Design firms began this year with high hopes that 2020 would provide the tenth straight year of market growth. The emergence of the devastating COVID-19 pandemic in late February put paid to those hopes. Now, design firms, like the rest of the U.S. economy, are scrambling to cope with the disaster and how it will impact them, and the markets, going forward.
Taking a look back to last year, the rise in the markets can be seen in the data collected on revenue earned in 2019 from the participants on ENR’s Top 500 Design Firms list. Taken as a group, the firms had a record total design revenue of $103.24 billion in 2019—up 2.1% from $101.16 billion in 2018. Market growth was up on the domestic side, rising 8.9% to $86.80 billion in 2019 from $80.55 billion in 2018. But revenue from projects outside the U.S. fell 20.2%, to $16.44 billion.
However, the figures actually undercount the market growth in 2019. For the first time in decades, Fluor Corp., which ranked No. 3 on last year’s ENR Top 500 list with $3.11 billion in design revenue, did not file a survey. In February, the U.S. Securities & Exchange Commission raised questions about Fluor’s accounting methodology.
As a result of this inquiry, Fluor announced it was reviewing its financial reporting and received a maximum six-month extension from the SEC in late March on filing its year-end results. Because SEC rules bar release of financial data to third parties before it is fully released to the public in an SEC 10-K disclosure, Fluor was unable to file a survey this year.
Also missing from this year’s Top 500 is Worley, formerly WorleyParsons, which ranked No. 30 on last year’s ENR Top 500 with $527 million in design revenue. Worley finalized its acquisition of Jacobs Engineering Group Inc.’s Energy, Chemicals and Resources division in April 2019. Worley also failed to file a survey. If Fluor’s and Worley’s revenue from last year’s Top 500 were not considered, the revenue for the remaining Top 500 firms rose 5.9%.
Mergers and acquisitions were again on the menu for major design firms. Management consultant and M&A firm Morrissey-Goodale, Natick, Mass., tracked 307 M&A deals among design firms during 2019.
Private equity companies have been particularly active in investing in the design profession. For example, in 2019, the Pritzker Organization in Chicago recapitalized STV Group; New York City-based Kohlberg & Co. invested in EN Engineering; Alexandria, Va.-based DC Capital Partners invested in Pond & Co.; New York City-based NewHold Enterprises invested in PRIME AE Group; and Miami-based TriVest Partners invested in BCC Engineering.
However, for some firms, there are no “for sale” signs posted. “Carollo is the nation’s largest independent engineering firm specializing solely in the water sector, and that makes us an acquisition target,” says Carollo Engineers’ CEO B. Narayanan. However, the firm has no interest in selling. Narayanan says the firm does what is necessary to remain independent by having a written transition plan, maintaining financial stability and fostering a strong corporate culture.
But the biggest deals were the ones that didn’t happen. In April, Fluor announced a shareholder rights program—effectively a “poison pill” plan—to guard against a potential hostile takeover after its share prices fell sharply these past few months. And the much-discussed merger talks between design giants AECOM and WSP broke off in April, when the COVID-19 crisis left market prospects uncertain.
The market was buoyant at the beginning of this year, with the only worry of most firms relating to the outcome of the presidential election in November. But on January 31, the U.S. Dept. of Health and Human Services declared coronavirus a public health emergency in the U.S. By early March, states and cities started issuing quarantine orders, and work began to slow down, and even halt in some jurisdictions. This left design firms, and the rest of the industry, scrambling on how to cope with the crisis.
There are many things that are unique to this pandemic, but the most dramatic condition is clearly the pace at which this pandemic has struck globally. “While other recessions have taken 12 to 18 months to make their full impact on the water industry, this pandemic has had a significant impact in four weeks … and we haven’t seen the health or economic peak yet,” says Lou Carella, executive vice president of Carollo Engineers.
This sudden reversal left design firms struggling on how to cope with the new reality. A few of the larger, international firms already had a head start from their experiences in Asia and Europe. “The global nature of AECOM provides us a unique ability to draw on experiences, lessons learned and best practices from around the world in response to challenges like COVID-19, and pass that information to our clients,” says Steve Morriss, AECOM’s president of design and consulting services for the Americas.
Another international firm that acted early was Mott MacDonald. It implemented a Group Pandemic Response Plan in January 2020, says Nick DeNichilo, the firm's CEO for North America. “This includes establishing a Group Pandemic Management Team that meets daily to coordinate and update our response while providing executive governance and oversight,” says DeNichilo.
