Word on the Street – A/E Industry Intelligence

November 22, 2021

Our 22 predictions for 2022

Let me get straight to the sandbagging. The big issue with making predictions is that it’s a no-win situation. If they come true, circumstances leading up to the event make them seem obvious. If they don’t, then we look like we don’t know what we’re talking about (see last week’s article It’s time for predictions, but first how did we do in 2021?)—which is (a) very on-brand for me and (b) not that great for our firm’s brand. So, on a risk-adjusted basis, all-in-all, making predictions—a bad idea. But, ‘tis the season, so here it goes. These are our team’s 22 predictions for 2022.

  1. There will be two major infrastructure failures: Another climate event—similar to the Texas Ice Storm earlier this year—will cause another massive grid failure somewhere in the U.S. And in an ominous sign of what’s to come over the next decade, we’ll also see at least one important water or transit infrastructure or utility or EV charging system hacked and shut down. (Stafford Palmieri, Principal Advisor and Mick Morrissey, Managing Principal)
  2. Go big or go home: Revenues among Engineering News Record’s Top 500 Design Firms will exceed $115 billion, eclipsing the record $104.8 billion set in 2020, with double-digit, year-over-year growth for the first time in the 21st century. This will be driven by consolidation among the industry’s largest firms, an evolving private equity ownership model that emphasizes scale, and an infrastructure bill that is expected to lead to an immediate $6 billion rise in A/E services output. (Jon Escobar, Consultant)
  3. Ring that bell! There will be at least one $350 million+ revenue A/E firm that goes public via IPO or special-purpose acquisition company (SPAC). This will be the beginning of a trend over the following 18 to 24 months in which we will see more $100 million+ A/E and environmental firms choose this option. Many of them will be capitalized by private equity prior to going public. (Brendon Cussio, Principal Consultant)
  4. Brave New World 1: Urban planning and spaces will evolve. Neighborhoods will shift towards more mixed-use flexibility. There will be movement towards the development of more open space and creating “escapes” to connect with greenery. A shift away from mass reliance on public transportation and daily commuting will allow for even more green space planning and innovation, resulting in the reimagining of city space for people and not vehicles. (Tricia Washington, Principal Consultant)
  5. Brave New World 2: Non-residential design and construction will trend toward repositioning existing assets vs. constructing new buildings as the world continues to rethink how people will live and work in a post-pandemic (or endemic) world. Residential investment will continue the double-digit percentage increases we saw in 2021, which, among other things, will make finding a reliable contractor to do your latest home improvement project a sustained exercise in futility. (Nick Belitz, Principal)
  6. Would you like that in Bitcoin or Dogecoin? More transactions in the A/E industry will take place using cryptocurrency. A/E firms will see more opportunities for its use in payments for their services, for paying their vendors and staff, AND for raising capital. Soon your AR and AP functions will be digitized—with resulting lower costs. (Morrissey)
  7. The flight of the boomers: In part related to the above prediction—boomers don’t (actually cannot) understand crypto—and in part because they’ve been worn down by the pandemic and its aftermath, there will be a record number of baby boomers retiring from the industry in 2022. And with them will depart a whole bunch of the drama that has been perpetuated among A/E leadership teams for the past 20 years. (Morrissey)
  8. Our electric and flying future: There will be more and more electric trucks on the road…and some hydrogen ones, too. Some of you will even see your first solar-powered production car on the road. Flying cars will move from the animated world of The Jetsons to the real world of your city. Oh, individual flight propelled by jet packs will also become a thing next year. (Mark Goodale, Principal; Morrissey gets the assist)
  9. Play to lose: Industry firms will get aggressive pricing projects, even pricing them to lose, as owners compete against each other to retain resource-constrained A/E firms as opposed to A/E firms competing for their projects. (Goodale)
  10. General economy: GDP growth will be about 4%—robust in historical terms but a slowdown from 2021’s mark of about 6%—as supply constraints in both goods and workers keep a lid on aggressive consumer and business spending and also due to a withdrawal of government fiscal support related to the pandemic and higher taxes. (Belitz; Cussio gets the assist)
