October 18, 2021
Taking the pulse of the A/E industry—Q4 edition
The A/E industry is powering into Q4. Your firm is on track for either another blowout year or one very close to it. You personally have been busier than a salmon swimming upstream since January 2. Your work-life balance can be better described as a work-life blur. Now it’s October (How did that happen?), and you’re in the middle of business planning for 2022. To help you with that, here are some of the trends and issues that our team is seeing around the industry. We hope that this will provide you with some additional context for what your firm is experiencing and what could lie ahead next year.
There’s no slowdown in sight: In fact, from what we’re seeing things are only going to get busier for you and your team in 2022. Each and every single one of our strategy clients—regardless of geography, market type, or technical expertise—is maxed out with work with growing backlogs. And it’s leading to some poor habits. Some leadership teams are not even responding to new opportunities because they don’t have the bandwidth to process them and are afraid of overloading their production staff. Don’t let this happen—it will irreparably damage your brand.
The peril of printing money: The problem with doing so well right now is that you start to believe your own press clippings. (Do they even have those anymore? Maybe it should be “You start to believe your own TikTok.”) You get complacent. You assume that what’s working for your firm now will work in the future. Maybe it will—but probably not. Today’s good times are an impediment to strategic thinking. (Check out Mark Goodale’s article Are You a Strategic Thinker? These Days, You’d Better Be below.) Why change when everything’s working so well?! (Narrator: It’s really, really easy to change when there’s red ink all over your income statement.) Leaders need to carve out the time and the space to think long-term and craft their firm’s post-pandemic vision.
Which infrastructure sectors are booming? W-A-T-E-R. Any firm anywhere doing anything with H2O is being deluged (ahem) with work. Firms with coastal and marine experience are having a year and then some. Same for transportation (including highways, transit, and aviation). Sure, there was a slowdown in DOT work in Florida and Texas in the fourth quarter of Fiscal Year 2021—but both states are back on track. Firms in the power delivery sector are also humming. The renewable energy sector—particularly in the Mountain West region—is keeping firms there super busy. Planners, engineers, field staff, and scientists around the country are (a) way past the point of complete career burnout, (b) considering getting out of the business entirely to go work the land or do something equally Zen-like as they take stock of their lives, and (c) getting offers of crazy financial packages from competitors to go work for them, which quickly put to rest any ideas of becoming farmers or getting too Zen.
Which buildings sectors are booming? She blinded me with science! As we predicted last year, the life sciences, biotech, science and technology, mission critical, and data center sectors are keeping architects busy with rewarding, high-profit work. What’s more of a shock is how quickly corporate campus work—greenfield and repositioning and repurposing of existing facilities—is coming back and putting designers back in the black after a horrendous 2020 and first half of 2021 for many of them. The residential boom continues to make millionaires out of architects, engineers, and surveyors (more on the lattermost below) around the country. Higher education work is rebounding this year as administrators realize they must invest in reimagined campuses for a smaller student population. Healthcare is holding its own. Industrial parks and distribution centers are making 60-plus hour weeks the norm at many site development firms. If there’s a weak spot in the buildings space right now, it would appear to be corporate interiors.
Which environmental sectors are booming? Everywhere you look the environmental market is red-hot. From EHS to geotechnical and construction materials testing to remediation, it’s close to 24/7 in the U.S. And the demand is across the board—federal, state, and municipal government as well as commercial. It’s good to be green.
Which regions are hot? It’s hard to find a part of the country where the market is cool or slow. Sure, the conventional wisdom is the Southeast, Southwest, and Texas are booming. And yeah, they are. But you’d be hard-pressed to find an architect, engineer, or surveyor (again, more on this below) anywhere to return your call about a new project opportunity within 24 hours. They are just so busy—everywhere. The universal refrain from a sample of our clients in Maine, Massachusetts, New York, South Carolina, Florida, Texas, New Mexico, Colorado, Illinois, Pennsylvania, Indiana, Ohio, New Jersey, Minnesota, Arizona, and California is that they have never seen such levels of demand for their services and see no slowdown ahead. Good times indeed. For those of you more “seasoned” professionals, at the risk of sounding like a curmudgeon, you’d do well to let your mentees know that it wasn’t always like this and that invariably the economy is going to tank.
Go (Mountain) West, young man: Firms in the Mountain West region are experiencing a year like no other. The long-term growth projections for cities in Utah, Wyoming, Idaho, Montana, and Colorado are robust, to say the least. Any one of these cities could grow to become the next Denver over the next 25 years, and design firms want to put boots on the ground to ride that wave of future work. So, we are seeing many West Coast and Midwest firms, in particular, opening offices in these states and looking to make acquisitions. Indeed, last year saw a total of 19 transactions in the Mountain West region. This year we’ve already seen 20!