Other firms had contingency plans in place for emergencies. VHB put in place its Business Continuance Program following the World Trade Center disaster in 2001. “From a business continuity perspective following the events of 9/11, VHB established a global risk committee to periodically analyze a wide variety of potential threats to our business, from cyberattacks and natural disasters to pandemics, to prepare the firm to meet the challenges of natural and man-made disasters,” says Mike Carragher, VHB’s CEO. He says communicating with employees is critical.
The increasing number of jurisdictions that are encouraging, or requiring, shelter-in-place and nonessential work office closings has accelerated the trend toward working from home and cloud-based collaborative work. For some firms, this is just an unexpected uptick in processes that were already in place. “We have long invested in the systems and technology that allow remote access to work, so parents and others caring for family can participate equally,” says Luke Voiland, principal at Shepley Bulfinch. He says this practice allowed the firm to pivot to remote work more rapidly and be effective in the face of the disaster.
Many firms also discovered how quickly they could react in a crisis. “In less than 48 hours, all of our nearly 5,000 employees were set up and fully functional in their own protected space,” says Anthony Bouchard, president of CDM Smith. But he notes that this quick reaction was the product of several years’ worth of technology investments, some of which fully support a remote work environment.
Morriss of AECOM notes that the technology to move to remote working conditions has long been available, which made the shift smoother. “Our movement to cloud-based platforms such as Autodesk BIM360, Bentley’s ProjectWise and Microsoft Teams was born out of the need to collaborate across a global company—now it’s helping to ensure business continuity for critical infrastructure projects.”
Cuningham Group Architecture is another firm that found the transition to a work-at-home environment relatively easy. The firm had moved to 100% laptop and cloud-based operations over the past two years, “so our teams adapted quickly to the new routine and are using video and virtual team tools to keep communication going on their projects,” says Tim Dufault, CEO. He says the firm is actively developing software that will allow BIM models to be digitally signed and certified, so it can move more quickly to a direct-to-fabrication delivery process.
Design firms generally agree that all the tools for coping with the new normal of a remote workforce are readily available now. “Overall, there is no technology or technique we are using that is new, but we are relying more heavily on every opportunity available to execute our work virtually, and there are many technologies that are helping us do so. Almost everything we do is in a web or cloud-based application,” says Sloan Harris, CEO of VLK Architects.
While design firms have had little problem shifting to a work-from-home scenario, their clients often are not so lucky. Many firms are finding new opportunities to help clients continue work in a quarantined environment. “We are seeing a big uptick of our digitized and data-driven solutions and new offerings to support our clients to respond, recover and make their businesses more resilient in the current COVID-19 crisis,” says Catherine Tobiasinsky, chief client officer for GHD.
“Many of our clients were less prepared for work from home, and we are helping them with technology. The great thing is everybody from our team and our clients’ teams have worked closely together to work in this new reality,” says Ray Kowalik, CEO of Burns & McDonnell.
The immediate reaction to COVID-19 on the design market has been uncertainty. Clients still are trying to understand the nature and extent of the problem and how it affects them. The result generally is that projects are being put on hold, but not many have been canceled.
One major indicator of COVID-19’s impact on the design profession is the American Institute of Architect’s monthly Architecture Billings Index. The ABI plunged to a score of 33.3 on a scale of 100 for March from 53.4 in February, reflecting a sharp decrease in design services provided by U.S. architecture firms. Further, the ABI index for project inquiries and new design contracts fell even farther, to 23.7 from 56.5. A rating of 50 shows a stable market. “Though most architecture firms have made quick transitions to remote operations, the complete shutdown of business activity is severely impacting architects,” said AIA Chief Economist Kermit Baker in the April 22 release unveiling the new numbers.
Every market is impacted by COVID-19 and is changing in different ways. “Retail and hospitality markets are in total chaos, with many businesses shutting down,” says Mike Medici, president of SmithGroup. Health care markets are addressing the pandemic crisis on a rolling basis and attempting to estimate when the apex will occur in each city or state. “A common thread is that everyone is experiencing this pandemic with no past point of reference,” he says.
Medici is not optimistic that the impact of COVID-19 will be short-lived. “With COVID-19 inevitably causing a recession in 2020, it will be interesting to see if we are working out of it by mid-2021,” he says.
On the buildings side, the corporate and commercial building markets are likely to see a slowdown due to declines in consumer spending, and the aviation market will be impacted by tenant build-outs and terminal upgrades being put on hold. “We have not had any project contracts canceled in the government sector, but we are seeing procurement postings slowing down or halted as resources are being pooled to address COVID-19 needs across each state,” says Paul VanDuyne, CEO of IMEG Corp.
