-term optimism but heightened levels of concern over the long term (12 months into the future). Here’s a brief “heat map” of five core sectors (using ↑ for growth, ↓ for decline, ↔ for stable):

• Transportation Infrastructure (↑) Full steam ahead: Transportation infrastructure is entering a second-half surge. Now that delayed Infrastructure Investment and Jobs Act (IIJA) funds have been released, expect increased activity from state DOTs. Design-build and progressive delivery methods are gaining traction in major corridor and transit projects. The only caveat is capacity—workforce and materials shortages could constrain just how fast projects can go. But directionally, transportation is a bright spot. 
• Energy & Industrial (↑) Powering up: The energy sector is another hot spot for AE services. The ongoing transition to renewable energy, grid modernization, and domestic manufacturing is translating into strong engineering demand. Power utilities are investing in transmission upgrades and renewable generation projects, much of it supported by the Inflation Reduction Act (IRA). However, wind and solar project activity and incentives may be at risk due to policy shifts and legislative action expected later this summer. At the same time, traditional energy (oil and gas, petrochem) has seen a cautious recovery with high commodity prices putting some pipeline and LNG export projects back on the table. On the industrial front, the push for onshoring manufacturing has created big capital projects and helped the sector reach record spending levels in 2023 and 2024. In 2025, however, this growth is not expected to be sustained, especially given the uncertainty around the IRA and CHIPS Act. Worth noting is the recent drop in EV sales (and sales outlook), which may also impact plans for large industrial projects. From a geographic perspective, states such as Texas and Louisiana and parts of the Midwest will continue benefiting from energy and manufacturing investments.
• Water & Environment (↑/↔) Water markets are flowing, for now: State Revolving Funds (SRFs), coastal resilience efforts, and PFAS regulations are fueling robust work for civil/environmental firms. Design and environmental leaders will continue working through available FY 2025 federal funding, but proposed EPA budget cuts are threatening SRF-funded work in FY 2026 and beyond. Clients will need to seek alternative sources to address the existing funding gap in water and wastewater infrastructure systems. Municipal utilities across the country are playing catch-up on deferred maintenance, while the West region is focused on drought-response projects.
• Commercial & Institutional Buildings (↔) Split fortunes: The vertical building sector presents a mixed picture. Offices remain weak, but data centers and lab space are growing. Firms in these niches continue to see strong inquiries, especially with AI and biotech expansions. Some commercial subcategories such as retail and hotel had their outlooks adjusted down as developers exercise some caution amid higher financing costs and weaker consumer spending. Meanwhile, institutional buildings (schools, health care, public buildings) are comparatively healthier. This segment—less prone to economic swings—is forecast to see moderate growth (6% in 2025), driven by demographic shifts. Starts forecasts for higher education, however, had a double-digit downward adjustment. Overall, the aging U.S. population needs more medical facilities, and many school districts are upgrading buildings. For building-focused AE firms, institutional work may offset some commercial softness.
• Housing (↓/↔) A tentative rebound: The U.S. housing market is in a strange place in 2025. After cooling significantly in 2023-24 (as 30-year mortgage rates climbed above 6%-7%), housing starts have been subdued. Builders began 2025 in a wary mood—in fact, homebuilder sentiment hit its third-lowest level since 2012 this June, reflecting buyer pullback due to “elevated mortgage rates and…uncertainty.” NAHB’s chief economist has gone on record forecasting a decline in single-family housing starts in 2025 given the affordability challenges. However, there are also signs of pent-up demand that could spark a mild rebound in housing if interest rates ease even slightly (possibly in October). Some regions—particularly parts of the South and Southwest—continue to see population growth and housing shortages, which is driving new construction, regardless. Multi-family housing had a boom in 2022 and has since pulled back, but it remains at historically healthy levels to meet rental demand. Net-net, housing isn’t expected to be a major growth engine for AE firms in the near term, but it’s also not collapsing. If borrowing costs fall or stabilize, housing activity could improve late in 2025. Until then, architects and engineers are likely to focus on niche opportunities (e.g., build-to-rent developments, adaptive reuse conversions in cities, and the ever-strong Sun Belt markets).

Regional & Demographic Trends: Geography Matters

The Sun Belt and Mountain West continue to dominate in terms of demand growth. The latest U.S. Census data show metropolitan areas and counties in Florida, Texas, Georgia, South Carolina, Arizona, and Utah with the fastest-growing populations in the country. These regions are attracting infrastructure investment, housing, and commercial development. Metro areas such as Dallas-Fort Worth, Houston, Miami, Atlanta, and Phoenix are adding population and jobs at above-average rates, which in turn drives local demand for infrastructure, housing, and commercial development.

Some Northern and Coastal markets that saw outmigration or stagnation earlier in the decade (e.g., New York, Chicago, San Francisco) have started to stabilize and even regain population thanks to immigration. But their growth is slower, and high costs continue to be a limiting factor. A strategic portfolio approach—balancing the ups and downs—will be key in the second half of 2025.

M&A Keeps Rolling—With New Dynamics

One of the most striking industry developments of recent years has been the relentless pace of mergers and acquisitions in the AE sector. Even in the face of economic uncertainty, deal activity remains robust. By mid-2025, industry consolidation is roughly matching last year’s near-record clip. In fact, through the first half of Q2 2025, 202 AE transactions had been announced year-to-date—almost identical to the pace at the same point in 2024. This suggests 2025 could meet or even exceed 2024’s deal total.

To put it in perspective, 2024 saw 473 industry deals, the second highest ever (just shy of 2022’s peak of 493). Drivers behind this M&A boom remain firmly in place: On the supply side, a wave of baby boomer and Gen-X firm owners are looking for exits or growth capital as part of ownership transition plans; on the demand side, both strategic acquirers and private investors are hungry for growth, expertise, and market share. It’s a classic seller’s market with ample buyers at the table—from global ENR 500 firms aiming to fill gaps in services or geography to private equity-backed platform companies executing roll-ups in niche markets. From an AE executive’s standpoint, even if you’re not selling or buying, this M&A wave matters—it’s reshaping the competitive landscape. Local firms you compete with could suddenly have the backing of a national player, or that niche specialty firm you partner with might get scooped up by a competitor.

Adapting to Thrive in a Changing Industry 

The AE and environmental consulting industry is entering the second half of 2025 with continued funding, backlog strength, and cautious optimism. Infrastructure and public work might suddenly accelerate if bottlenecks clear. Private markets as well as housing may get revived by potential rate cuts later this year. Will you have capacity to scale up or pivot? To navigate imminent shifts in the broader political and economic environments, firms need to be agile. Those that can attract talent, adapt technologically, and remain acquisition-capable will be best positioned to turn current uncertainty into opportunity.

For customized market research for your organization or questions about our market intelligence services, call/text Rafael Barbosa at 972-266-4955 or email [email protected].

Weekly M&A Round Up

New domestic deals across TX, CA, OH, OR, FL, and NJ: Last week, we reported on eight new domestic transactions, including two deals in Texas. Domestic industry M&A activity is now up 5% over the past 12 months. Globally, six deals were announced in the UK, Finland, Norway, and Germany. You can check all the week’s M&A news here.