The Top 500 Design Firms: Market Poised for Takeoff
Design firms are ready for a sprint in an expanding marketplace
Major design firms have set up the starting blocks and are ready to begin the sprint for a rapidly expanded marketplace. After the election of Donald Trump, companies report positive signs in most markets. Early economic news has been encouraging, as job creation in the private sector spiked in the first quarter of 2017. But the failure of the president and Congress to agree on a health-care reform package and a tax-cut program has many firms worrying that it may be a while before the starting gun goes off.
Many large designers say the current market continues to be healthy and believe it will stay that way in the near term. Some firms point to early indications that clients, particularly on the private-sector side, think the new administration will cut taxes and regulations, encouraging new capital investments. Further, Trump’s vow to aid in the rebuilding of U.S. infrastructure have those in the public sector anxious to get started. All this points to a continued strong construction market. However, many of the top U.S. design firms are adopting a “wait-and-see” attitude.
ENR 2017 Top 500 Design Firms Chart
ENR Top 500 Design Firms 2017: Market Poised for Takeoff PDF
A measure of the overall health of the market can be seen in the data from ENR’s Top 500 Design Firms list. Taken as a group, the Top 500 firms had a record design revenue of $92.84 billion in 2016, up 1.1%, from $91.81 billion, in 2015. Market growth was up on the domestic side, rising 3.8%, to $71.69 billion, in 2016, from $69.07 billion in 2015. However, revenue from projects outside the U.S. continued to fall, dropping 7.0%, to $21.14 billion, in 2016, after a 13.0% decline in 2015.
The international downturn in revenue is largely due to a drop in design work in the oil-and-gas sector, which fell 22.0%, from $6.9 billion, in 2015, to $5.4 billion in 2016. This drop-off can be attributed to oil-price uncertainty. Oil prices began to rise only late in 2016, giving some hope to firms in that market.
- Consolidation: More Deals Coming?
- Equity Investor Interest
- Election Bounce
- New Policy Changes
- A New Environment
- Local Politics
- Project Delivery
- Help Wanted
- Designing for the Future
- Disruptive Times Ahead
Consolidation among design firms continued in 2016, although at a somewhat less frenetic pace than in previous years. Among firms ranked on last year’s Top 500, DLR Group acquired New York City-based architect Westlake Reed Leskosky (ranked at No. 320 in 2016); NV5 Global Inc. acquired several firms, including Las Vegas-based JBA Consulting Engineers (No. 357); Tulsa, Okla.-based engineer-contractor Matrix Services acquired Columbus-based River Consulting LLC (No. 377); Day & Zimmermann acquired Glenn Allen, Va.-based Hankins and Anderson Inc. (No. 412) and Woodard & Curran acquired Walnut Creek, Calif.-based RMC Water and Environment (No. 456). In addition, Jensen Hughes Inc. acquired previously ranked AON Fire Protection Engineering. Further, Terracon acquired seven major design firms in 2016. Also, merger activity among large firms is beginning to spike again this year (see p. 51).
But Stantec Inc. rode the biggest wave on the acquisition front in 2016. In addition to acquiring Chicago-based VOA Associates Inc. (ranked at No. 181) and previously ranked Bury, Austin, and New York City-based Edwards & Zuck, Stantec entered the construction arena by buying Broomfield, Colo.-based engineer-contractor MWH Global.
Stantec CEO Bob Gomes says the MWH acquisition was a response to marketplace opportunities for more integrated services. “We are now reaching new markets in global geographies, continuing to prove we are leaders in water and infrastructure markets around the world,” he observes.
Gomes says Stantec now is working on strategies to support its global operations in the U.K., Australia, New Zealand, Latin America and central Europe. He admits that “our full integration strategy is time consuming and distracting in the short term, but it builds long-term value as the team becomes truly integrated, which facilitates better collaboration.”
AECOM, which has made some of the largest acquisitions in past years, currently is focusing on organic growth. “Our markets in transportation, water and buildings are looking very positive, and we are seeing significant organic growth in all three sectors,” says Vahid Ownjazayeri, AECOM executive vice president and chief growth officer. He is particularly bullish on infrastructure in the U.S. “The political, public, financial and capital markets are all behind improving our infrastructure,” says Ownjazayeri, who notes that AECOM has the design, construction and financial expertise to help build and find financing for major projects around the country.
Another trend is the continued push by equity investors into the design field. Chicago-based investor Keystone Capital Inc. invested in Coral Gables, Fla.-based Target Engineering Group in January 2016, and New York City-based equity investor KKR bought a stake in Houston environmental engineer Resource Environmental Solutions LLC last June.