However, quarantine orders and the economic disruption they are causing have created a great deal of uncertainty everywhere. “Debt is rising. Credit markets are tightening. Residents and businesses are not paying rent. It’s hard to speculate what will happen long term, but for the next few weeks our clients are in a period of evaluation of current projects and potential opportunities,” says David Senden, principal at KTGY Architecture + Planning.
On the other hand, many market sectors are seeing a surge in work. “Projects in the technology, water, health and pharmaceutical markets continue to be strong. I do worry that the supply chain will start to impact construction projects more and more due to the disruption in Asia,” says Robert M. Scaer, CEO of Gannett Fleming. “Our food and beverage, consumer goods and life sciences clients are faced with the challenge of keeping up with demand,” adds Doug McKeown, CEO of Woodard & Curran.
On the federal side, many agencies already have the infrastructure and technologies to support and regularly promote working remotely. “While disruptions are expected, Federal Land Management Agencies and Federal Highway Administration Office of Safety are moving forward with ongoing projects,” says Nancy Barker, federal market leader at VHB. “Unlike a government shutdown or catastrophic weather event, where funding or resources are issues, federal agencies need to continue to address mission requirements during COVID-19,” she says.
Unlike most building sectors, which may be subject to stop-work orders and economic pressures, most jurisdictions deem the infrastructure market “essential” and most of the work is proceeding. “For ongoing projects, COVID-19 has not had a real impact,” says Narayanan of Carollo. He says that upcoming projects may be affected, but only as to the timing of new proposals, which may be deferred. It is the long-term prospects that are up in the air. “It all depends on the economy coming out of the crisis,” he says.
Not that work for public utilities won’t be hit by the crisis. Declining revenues stemming from ratepayers struggling to pay their bills may force utilities to prioritize projects differently or find alternative sources of funding. “We are modeling 10-20% revenue reduction with this work,” says McKeown.
As the result of COVID-19 crisis, many nonessential utility workers have been sent to work from home. “Load is shifting from commercial and industrial customers to residential customers. Utilities are being forced to re-evaluate upgrades and maintenance work, because outages can no longer be taken,” says Kowalik of Burns & McDonnell. Numerous projects will experience work stoppage due to resource constraints, outage planning issues and substantial reprioritization.
In the transportation sector, work restrictions and stay-at-home orders have caused a substantial reduction in traffic. “This has spurred many transportation agencies to accelerate construction schedules on transportation projects due to minimal traffic impacts from stay-at-home directives,” says Kumar Buvanendaran, CEO of PRIME AE Group Inc.
Many design firms in the transportation sector agree that their market has been less affected than most. “There is strong potential to accelerate project work to take advantage of reduced asset usage to maximize efficiency of construction efforts, as well as to leverage existing low interest rates by bonding against future capital dollars,” says Steve McElligott, transportation market leader at VHB.
One of the most adversely affected sectors during the past three months has been the oil and gas market. The downturn in the petroleum-related market initially came not as a direct result of the COVID-19 crisis, but from a dispute between Saudi Arabia and Russia over oil production levels. Russia had refused to cooperate with OPEC on reducing oil production.
As a result of Russia’s production stand, on March 9, Saudi Arabia announced it was increasing production from to 12 million barrels a day, up from 9 million, driving oil prices down and hurting Russia’s economic dependence on oil exports. This caused the price of oil to drop to levels not seen in nearly 30 years.
However, the drop in oil prices coincided with the COVID-19 pandemic sweeping the globe, resulting in a radical reduction in the demand for gasoline as people were unable to do as much driving. Worldwide oil demand fell by 30% in late March and early April, forcing OPEC to agree to restrict production, but the damage to the oil and gas markets was done. There currently are over two dozen oil tankers off the coast of Southern California unable to offload their cargo because storage facilities are full.
This has caused problems for design firms in the oil and gas markets. “Oil price declines have also impacted many other segments of the global economy. The shock waves from these unprecedented events have undoubtedly touched every part of global society and the economy, including the end-markets of energy and infrastructure that we operate in,” says Joe Sczurko, CEO of technical consulting solutions for Wood.
There are some stark predictions for downturns in capital expenditures in oil and gas in recent reports, so Wood is focusing on maintaining, enhancing and extending the life of existing assets, “and we have substantial capability and experience doing this for clients all over the world,” Sczurko says.