  11. No new indoor malls: The contracting (really hemorrhaging) of retail space that was underway across the U.S. will accelerate even further as people realize that going to stores for staples and commodity goods amid their potentially unvaccinated neighbors is no fun, especially when they can order everything online. This will create opportunities for firms to answer the prayers of commercial landlords on how to repurpose strip malls and retail centers. The indoor mall will go the way of the dodo. (Palmieri and Belitz)
  12. A record year for consolidation: The industry will see 430 transactions next year. And in another first for 2022, it will be the year in which there is at least one transaction in each of the 50 states—something that has never happened before. (Escobar)
  13. Private equity to the rescue? Private equity and family office sponsors will continue consolidating the industry. Between them they will account for 50% of all domestic design and environmental firm mergers and acquisitions next year. They will be responsible for 9 in 10 of all recapitalizations of ENR Top 100 firms that take place in 2022. And by the end of 2022, one in three of the ENR Top 100 will be capitalized by private equity. (Nate Wentworth, Consultant)
  14. Double-digit EBITDA multiples—you cannot be serious! (Thank you, boyhood idol John McEnroe.) The A/E industry will see record-setting M&A multiples in 2022 as publicly traded and overseas firms pile into the market and drive up firm valuations by at least 20% over last year. We will see deals in the teen-digit multiples on trailing 12-month EBITDA for design and environmental firms north of $50 million in revenue that are well positioned in the infrastructure, life sciences, and technology markets. Valuations for firms specializing in coastal engineering, renewable energy, and water and air pollution control will see major jumps. (Cussio, Escobar, Morrissey)
  15. Infrastructure bill FOMO, part one: Publicly traded firms will double the number of their acquisitions in the U.S next year. They’ve represented a continually declining share of U.S. deals over the past decade—accounting for less than 9% this year. But their shareholders will demand they step up their M&A game to maximize the value they can gain from the infrastructure bill. They will face stiff competition from the current M&A leaders in the clubhouse—namely the financial sponsors. This competition is good news for sellers—it will drive firm values up to new records. (Escobar)
  16. Infrastructure bill FOMO, part deux: The French love a good party. As do the Spanish. The British are always in for a knees-up. Don’t get me started about the Irish. As for the Danes—if there’s Carlsberg on tap, they’re there. Next year, overseas buyers—particularly from Europe—will double their M&A activity in the U.S. We’re at the threshold of a golden age of infrastructure development here—and global A/E players want in on the bacchanal. Expect new entrants in the U.S. market from South America and Asia. (Morrissey)
  17. Double down on digital deals: There will be a continued push by A/E and environmental leadership teams for investments into technology and technology-focused companies to gain a competitive advantage. We saw eight such “tech” acquisitions in 2021. This number will double in 2022 and include firms that specialize in data management and intelligent technologies (AI, machine learning, IoT). (Cussio, Wentworth)
  18. No place for Ebenezer Scrooge: In an extremely challenging hiring landscape, the emphasis will be less on recruiting and more on retention. The focus will shift towards keeping your existing people happy and in place. Companies will be investing in employee happiness programs and focusing on advancement, financial incentives, flexibility incentives, perks, learning opportunities, career advancement, and more. (Washington)
  19. Competitive phygital flexibility: The A/E industry will converge on a flexible workplace model. It will blend all of a firm’s physical and digital investments to meet enterprise (e.g., culture, social fabric) and project (e.g., profit, quality, creativity, customer experience) outcomes they (and their clients) need to achieve. Collectively, THOSE will determine when employees will be together physically and where (in a company-leased office or a coffee shop or on the beach) and when they can (and should!) be remote. (Morrissey)
  20. AEWeWork: Firms of all types, but especially small ones, will begin exploring shared leases to split time using the same office space as the office-dwelling world fully commits to not showing up in the office five days a week again. Forever. (Belitz)
  21. Finally, the results are in: Studies will show that firms that embrace the WFH or hybrid working models will perform better than their peers that do not in terms of profitability, utilization, and employee retention. (Wentworth)
  22. Good insurance is a unicorn: The alternative delivery world will become even more risky. Finding the right insurance provider will be more important than ever. More owners will shift to Progressive Design-Build or an Alliance project-delivery model in order to share risks and make their projects viable. (Morrissey and mystery client)

