Ten years ago, 2006, was arguably the A/E and environmental consulting industry’s peak of financial performance and achievement. Architects and engineers everywhere took advantage of unprecedented gains in commercial and residential building while surging tax receipts and a post-9/11 world provided steady demand for new federal, municipal and security infrastructure. Institutional, educational, energy and telecommunication markets all flourished. Companies of all disciplines and sizes were inundated with profitable opportunities to choose from, and successful (and perhaps overconfident) owners enjoyed record levels of compensation and returns on investment. The rising tide lifted all boats.
We all know what happened next.
Fast forward to today and we’re now six full years into our industry’s recovery cycle. Here at ROG, we characterize the environment as optimistic, yet uneven (at best). Yes, we have observed many great organizations and leadership teams having record-breaking years and “bucking the trend.” However, we also continue to observe firms that persistently struggle to break out.
At a macro level we remain encouraged that overall construction spending is back to 2007 levels, the AIA billings index is consistent and resilient, and the ACEC Engineering Business indices are solid. Yet many presidents and principals will confess to a new era of client stops and starts, diminished risk taking, and an uncertain feeling of where and how this current cycle will run. Several admit the “long shadows” of those dark days in 2008 and 2009 still linger to some degree and continue to impact strategic planning and growth pursuits.
Janus’ Bill Gross, the famed bond king and investor, years ago referred to this new and confusing global landscape as the “New Normal.” In fairness to A/E leaders, the overall U.S. economy has been tepid as well and we can debate endlessly whether those problems are structural, cyclical, generational, global, political or financial (likely all of the above).
For design professionals who enjoyed 20-plus years of consistent growth and exceeding U.S. GDP performance, the last five years witnessed a stark and uncomfortable reversion. Property development, federal government spending, global building and energy infrastructure – all of which have taken their respective turns driving our industry’s success the last two decades – to some degree now appear peaked and/or with lingering headwinds and murky outlooks.
To illustrate my point, this year’s ENR 500 provides evidence of an industry still trying to get fully back on track. While skewed toward mid-size and large A/E firms, the rankings do serve as a useful annual benchmark for overall industry health and direction. For 2015, the top 500 firms generated total revenue (includes domestic and international projects) that was 0.5% below 2014 results. Unfortunately, the overall 2014 numbers were lower than 2013. In fact, only now in 2015 did our industry finally surpass the ENR 500 domestic design revenue dollars that were generated back in 2008!
The following chart highlights the ENR 500 domestic and international growth rates and U.S. real GDP over the last five years:
|Year||ENR 500 U.S. Growth||ENR 500 Total Growth*||U.S. Real GDP|
*Source: Engineering News Record; Includes revenue from both domestic and international projects
The key long-term question arises: Is this as good as it gets?
From our consulting engagements as well as countless discussions and interviews with A/E and environmental consulting leaders and board members, the ramifications of a slow-growth industry have resulted in the following:
Given our reflections and postulations, please know that the intent of this column is not to come across as overly pessimistic or cautious. All economies and industries have cycles and, in a diverse sector such as ours, there will always be firms that over and underperform.
The upside potential is that there’s no shortage of building, environmental and infrastructure demands in our country, from the massive need for new and affordable single-family housing, major upgrades to transportation and water infrastructure, safer and cleaner air, and revolutionary investments as traditional and renewable power sources intersect. A/E firms and leaders throughout history have shown an amazing ability to adapt and endure and we have no doubt they will continue to do so.