A Long-Term Paradigm Shift?
The COVID-19 crisis continues to rage, with no end in sight. While some states and local jurisdictions have begun to ease restrictions on “non-essential” work, many more have retained them, causing the economy to take a major hit. This raises the question of where the economy, business and the design profession will be once the crisis ends.
The big question for design firms is what will the market landscape look like going forward? At this point, not one has an accurate gauge. “Anyone who makes a prediction today is guessing,” says Christopher M. Huckabee, CEO of Huckabee. He says that, if the crisis ends soon, it is likely a minor issue. “However, an extended economic stop will cause an extended economic slowdown that will impact most markets.”
Firm leaders say the COVID-19 pandemic will profoundly affect every market, how people interact and how firms integrate wellness at all scales, and designers are already contemplating the impact on future designs. “There’s an energy around reimagining the future workplace, future schools, future healthcare facilities, everything. We’ll see much more integration between physical environments and virtual environments,” says Shawn Basler, co-CEO of Perkins Eastman.
For design firms, the impact on their own operations may be widespread. “Once the pandemic subsides, strategic review will need to be conducted of the remote workspace advantages and challenges experienced. It is hard to believe that firms will return to the traditional office environment, and the amount of office space for housing staff may change significantly,” says VanDuyne of IMEG Corp.
While most firms have had the capability for remote working for a long time, and used it here and there to allow for flexible work schedules, they never really tested it on a broad scale. “Now that we see what is possible through technology, we may decide that we don’t need the amount of office space we thought we did, or that the standard workday isn’t necessarily what we thought it was. We may have a completely new normal,” says McKeown of Woodard & Curran.
The COVID-19 crisis is proving to the design industry that traditional operations may rapidly become obsolete. “We were thrust into this model with no warning, and perhaps the silver lining is that we’re getting a real-time test of the workforce of the future, where working in new ways is really going to help us become more efficient and cost effective as an industry,” says Mario Azar, president of Black & Veatch’s global power business.
However, it is not just the design profession that will be impacted in the future. As more clients are forced to allow their employees to work remotely, there may be some serious rethinking about how much office space is required to sustain operations. For years, younger employees have been pressing corporate clients about their need for a better work/home balance. The work-from-home restrictions during the COVID-19 pandemic may give new impetus to their demands.
This may cause corporate clients to rethink how much office space is required to maintain operations. “There will be lots of people who have shifted to work, live and play more at home who love it. We will have to rethink what physical spaces are needed to facilitate life. The idea of essential work will quickly shift to questions about essential buildings,” says Curtis J. Moody, chairman of Moody Nolan. Thus, the demand for commercial office space may be reduced.
In the residential markets, firms already were noticing a generational shift toward more suburban lifestyles. “We are noticing a trend that centers around millennials and migration to the suburbs. As they begin to expand their families, some millennials are looking to purchase homes outside the city. However, they still desire an urban lifestyle,” says Steve Thomas, Real Estate Market Lead at VHB. The creation of “surban” neighborhoods—a conversion of urban living within a suburban environment—offers the best of both worlds with restaurants, retail, home, office and entertainment all located within a safe, walkable community. The move toward more use of working from home may boost this trend.
Another trend that may be accelerating is that of healthy buildings. The WELL Building program from the New York City-based Well Buildings Institute has been gaining traction, as has the U.S. Green Building Council’s Leadership in Energy and Environmental Design Version 4, with its emphasis on avoiding chemicals of concern to health in building design. However, these standards have made the most inroads in the commercial office and institutional markets. With the COVID-19 outbreak and the increasing concern among people about healthy residential environments, many designers believe there will be a change in attitudes in the residential market, particularly in multi-unit residential.
Many firms agree that there should be a shift in the tenant mix to lean more toward health and wellness. “Aside from COVID-19, there is a growing number of baby boomers who will need access to health care in the near future. Outpatient centers and quick clinics that can accommodate the increase on demand will start to make their way into mixed-use developments and the dark anchor space within malls,” says Jim Harkin, senior vice president at NELSON Worldwide.
Harkin expects a variety of new considerations may go into residential and commercial design going forward. For example, he believes “zero-touch” technologies, such as automated doors, voice-activated directories and motion sensor lighting, will become more in demand. “This will minimize the spread of germs and spending on cleaning services, while also making guests feel safe and more comfortable while spending long periods of time at shopping and entertainment destinations,” he says.