We’ll check back this time next year to see how we did with these predictions. Meanwhile, if you have predictions you’d like to share with us OR (more likely) you disagree with any of these predictions, email or call me, DM me on Twitter, or send me a message on LinkedIn.

Congratulations to our friends at Larson Design Group (Williamsport, PA) (ENR #287): The leadership team of this national A/E and professional consulting firm announced that architecture and interiors firm LWPB (Oklahoma City, OK) will join them as a subsidiary, effective January 2022. We are thankful that Larson Design Group trusted us to be an advisor for this important transaction.

Congratulations also to our friends at Wallace & Associates (Murrieta, CA): This public infrastructure construction management firm joined ENR’s #31-ranked construction management-for-fee firm, Anser Advisory (Santa Ana, CA), expanding Anser’s water and wastewater consulting capabilities. We’re happy that we could help initiate this transaction for the team at Wallace and advise them through the process.

Industry M&A up 30%: Another week, another 11 domestic transactions announced. The industry is consolidating at an extraordinary pace—with no slowdown in sight.

M&A Symposium Livestream now available: Want to catch up on the latest M&A trends and deal multiples? Would you like to know post-pandemic best practices for buyers, sellers, and integrators? You can have it all by purchasing a recording of our recent Texas M&A Symposium. Click here to find out how.

You missed early-bird registration for the Southeast States M&A Symposium: Interested in growing through acquisition in the Southeast? Or are you based in the Southeast and considering a merger or sale? Or would you like to have a business-justified reason to spend a long weekend in Miami this January (average temperature for the month is 74 degrees) to better understand how M&A can benefit your business? If you answered “yes” to one or more of these questions, our Southeast States M&A Symposium in Miami, Florida, is for you! You missed early-bird registration—but there are still some places left in the sunshine. They’ll be gone soon, however, so best to reserve your place today.

Questions? Insights? What are your predictions for 2022? Email Mick Morrissey at [email protected] or call him at 508.380.1868.

THE INFRASTRUCTURE BILL PASSED…YAY?

Now that the long-awaited infrastructure bill is law, how the heck is all of the work going to get done? A/E firms are already stretched exceedingly thin, backlogs are at an all-time high, and the talent pool is as shallow as Lake Mead.

If you were hoping to catch your breath, you’re out of luck; here’s what’s getting pumped into the nation’s infrastructure:

$110 billion for roads and bridges. At the top of the list, about $110 billion of new funds will go into improving roads and bridges, as well as investments in other large-scale transportation programs.

$108 billion for electric grid and energy. Among the clean energy investments that survived the negotiation process is $108 billion for upgrading the nation’s electricity grid, which includes thousands of miles of new transmission lines and funds for smart-grid technology.

$66 billion for Amtrak. Amtrak will receive a record $66 billion for high-speed rail, safety improvements, Amtrak grants, and modernization of the Boston to Washington, D.C., corridor.

$65 billion for broadband internet. Above and beyond the billions already earmarked in the American Rescue Plan, $65 billion will be invested in broadband infrastructure to ensure nation-wide access to high-speed internet.

$55 billion for clean drinking water. Approximately $55 billion will be invested to replace all lead pipes and service lines—the biggest investment ever made in the nation’s clean drinking water.

$50 billion for Western water protection. Over $50 billion will be used to weatherize water systems in the West against droughts, floods, and wildfires.

$39 billion for public transit. A record $39 billion will go to public transit. The focus will be on modernizing systems, improving access for the elderly and people with disabilities, and the repair of thousands of miles of track. Thousands of buses and rail cars will also be improved.

