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Executive Corner: Back in the Saddle for the AEC Industry

Steve Gido on May 12, 2021 - in Articles, Column

It’s hard to believe we’ve crossed the one-year milestone of the global coronavirus pandemic. Populations have endured and adapted to the day-to-day changes in societal norms, business practices and lifestyle patterns. As we start to see the light at the end of the tunnel, many important macro forces and challenges are reshaping our industry in dynamic ways. Will these be temporary or permanent? Beneficial or detrimental? Recent conversations with dozens of AEC leaders offered insights into what they’re observing today.

Many firms entered 2021 in great shape. As companies closed the books on 2020, it’s evident many AEC organizations had a banner year, which seems paradoxical given the unprecedented business disruptions and heightened fear levels witnessed a year ago. Credit residential land development, resilient state budgets, strong backlog levels entering the year, CARES Act/PPP reassurances, and the general seamlessness of work-from-home models helping the bottom line. Publicly traded engineering and construction stocks are at all-time highs.

Back to the office. A majority of firms had some staff working in offices during the last year. Still, we’ll start to see that continue to accelerate this year, especially as broader numbers are vaccinated and K-12 schools widely reopen. Leaders have shared various models of remobilizing their employees back, from graduated periods to hard deadlines. Will companies continue to offer work-from-home models as an employee benefit? Will office layouts and functions remain the same, or will a “hoteling” concept take root as fluid workforces come and go? Since professional-service firms are highly dependent on creativity and collaboration, will these new approaches enhance firm productivity, communication and culture?

Labor shortages persist. If there’s an industry mantra to start 2021, it’s “We’re Hiring!” Presidents, principals and human-resources executives shared with us the countless positions (from entry-level to C-suite) of every discipline they’re desperately trying to fill, given growing backlogs. Recruiters, noting this job market and climate is as intense and competitive as they can recall, are witnessing signing bonuses, bidding wars for talent, and escalating salary requirements to find and retain exceptional talent. 

Industry consolidation rolls on. Already, first-quarter merger and acquisition activity is up 15 percent compared to the same pre-pandemic quarter last year as dealmakers have skillfully learned to work across a virtual process, from courtship to closing. More buyers are coming off the sidelines, fueled by executive confidence and strong balance sheets, and ready to deploy capital on synergistic deals and regional expansions. It’s an ideal time for baby boomer owners to kickstart ownership transition and exit-strategy plans.

• Private equity is quietly transforming the industry. One of the most-distinct trends in the last 10 years has been prominent AEC organizations recapitalizing and restructuring with outside private-equity firms’ help. These marriages introduced a different investor class to our industry, often bringing financial sophistication, capital access, and a unique return-on-investment mindset, not to mention additional competition for executive talent and acquisitions. New financial sponsor-backed platform combinations have been created in the last year, including industry leaders TranSystems, Enercon, RATIO Design, Universal Pegasus, PBK Architects, Hull & Associates, Continental Mapping Associates, among many others.

 • Marketing models are evolving. As we all know, the pandemic forced personal face-to-face client interactions and prospective business-development meetings and networking to suddenly become virtual. And despite the “Zoom fatigue” aspects, the benefits of digitalization to marketing teams were evident: from efficiently responding to RFPs, promoting project successes across social media, and running seminars and training sessions online. Although handshakes and “meet and greet” conferences will soon return, it’s likely some of these models could remain in place.

• Proposed infrastructure policy seems promising. As reported in March 2021, the Biden Administration recommends $2 trillion in new federal infrastructure spending as part of a broader economic stimulus and recovery package. Sizable investments would be made in affordable housing, electric-vehicle incentives, roads and bridges, high-speed broadband, electric grids and clean energy, and public schools and transit. Monies would be allocated by primarily increasing the top-line corporate tax rate from 21 percent to 28 percent. Indeed, the timing and magnitude of this will have to play their way through the chambers of Congress, and the expected drama of procedural reconciliations and technicalities will be worth following.

• We’re not out of the woods here, folks. Despite general positive economic and industry news on housing, unemployment, architectural billings and manufacturing, the reality is some markets will be feeling the ramifications of this period for quite some time. Nonresidential construction starts were down a staggering 27 percent in 2020 and tepid to start this year. Interest rates jumped along with commodity prices (lumber prices tripled in the last year). Many industries and institutions, from retail, restaurants, higher education, hospitality, oil and gas, healthcare, and office buildings, will face headwinds until U.S. population mobility and aggregation comes back in more-significant numbers, and capital spending returns. A lumpy and lengthy recovery means some states will thrive, and others will continue to languish.

The next year should prove to be a period of excitement and optimism, not only for our industry but for broader societies and institutions. AEC leaders will have to continue to navigate economic headwinds and disruptions as well as day-to-day business challenges on the road to normal. Happy trails!

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About Steve Gido

Steve Gido specializes in corporate financial advisory services, including mergers and acquisitions, business valuations, ownership transition plans, and strategic planning for engineering, architecture, environmental consulting and construction firms. He leads ROG+ Partners’ merger and acquisition practice, and has advised on a wide number of A/E/C transactions, representing buyers and sellers of all sizes and disciplines.

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