The biggest equity investor move occurred on March 31, when New York City-based New Mountain Capital acquired publicly traded TRC Cos., taking it private. “We had been getting calls almost every month about acquisitions, but New Mountain Capital was especially aggressive in courting us,” says Chris Vincze, TRC’s CEO.
Vincze says New Mountain’s acquisition will leave the current management in place and provide a vehicle for further TRC investments in areas such as project management.
Vincze also notes that the following week, TRC acquired Caltrop Corp., a Riverside, Calif., engineering inspection and construction management firm. “This acquisition was in the works before the New Mountain move,” Vincze says. He says Caltrop fits into TRC’s plan to expand its array of environmental services to get into program and project management.
The November presidential election has spurred optimism in many markets. President Trump’s pledge to reduce regulations and provide tax relief has many clients looking at new capital spending. “In certain industrial segments, such as oil and gas, we are seeing more confidence in capital spending, with an expectation of favorable regulations,” says Doug McKeown of Woodard & Curran. He says this confidence has resulted in an uptick in environmental-related work in the petroleum and industrial sectors.
Others have seen the election bounce in the private sector. “Prior to the election, there was a great deal of cash sitting on the sidelines, waiting to see what the outcome would be. Regardless of the outcome, things needed to happen, and we are now seeing projects move forward,” says Ralph A. Hargrove, CEO of Hargrove Engineers + Constructors.
There is clearly increased optimism in the market due to the anticipated funding of infrastructure projects by the new administration. “But there is still some uncertainty with industry and utility clients committing to projects and the investment required to move the projects forward,” says Michael Carroll, CEO of CHA Consulting Inc.
Until specific administration policies and laws are in place, many firms are cautious about the election’s impact on the private sector. “I’ve seen nine presidential elections during the course of my career in engineering. I can’t recall a single one that has generated this much discussion around potential impact, positive and negative, to the business,” says Vincent P. DiPofi Jr., SSOE Group chief strategy officer.
Since Trump has touted private investment in U.S. infrastructure, many sector firms now are very optimistic. “Our pipeline of opportunities for roads, bridges, rail, tunnels, airports and water continues to strengthen and likely will explode over the next 24 months with the transition to a new presidential administration and upon resolution of the transportation bill,” says Mike Johnson, president of Parsons Infrastructure.
Johnson concedes that, at present, there are no “hard” changes in the marketplace. However, he says there is a change in attitude in the public and the industry, “driven by the excitement of the anticipated passing of an infrastructure bill and the increase in manufacturing facilities [propelled] by the administration’s economic growth agenda. Consumer confidence is high, and spending is up,” he says.
Ownjazayeri agrees there has been a shift in the attitude about infrastructure spending. “On infrastructure, everyone is agreed and everyone is aligned, so we need to capture this moment,” he says.
But many in the industry are being cautious. “We certainly see optimism in the public and private sector after the election. The momentum resulting from this optimism will be sustained only if our clients see progress on infrastructure and tax reform legislation,” says Greg Nettuno, senior vice president and infrastructure director at GAI Consultants.
Eric Keen, president of HDR, echoes these sentiments. “Many of our markets are cautiously optimistic about the potential for increased infrastructure funding and a healthier business environment,” he says. “But how the new administration works with the new Congress to set funding levels and priorities and enact policy changes is still unknown, and that will determine how our markets respond.”
The overall market for transportation remains very strong, given myriad funding sources available and the strong public support shown last November for infrastructure-related ballot issues. “After the election, optimism for an increased federal transportation program instantly shot up with talk of the ‘Trump trillion’ infrastructure plan,” says Robert Slimp, chairman and CEO at HNTB. “That optimism is still there, but it has been tempered a bit as discussion of other federal priorities, including a tax overhaul, have risen.”
Some of the new administration’s specific regulatory actions have begun to have an impact on markets. For example, the Clean Water Rule, which Trump has put on hold, “had the potential to categorize a large portion of the Gulf Coast region as wetland,” says Lee C. Lennard, CEO of Brown & Gay Engineers Inc. “Now, with easing regulations, the private sector has renewed optimism for investing in infrastructure, especially in the fast-growing upper Texas coast.”
Another policy shift is the president’s announcement that he wants to renegotiate the terms of the North American Free Trade Agreement. “For sure, the automotive market has been affected, and we’ve seen spending go on hold as everyone waits to see how potentially changing NAFTA regulations affect plant productions,” says DiPofi of SSOE Group.