$25 billion for airports. More than $25 billion has been allocated to help modernize the nation’s airports.

$21 billion for Superfund site cleanup. Approximately $21 billion is planned for cleaning up Superfund sites around the country.

$17 billion for shipping ports. About $17 billion will go toward improving port infrastructure, including inland water navigation, operations, and maintenance, allowing ports to accommodate larger vessels and reduce shipping congestion.

$15 billion for electric cars, buses, and ferries. Along with $7.5 billion for a national network of electric-vehicle chargers along highway corridors, another $5 billion will go to zero-emission buses and $2.5 billion for ferries.

$11 billion for road safety. About $11 billion will go to transportation safety programs, including a new program aimed at reducing crashes and fatalities, especially those involving cyclists and pedestrians.

$1 billion for reconnection for communities. About $1 billion will be spent on reconnecting neighborhoods that were split apart by the construction of highways, roads, and other transportation-related projects through the reconstruction of streets, parks, and other infrastructure. 

The package also includes $650 billion in previously authorized funding for roads and other infrastructure, including almost $300 billion for the Highway Trust Fund and $90 billion for public transit over the next five years.

How will this tidal wave of funding impact A/E firms? We connected with a few industry executives to get their take.

“Our industry has faced many challenges, and a common thread has been reactionary acts and funding to appease public sentiment on decaying infrastructure,” reflects Bony Dawood, president of Dawood Engineering Inc., a Pennsylvania-based multi-discipline engineering and technology firm with operations throughout the U.S., Europe, and Asia. “It is our hope that the infrastructure bill provides sufficient resources for our industry to develop sustainable solutions. We have grown through the post-pandemic economy and must understand our resources as we strive to be a value provider. We have pursued a specific strategy over the last few years to manage opportunities which includes increased collaboration and alliances with like-minded companies (specific talent is too difficult to obtain with the growing marketplace) as well as innovative processes fueled by technology. The adage of “eat” or “be eaten” will accelerate and dominate our industry to meet client needs. I anticipate an increased consolidation within the A/E industry will occur with the lack of graduates filling the void being left by retirees. Many smaller firms with great reputations will continue to struggle to attract talent for a variety of reasons and will recede or exit the marketplace.”

Bill Keen, Chief Innovation Officer at Clark Nexsen, a fully integrated, Mid-Atlantic-based A/E firm says, “We’ve all been talking about the major investments needed in infrastructure for years, with really nothing to show for it. The spending is spread across most of the infrastructure sectors, so there could be lots of additional project opportunities for us with our DOT and municipal clients. A lot will depend on whether the money will be allocated to where it’s needed. It also remains to be seen if the money ends up going to projects that are already designed and ready for construction. It’s good to see this get passed, although it will take some time for the spending to get through the system to turn into projects. That could be good fortune, given the talent shortage in the industry and the projection that it’s not going away soon. It’s wishful thinking, but if we could get regular annual funding on infrastructure instead of surges and sags, I think the talent shortage would be abated some. When the market dips, there are too many people that leave the engineering profession and don’t come back. And more consistent demand leads to more people entering the profession.” Keen adds, “I hope we’ll see the spending targeted to critical needs instead of spreading it around such that the resulting projects end up being too small to really move the needle. On smaller projects, the portion of the money spent on administration and overhead is quite large relative to larger projects. That really eats into how impactful the spending can be.”

Tom Stokes, president of Northeast-based consulting engineering firm Howard Stein Hudson, believes that once projects start moving, they won’t stop. “I think the most important aspect of the legislation is the certainty of the funds,” says Stokes. “Infrastructure projects need consensus and must be developed with public support. Agencies and municipalities will now have confidence to advance projects knowing that construction funds are available. The legislation will continue to help build momentum to deliver much-needed projects.”