When is the cavalry coming? Think you are alone in being frustrated that you cannot find people to hire? Well, think again. It’s a universal sentiment among your peers. CEOs everywhere say, “We can’t find the good people to do all the work.” (And yet it gets done anyway—just with less quality and more potential for errors). There are firms with Priority #1 staff-level requisitions that have been open since pre-pandemic days. And it’s not just professional and technical staff. Firms are having difficulty finding administrative and support people with the required skills. And don’t get me started on surveyors. If you are a licensed surveyor, you are worth your weight in gold. But sightings of a surveyor for hire are rarer than those of Bigfoot. We’ve seen a flurry of small surveying firm acquisitions this year. Many of those deals are being made not for the clientele and contracts, but for the licensed and experienced staff. We predicted this three years ago before the pandemic and are seeing it play out in real time.
Firms are in GREAT financial shape: Not just yours—everyone’s. Balance sheets are strong. Everyone is flush with cash. Clients are paying quickly. (They don’t want their A/E firms to have any excuse to be upset and slow down on the projects). ESOP valuations are increasing 20% or more. Bonuses will be off the charts for a second year running. How leadership teams choose to invest that capital during these extraordinary times will play out when things start to slow down after 2022. (Note to CEOs: This would be a great time to make like George Costanza and leave on a high note as a new study confirms that when things get financially challenging again—and they will—it’s the CEO’s health that gets most impacted.)
Vaccination vs. Integration: Vaccination mandates and policies are providing an interesting wrinkle in Q4 industry M&A. Most (not all) acquirers (check out last week’s article What can we learn from the thirteen most prolific acquirers in the A/E industry?) are of a size or have enough exposure to federal work that they are either requiring or strongly encouraging their employees to be vaccinated to work in the office or on specific contracts. But many of their acquisition targets don’t have such policies, and indeed, many key managers and employees in those targets refuse to be vaccinated. This is becoming a sticking point in negotiations, due diligence, and assessment of cultural fit.
Q4 momentum? The A/E industry is accelerating in this fourth quarter and is maxed out. Even without a federal infrastructure bill, all indicators are for yet another record year in 2022. What could go wrong? (Narrator: What could go wrong this time feels eerily similar to the fourth quarter of 2019.)
Industry consolidation shows no signs of slowing down: It was another bumper week for design and environmental firm mergers and acquisitions with 14 domestic transactions announced. Firms in California, Texas, and Florida alone account for 28% of all mergers this year.
Congratulations to our friends at Chen Moore and Associates (Fort Lauderdale, FL): This week they announced their acquisition of 25-employee Fred Wilson & Associates (Jacksonville, FL). We’re thankful that they trusted us to advise them on this important growth initiative.
Congratulations are also in order for our friends at George Butler Associates (GBA), (Lenexa, KS) (ENR #377): This week they announced their acquisition of underwater engineering and inspection firm Rio Engineering (Austin, TX). We’re privileged that they chose us to advise them on this important undertaking for the firm.
Speaking of Texas: Who is the leading M&A advisor for serving the Texas A/E market? We are. Check out these industry-leading 25 transactions in which we have assisted Texas A/E and environmental firms to either achieve their strategic goals through M&A or enter or grow in Texas through acquisition. To see the 150+ A/E and environmental firm transactions that our team has initiated and advised on nationally, click here.
Texas M&A Symposium registration is closed: If you’d like to join over 100 industry CEOs, M&A decision-makers, and investors from Texas and around the nation next week in Houston to learn whether Texas firms are more valuable than firms elsewhere in the country—then sign up for the event waitlist here. Sign up here to be notified when the video recording of the Symposium is available for purchase.
Early-bird registration for the Southeast States M&A Symposium is now open: Interested in growing through acquisition in the Southeast? Or are you based in the Southeast and considering a merger or sale? Or wouldn’t you like to have a business-justified reason to spend a long weekend in Miami this January? If you answered “yes” to one or more of these questions, our Southeast States M&A Symposium in Miami, Florida, is for you!
Questions? Insights? What market conditions are you seeing? What’s your outlook for 2022? Email Mick Morrissey at [email protected] or call him at 508.380.1868.
ARE YOU A STRATEGIC THINKER? THESE DAYS, YOU BETTER BE
The vast majority of A/E industry principals I’ve worked with over the years view business issues from an operational or tactical perspective. They don’t often have the opportunity or training to practice strategic thinking on a regular basis, regardless of the size of the firm they work in.