Another area of consideration is cleaner design: designs that will be more preventative in their efforts to stop the spread of germs. “We will start to see more sanitation stations and environmental graphics that communicate how exactly these developments are making safer and cleaner environments. Additionally, UV lighting systems and modern HEPA filter systems may be utilized more to combat germs,” Harkin says.
Another sector that will be affected is health care. Currently, hospitals are under stress, and not just from the COVID-19 cases they are handling. Nearly all revenue-generating elective surgeries have been deferred as health care clients deploy resources to address COVID-19 demands. This may lead to less spending in the near term on new facilities.
Instead, there may be an increasing emphasis on revamping existing facilities. Infection control in hospitals has long been an issue, and the COVID-19 crisis has brought this issue to the fore. Many design firms working in the hospital and health care sector already are looking at new designs to enhance infection control (see p. 43).
Another market that may see long-term changes as the result of the COVID-19 crisis is higher education. There will be an immediate impact to higher education from a drop-off in revenue streams due to student refunds and lack of auxiliary funds, such as parking, dining and recreation user fees, coupled with diminished state support associated with falling tax receipts. Further, donor-funded capital projects may dry up as endowment performance lags in the downturn, says David McIntyre, institutions market leader for VHB.
However, even more profound may be the current use of remote learning brought on by COVID-19. “Colleges and universities are already massively impacted, and it will be interesting to see if this experience with remote learning moves more people into online learning worldwide over the long-term,” says James Miner, CEO of Sasaki. If students don’t return to campuses in the same way post-pandemic, there will be a huge financial impact to campuses. “So anyone who operates in higher education will need to think differently about their delivery model, and we expect institutions will be looking for new ways to adjust their campuses to meet new realities over the next several years,” he says.
On the K-12 education side, one of the biggest impacts has been concern about school funding bond issues. “Many pending educational bond referendums have been delayed to November. While some educational clients are asking that we begin design work as originally scheduled so projects can stay on the planned bid-build-delivery path, others are waiting to see how the economic slowdown impacts growth and needs,” says Christopher M. Huckabee of Huckabee.
On the transportation side, there may be significant impacts from the COVID-19 crisis. Remote working from home may become a norm. “Budget shortfalls related to lost tolls, fares, gas tax, airport fees and other revenue will likely take a toll on the infrastructure sector. While government stimulus and subsidies may shore things up temporarily, there may be a longer-term slowdown of major capital expenditures,” says DeNichilo of Mott MacDonald.
To Panic, or Not to Panic
Staffing has been a problem for design firms for the past decade. But COVID-19 has put a stop to most firms’ general hiring. Further, some firms are considering furloughs and layoffs to get them through. But many firms are very reluctant to resort to downsizing in what may turn out to be a lengthy recession. “The outcome of the COVID-19 pandemic might have a similar impact as the 2008 recession,” says Harris of VLK Architects. Some firms in 2008 were forced to lay off staff, causing many architects to leave the profession and never come back. VLK is avoiding this outcome by continuing to find ways to add talent and expertise, Harris says.
“With everything that is going on now, I expect to see hiring slow significantly across the industry, not only because firms are going to be more fiscally conservative, but because it is going to be difficult to effectively on-board at a time when social distancing is so important,” says McKeown of Woodard & Curran.
Bouchard of CDM Smith believes the COVID-19 crisis will not end the war for talent. Further, he says the industry must continue to search for qualified individuals. He says “there is an untapped resource in professionals who have left the STEM field due to life circumstances and who want to come back to the profession.” So CDM Smith, together with the Society of Women Engineers and iRelaunch, has established a re-entry program known as ReBoot to help those individuals return to the workforce.
The current market has taken some severe hits from the COVID-19 crisis. And some things are out of the industry’s control, like what the economy will look like after this is over. Narayanan of Carollo cautions that wholesale layoffs like the industry experienced during the last crisis, the great recession of 2008, only caused greater staffing problems when the market turned around. “Now, many firms are scrambling to find short-term solutions to the crisis, like layoffs. Instead, the current crisis should be looked at as an opportunity to put your people to work to find long-term answers to problems facing the profession,” he says.
Many in the design profession look at the current situation and say take the lemons and make lemonade. “In our 92-year history as a company, we have found that periods of instability are also when great innovation occurs,” says Tobiasinsky of GHD. “Many clients and communities depend on organizations such as ours to keep working and provide additional capacity, resources and new services. We are pivoting to meet these new demands and find novel ways of serving or supporting our clients and communities.”