“The demand for services is going to be historic,” says Chad Nixon, president of McFarland Johnson, a multidisciplinary planning, design, and construction administration firm based in the Northeast. “To put this plan into perspective, it’s the equivalent of the entire Eisenhower Interstate Highway System in 2016 dollars. This strategic investment in long-term infrastructure funding will provide continued support for projects over the next decade and will bring stability to the A/E/C industry. But with this historic investment in infrastructure, our industry will shift from a focus on competition for new projects to a hypercompetitive focus on recruiting and retention of our workforce.”

There may never be another time when the A/E industry is needed more. Are you ready?

To learn more about how Morrissey Goodale can help your firm prepare for unprecedented times, call Mark Goodale at 508.254.3914 or send an email to [email protected].

FOUR FACTORS TO WATCH

1. House Approves Social and Climate Spending Bill

After months of talks and changes from its original framework, the Build Back Better plan was pushed through by the House on Friday. (Votes were along party lines, except for one Democrat joining all Republicans against the bill.) It will now head to the evenly split Senate, where lawmakers are expected to take a hard look at and possibly amend provisions related to paid leave, taxes, immigration, and other areas. In its current version, the bill includes the following highlights (totaling roughly $2 trillion to be spent over 10 years):

  • $555 billion toward climate initiatives:
    • $320 billion in 10-year expanded tax credits;
    • $110 billion to grow U.S. supply chains for renewable energy technology;
    • $105 billion to boost resilience;
    • $20 billion for government entities to implement energy-efficient technologies;
  • $150 billion for affordable housing (assistance, repairs, and new housing);
  • $18 billion in the first three years to set up a universal preschool program;
  • $100 billion over three years towards childcare programs;
  • $150 billion to provide seniors with improved home care;
  • $200 billion for four weeks of parental, sick or caregiving leave starting in 2024;
  • Healthcare:
    • Extension of Medicaid subsidies through 2027;
    • High-cost prescription drugs that don’t have competition in the market would become eligible for negotiation starting in 2025;
  • Taxes:
    • Increase in Corporate taxes, including a minimum of 15% in foreign income and 1% excise tax on stock buybacks;
    • 5% surtax on adjusted gross income above $10 million and an additional 3% on adjusted gross income above $25 million;
    • High-income business owners would face a 3.8% tax on active business income;
    • Raise the $10,000 cap on state and local deduction to $80,000 from 2021 to 2030;
    • $80 billion to double IRS staff to address tax compliance.
  • $100 billion set aside for immigration-related provisions

 

2. Retail Sales  

According to the Commerce Department, retail sales (excluding automotives) rose by 1.7% from September to October, which is higher than expected, led by online sales and gasoline. There was a 16% increase from October of 2020. Although inflation has been creeping and sentiment has dropped, consumers still have money to spend. Some might have started holiday shopping earlier in anticipation of effects of the supply chain crunch on gift shopping.

 

3. Industrial Production and Capacity Utilization  

The Fed released stats on industrial production and capacity utilization last week, reporting higher-than-expected levels for both components. These metrics focus on manufacturing, mining, and electric and gas utilities productivity. Total industrial output, which decreased in September, was 1.6% higher in October, and capacity utilization went up by the same percentage but was 4% below its long-run average (1972-2020).
 

4. U.S. Economy  

The Conference Board Leading Economic Index (LEI) increased by 0.9% from September to October, which is considered a relatively sharp rise, suggesting that the economy is likely to continue expanding towards the end of 2021 and into 2022. Average workweek and consumers’ outlook contributed negatively to the index. In case you are curious, below are the ten components of the LEI:

 

  • Average weekly hours, manufacturing
  • Average weekly initial claims for unemployment insurance
  • Manufacturers’ new orders, consumer goods, and materials
  • ISM Index of New Orders
  • Manufacturers’ new orders, nondefense capital goods excluding aircraft orders
  • Building permits, new private housing units
  • Stock prices, 500 common stocks
  • Leading Credit Index™
  • Interest rate spread, 10-year Treasury bonds less federal funds
  • Average consumer expectations for business conditions

 

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