In a mature, steady industry, that’s not necessarily a fatal flaw. But since COVID, the A/E industry has been turned on its head. Whether it’s the literally overnight transition to a remote workforce, the seemingly endless barrage of technology disruptors, or private equity’s massive impact on the M&A market, strategic thinking is required to leverage opportunities and position a firm for sustainable, profitable growth. While operational decisions can also help a firm outperform the competition, tactics can be relatively easily imitated and tend to have a limited shelf-life, especially given the rate of change we are all witnessing. Strategic-level decisions, on the other hand, focus on doing things differently and provide a sustained competitive advantage in a way that preserves meaningful differences with rivals. They begin a thought process that help leaders recommend decisions that affect the firm as a whole and to better understand the importance of a competitive advantage.
But to think strategically and not just tactically, you must be able to distinguish between the two. Here are just a few examples of strategic decisions:
- What a firm’s mission will be, or it’s enduring purpose or cause.
- What a firm’s vision will be, or what it will look like at some point in the future.
- What businesses the firm will be in, and not be in.
- Deciding how to compete in those businesses (e.g., will your firm compete as the low-cost provider or the premium service provider?)
On the other hand, operational and tactical decisions keep the business running effectively and efficiently by translating strategies into actions in core business areas, such as HR, finance and accounting, marketing, IT, and, of course, production.
Nevertheless, it can be a hazy distinction. Even when the conceptual distinction is made between the two, the line separating them is not always obvious.
For example, what if you decide to reduce your proposal fee to beat a competitor. On the face of it, that would be tactical. But what if it’s in support of a larger strategic decision to build market share by wresting away client relationships from the competition? Is reducing the fee on that one proposal now strategic in scope?
Or what if you make an aggregated series of purchases of top-end design software? And say these software purchases give your company additional competencies and thereby alter the strategy of the firm? Would they be strategic purchases? Perhaps.
To help differentiate, ask these questions:
- Will the decision change the firm’s position in the industry?
- Will the decision involve a new business area?
- Does the decision have a significant financial impact on the firm?
- Would it evoke a significant response in the environment–that is from competitors or other stakeholders?
If the answer is yes, the thinking and the accompanying decisions are strategic in nature.
So, remember, while operational and tactical decisions keep A/E firms running in this hectic short-term, it’s strategic thinking that will separate the top performers from the rest of the pack in the long-term.
For more information on how Morrissey Goodale can help your firm with strategic thinking and planning, call Mark Goodale at 508.254.3914 or email him at [email protected].
FOUR FACTORS TO WATCH
1. Labor Force
The pandemic, as it did with several other factors, has accelerated the rate at which the U.S. labor force has been declining, from its peak at 67.3% in the early 2000s. In September, 61.6% of Americans, 16 or older, were working or seeking work. Resignations totaled 20 million between April and August, which is a 12% increase from the same period in 2019, when the job market was especially booming. Quitting reasons certainly included more traditional circumstances like taking a job elsewhere or changing careers and going after another degree. This time factors like lack of child or elder care, extended unemployment insurance, vaccine mandates, or simply taking a break were also part of the conversation.
On a broad spectrum, this scenario leaves employers needing to adjust compensation strategies and get creative on talent acquisition. Those still in the workforce or considering coming back to it, will be enjoying the competition for their skills, but over time, if labor becomes scarcer, companies may need to adjust operations or reinvent services, investing in productivity tools and automation. Another scenario we might see is companies functioning somewhat like a startup environment, where employees are compelled to diversify skills and wear multiple hats to cover for the lack of personnel that may or may not eventually come back to the workforce.
The ongoing worker shortage has been forcing employers to increase wages which also puts pressure on companies to increase prices. Worker shortages within global supply chains, which have been an issue since long before the pandemic (i.e., truck drivers and warehouse workers) have been a significant factor contributing to the 5.4% CPI rise in September vs. the same period last year. The U.S. economy wants to make a fast and furious recovery, but it is having to hit the brakes. Americans have more money in their households from government stimulus and higher wages, providing a boost in demand despite higher prices. The supply chain drag will continue for a bit longer, leading to higher costs that will eventually be passed down to consumers. As COVID cases continue to decrease throughout the world, let’s hope the dust somewhat settles and we have more predictable variables. We will leave the discussion around the impact on Fed policies and whether inflation is “transitory” for another day.
3. Vaccine Mandates
The Labor Department is close to implementing a federal rule requiring workers in businesses with 100 or more employees to be vaccinated or regularly tested for COVID-19. Roughly 80 million workers would be impacted, and companies may need to revisit their policies for on-site and remote work, especially those operating in multiple states. The rule is creating mixed reviews and will likely add administrative and logistical complexities to the currently atypical business environment.
4. COVID-19 Case Numbers
As of October 14, the seven-day moving average of newly reported cases declined 14% vs. the prior week from 95,000 to 82,000.
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