While not yet in place, Trump has said he wants to act to deregulate the banking industry. This move may provide banks and other financial institutions the freedom to allow more of their lending portfolios to be used for real estate development. Some firms already have seen a loosening of lending practices. “Commercial real estate private-equity firms are seeing all-time highs in fund-raising. Generally, these funds are creating investments that will drive work for engineers,” says Joseph P. Derhake, CEO of Partner Engineering and Science Inc.
What may have a big impact on building-sector construction is the proposed replacement of the Affordable Care Act. The initial proposal to amend Obamacare fell short in Congress, and no one can predict how any replacement will affect the health-care market. “Those in health care are asking a lot of questions in regard to the effects of the intended repeal and replacement of Obamacare,” says Mike Medici, president of SmithGroupJJR. “When Obamacare was put in place, it signaled some relief from indigent care at emergency rooms. Right now, we still don’t know enough to change our current strategy for the healthcare market.”
Bradford Perkins, CEO of Perkins Eastman, agrees that the future of the health-care building market remains cloudy. “The results last November definitely introduced uncertainty into the health-care and long-term-care markets, but the death of the latest health-care bill seems to have assuaged that sense of uncertainty for the time being,” he says.
A major area of concern about the new administration is a potential shift away from environmental issues. Scott Pruitt, the new U.S. Environmental Protection Agency administrator, says his focus will be on current regulations and addressing immediate environmental problems.
For many firms in the environmental market, this approach may cause a change in the sector. “There is definitely more of a pro-business/less regulation sentiment that has fueled optimism since the election, particularly with regard to environmental regulations and concerns,” says Kevin Langwell, senior vice president of client development at Terracon. “For our company, that can be a double-edged sword. Fewer regulations mean more projects that need our services can move forward. But, for us, it also means fewer opportunities to consult with clients on compliance with those regulations,” he says.
Vincze of TRC generally agrees. “If you are considering a major investment in a new plant but there are 12 layers of regulations to proceed through, you might think twice about the time and effort. But if you suddenly find there now are only eight layers of regulations, you might be more willing to make that investment,” he observes.
Many firms in the private sector are less concerned about their clients’ willingness to spend on environmental issues. “It’s important to note that most firms want to continue to do the right things, and proper environmental stewardship is included in that,” says McKeown of Woodard & Curran. He says streamlined or reduced regulations can help these industries, but they are still interested in managing their environmental responsibilities in a way that does not negatively impact their brand or image. “In other areas, we have seen projects slow down, as clients wait for more clarity around available funding and regulatory pressure. Ambiguity is causing a more cautious path and pace, in some cases,” he says.
Another impact of a de-emphasis on federal environmental regulation is the potential growth of state and local regulations. “We’re likely to see projects focused on environmental protection move from federal-level support to local-level support,” says Zach Chrisco, principal at Sasaki.
Chrisco says the pressure will fall on cities and states to support existing initiatives and create funding for new projects. “This will put more pressure on local markets to work with neighboring communities and cultivate public-private partnerships to tackle larger-scale issues, which could be a positive,” he says.
Many design firms note that there is a growing trend toward local funding of both physical and social infrastructure. “People are not excited about sending their dollars to Washington in hopes that they will be returned, but they are willing to vote for local taxes and bond issues that will be spent in their own communities,” says George Pierson, CEO of Kleinfelder.
For example, the passage of infrastructure spending referenda last November in cities such as Los Angeles, San Francisco, Atlanta and Seattle will make $200 billion available for development of transportation infrastructure in the decades ahead. “In Los Angeles alone, Measure M will raise $120 billion over 40 years to fund L.A. Metro’s vision of adding 100 miles of new railway,” says Gregory A. Kelly, CEO in the U.S. and Latin America for WSP | Parsons Brinckerhoff (soon to be rebranded as WSP). He says local spending initiatives will ensure a robust transportation market, regardless of whether Trump is able to persuade Congress to approve his $1-trillion infrastructure spending program.
Another example of local funding was a North Carolina bond referendum, passed in spring 2016, that has led to a flurry of public projects, most notably in the higher-education sector. “We saw an immediate uptick in [requests for proposals] and opportunities, such as a new nursing and instructional building for the [University of North Carolina-Greenville] School of Nursing,” says Katherine N. Peele, executive vice president for LS3P.
However, local legislation can be a perilous thing. California is a prime example of how a state can foster industry investment but also cause grave concerns. The 2016 California state election saw the largest passage of public-school bonds in the state’s history. “This is a game-changer that affects all public education—K-12 schools, community colleges and the California State University system,” says Wendy Rogers, principal at LPA. She says this infusion of funding is based on bringing innovation and collaboration to education, empowering students to have greater agency.
On the other hand, some of the state’s political moves may end up hindering some of its markets. “The California market may be tested if it identifies as a sanctuary state. From that perspective, there will be tension and aggressive positioning between the federal government and funding to the state,” says Darin Anderson, CEO of Salas O’Brien.
Another cause of concern in California is Assembly Bill 199, which is working its way through the state Legislature. It would require prevailing wages to be paid on all residential construction. “With California’s current housing affordability crisis, this could increase the cost of construction and make many projects untenable. That’s troubling,” says David Senden, principal, KTGY Architecture + Planning.
Design firms also are struggling with “not-in-my-backyard” protests on an ever-increasing basis.
“Human nature is to resist change, but the only way out of some of our housing affordability issues in some parts of the country is more development. This doesn’t mean it shouldn’t be controlled and thoughtful,” he says.
There was a joke several years ago about the use of public-private partnerships (P3s) in infrastructure: Everyone could name five P3 projects underway, but they all named the same five projects. With Trump pushing for more private funding of infrastructure, the move toward alternative project financing and delivery is becoming a hot topic among design firms.
The need to upgrade U.S. highways, railroads, bridges, tunnels, ports, water systems and electric utilities is widely recognized, along with the positive effect that would have on the economy and employment. “But the question remains: How do we pay for it? Innovative technical and financial solutions are in demand as stakeholders look for the most efficient ways to get the job done,” says Nick DeNichilo, CEO of Mott MacDonald, North America.
According to DeNichilo, the financial community has a greater interest in infrastructure investment and P3s due to the stronger economy. “Mott MacDonald is a world leader in P3 delivery, and that [experience] is giving us an advantage with clients who are increasingly considering delivery methods such as P3 and design-build,” he says.
In the past couple of years, there have been numerous examples of P3s getting underway. “Last year was a breakthrough year for P3s in the built environment with the groundbreaking at the Long Beach Civic Center, a downtown revitalization project for the Port and City of Long Beach; the highly successful, state-enabled completion of the George Deukmejian Courthouse; the rebuilding of LaGuardia airport; multiple future P3 initiatives at LAX; and the planned Broward County Convention Center and the Florida Convention Center and Hotel,” notes Gary Brennen, co-president of Syska Hennessy Group.
The move toward design-build and P3s has many design firms embracing the team concept in project delivery. “The lines between architecture, construction and engineering are rapidly blurring as the design and construction process becomes more complex and interrelated,” says Thompson E. Penney, CEO of LS3P. He says project delivery is now an interdependent “team sport.”
P3s have been successful on the transportation side, where tolls can provide a reliable revenue stream. However, many design firms remain skeptical about the use of P3s in other markets. In the North American water market, “the alternative project delivery share is not growing, and [P3s] have not attracted any significant traction yet,” says Johnson of Parsons Infrastructure. The strongest areas remain advanced water treatment in California and consent-decree programs in larger cities, he says.
Ownjazayeri of AECOM echoes Johnson on water-market P3s. He says that, generally, the water market now is driven by consent decrees. “A P3 in the water sector requires local agencies to sell assets and guarantee rate levels to investors, and that is something that most agencies are reluctant to do,” he says.
For design firms, the cost of bidding is another problem that must be confronted. With the number of P3s and design-build competitions skyrocketing, “we are required to spend a disproportionate amount of money to chase work with very limited ability to increase our returns to make up for such up-front investment,” says Medici of SmithGroupJJR. “When you win, all is good. But when you lose, you wonder what you could have accomplished with that money and time.”
A major trend involves design competitions on P3 or design-build projects that have small stipends or no stipends, Medici notes. “Firms are getting pressure to contribute more up-front work—for free and with detailed solutions—which will take us down a path of no-win,” he points out. “Once we exceed the stipend in a competition, we rarely have methodologies to recoup the investment.”
Finding the staff to do the work is an increasing difficulty for design firms. As clients increasingly shed non-core personnel in favor of outsourcing design work, firms are under pressure to find the technical and management staff to cope with the work.
Many firms have relied on foreign-born students and professionals to help ease the problem. However, the Trump administration’s “Buy American”-“Hire American” program to crack down on foreign workers has many firms worried (see p. 6). “There are clear shortages of appropriate design staff in some major markets, and the recent crackdown on H-1B visas will make it even harder to fill those positions, particularly those designers who make up our younger staff and add so much to our talent base,” says Perkins of Perkins Eastman
Many firms are trying to work through the problem with existing staff. “We are transferring and retraining staff when practical and recruiting from additional geographic and technical areas to meet this demand,” says John Grow, chief strategy and marketing officer for Transystems.
Many firms are thinking big picture, investing in students pursuing a technical education. For example, Atkins North America has a foundation that supports science-technology-engineering-math (STEM) learning through scholarships and donations to school programs, from grade school through college, says George Nash, Atkins North America CEO.
Terracon is supporting STEM-related organizations, such as the National Society of Black Engineers, to increase and diversify the pool of young people who choose to enter the construction field, says John Prutsman, Terracon senior vice president.
But for many design firms, the old way of recruiting is not working. “If we’re saying we just want to hire the same profile we’ve always hired for 30 years, then the labor shortage is not surmountable. If we think out of the box and look for nontraditional people in nontraditional places, then maybe we can fill some gaps. For sure, doing what we’ve always done won’t work,” says DiPofi of SSOE Group.
For design firms, doing the same thing in the same way is no longer acceptable. Many firms are looking at future trends to determine where the public is headed and how the firm can design for years to come.
Stantec has partnered with Phoenix-based Local Motors on its Olli program, which seeks to provide a self-driving shuttle that can be used by transit agencies, universities and municipalities. “We are also serving as the project manager for the GoMentum Station in California and are acting as the lead civil engineer in the Edmonton, Alberta-based ACTIVE-AURORA, the first connected vehicle test bed in Canada,” says CEO Gomes.
VHB is another design firm that is looking to the future. It is working with the U.S. Dept. of Transportation’s Smart Cities Challenge to leverage technology to aid cities in making smart policy decisions on urban development. “What we are seeing with Smart Cities is that the advancement of technology is moving faster than municipalities are able to keep up,” says Dave Mulholland, VHB’s Southeast regional manager. “Leveraging Big Data, which is everywhere, professionals are able to quantify the benefits and make real-time decisions to benefit the communities in which we live,” he says.
But many firms are taking a more direct approach to envisioning future design needs. In 2016, KTGY created a new studio that is devoted to exploring the future of residential and mixed-use architecture.
KTGY’s R+D Studio has developed floor-plan templates for trends such as multigenerational apartments and microstudios, as well as so-called macro-units, a dormitory-like apartment which offers young professionals a communal atmosphere in urban neighborhoods that otherwise would be unaffordable. “The intention is to challenge the accepted norms of residential architecture,” says Senden.
Also doing research and development but on a larger scale, Woods Bagot is studying demographics on how neighborhood networks relate and how residents interact with their immediate environment, enabling the firm to do more effective urban planning. “We are shifting the focus of design to a more human-centered experience.
People want spaces that are more tailored to how they live, work and play,” says Jeremy Agraz, director of development in San Francisco.
Other firms are beginning to design for more specific future trends. For example, package delivery and drone delivery have become two integrated, disruptive technologies in the apartment industry. “We have developed a prototype that allows for air drones to be delivered into secured pods,” says Mark Humphreys, CEO of Humphreys & Partners Architects LP. “A second land drone will pick up the package and transport it directly to the specific unit. There are still some logistics to work out, but the technology will be there in the next few years.”
Perhaps the most disruptive technology on the horizon is the growing experimentation with autonomous vehicles. Many design firms have noted that driverless cars will be more predictable and more law-abiding than cars with human drivers. This predictability may affect how future highways are designed.
Parking is another issue that is only starting to be addressed. “Reportedly, there are eight parking spaces for each automobile in the U.S. With driverless vehicles expected to be mainstream in the not too distant future, the real estate industry will have to rethink what to do with all that real estate that is occupied by parking,” says David T. Gockel, CEO of Langan Engineering.
Gockel believes that, in urban centers, below-grade parking may eventually be converted into self-storage to satisfy a growing demand for storage space. In the suburban-office market, the densification of the employee population, which is the result of collaborative open-floor plans, has spurred the construction of new parking decks, he notes. “No sooner will these decks be completed than the owners may find their use is no longer needed due to driverless vehicles. Some developers are erecting parking decks that can be converted to B-class office space,” Gockel points out.
For major design firms, the future looks good—possibly very good—depending on whether the rhetoric out of Washington becomes reality. However, as many executives declare, the future is not certain, and we will all “wait and see.”