The Zweig Letter Special Issue: 2010 AEC Industry Outlook.
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2. 2 Issue 843: December 21, 2009
Editorial Business trends to watch in 2010
From page 1
6. Some sort of national health care
> Watch out for these six major trends in project pipelines, some firms have been
impacting the AEC industry this year.
reform will pass early in the year and clear forced to lay off staff members and power-
the way for health care institutions to ZweigWhite recently released its annual down their offices to cut costs while they
start spending real money on facilities AEC Industry Outlook: Strategy and Insight wait for the situation to improve. At the
once again. for Design & Construction Firms report, same time, the cost of providing benefits
and while the outlook isn’t as rosy as some to employees continues to climb. Both of
7. The college and university market will previous years’, it’s not these problems are being addressed on a
once again be one of the strongest sectors > Trends the gloom and doom of a national level, and look for the outcomes
for our industry. With recovering endow- year ago. Firm leaders are of action taken by Congress and the
ment portfolios, combined with increasing somewhat more optimistic overall about Obama administration to change the face
enrollments (unemployed or underem- their prospects in 2010 than they were of business in the wider economy, as well
ployed people tend to go back to or stay in heading into 2009, but it’s not going to be as within this industry, in 2010.
school), it has to bode well. easy for many reasons, not least of which
8. The Green Movement, led by firms is continuing uncertainty in the U.S. > What’s Ahead
such as Wal-Mart, will create entirely new economy. 1%
service lines for A/E/P and environment This year, we are tracking six major trends 7%
15%
firms that want to pursue it. 2010 will be that will affect the AEC industry over the
the year of “green.” next 12 months:
9. Other strong markets will be airports ■ Economic uncertainty 38%
and aviation facilities, roads and bridges,
■ The American Recovery &
nuclear power (it’s back!), and many fed- 40%
eral government sectors. Weak markets Reinvestment Act of 2009 and other
will be office and retail, K-12 (who can government intervention
Expectations of business performance
pass a tax increase?), and almost anything ■ Unemployment and health care in 2010
industrial other than warehouse and
■ Mixed merger & acquisition activity Outstanding . . . . . . . . . . . . . . . . . . . . .1%
distribution.
■ Globalization of the AEC industry Excellent . . . . . . . . . . . . . . . . . . . . . . .15%
10. Popular management and wealth-
building book authors will issue sequels ■ Green building Good . . . . . . . . . . . . . . . . . . . . . . . . . .40%
such as Who Moved my Cheese, Again?, ■ Economic uncertainty. The past 15
Satisfactory . . . . . . . . . . . . . . . . . . . . .38%
Good to Great to Mediocre, and The months have been very difficult for the Poor . . . . . . . . . . . . . . . . . . . . . . . . . . . .7%
Millionaire Who Used to Live Next Door, U.S. economy, as a result of the “Great Source: AEC Industry Outlook: Strategy
in attempts to revitalize their own careers. Recession” that began in December 2007. and Insight for Design & Construction
Firms
11. And, finally, Tiger Woods will prove, While many economists are now declaring
once again, what an incredible athlete he the recession officially over and many of
really is, as mistress #’s 17, 18, and 19 the most-watched economic indicators are ■❄The American Recovery & Reinves-
(identical triplets) present themselves and improving, 2010 may still be a difficult tment Act of 2009 and other government
tell their story to the world. The seeming- year as the recovery progresses weakly, intervention. In 2008 and 2009, we saw a
ly endless stream of Tiger love partners will especially in light of trend # 2, a still very series of unprecedented government mea-
keep Oprah from going through with her high unemployment rate. sures aimed at improving the health of the
planned retirement in 2011. ■ Unemployment and health care. On economy. These bills and initiatives—
Dec. 4, the Bureau of Labor Statistics most notably the American Recovery and
So there you have it. My crystal ball is
released new unemployment figures that Reinvestment Act of 2009 (ARRA), the
overheating and getting a little cloudy...
showed a slight improvement to America’s stimulus bill— provided opportunities for
so I have to put it back into the sock
soaring unemployment problem, with the the AEC industry, but also caused some
drawer until this time next year. Good
national rate dropping to 10%. However, headaches. Only about 25% of the bill’s
luck, All— you will need it in 2010. ■
that figure is still one of the highest the appropriations have been awarded so far,
MARK ZWEIG is the founder of so look for this bill to continue to influ-
U.S. has experienced since the recession
ZweigWhite. Contact him with questions ence the building and construction sectors
began. And the AEC industry has not
or comments at mzweig@zweigwhite.com. in 2010 and beyond as more of the provi-
been immune. In response to the drop-off
sions are enacted. A possible second stim-
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4. 4 Issue 843: December 21, 2009
Economists see brighter days for AEC industry in 2010
> Low mortgage rates, stimulus money could down side,” he says. “We’re seeing some “With the revival of the stock market, we
spur more activity in some sectors.
improvements in the broader economy could see an increase in endowments and a
Two leading AEC economic analysts and ultimately that’s going to mean good pickup in activity in those sectors,” he
expect an uptick in work next year, things for the construction industry.” He says. Simonson also expects to see a limit-
although they warn firm leaders not to believes the recession ended somewhere in ed revival in the retail market “if I’m right
expect a return to the industry’s heyday of the June-July timeframe, but will wait for about home building,” saying new home-
only a few years ago. official word on that. owners will do increased levels of business
Ken Simonson, chief economist for at home-improvement stores and the like
The good, the bad, and the ugly in their areas.
Associated General Contractors of Simonson says he expects the pool of cash
America (AGC) (Arlington, VA), is “par- set aside for infrastructure projects in the Baker says he sees the institutional sector
tially optimistic” about American Recovery and Reinvestment Act as much stronger than the commercial sec-
> Outlook what’s to come in of 2009— about $135 billion of the $787 tor in 2010, saying he hopes designers see
2010, saying he expects billion total— to be distributed more a turnaround by the middle of the year, a
to see growth of 20% to 30% in single- feverishly this year and allay some of the timeline that would mean construction
family home building, a boost that would concerns across the AEC industry about activity would grow in 2011.
still leave that sector below its 2007 levels, the relatively paltry impact the stimulus “There’s still a hope the stimulus will do
but a significant step up nonetheless. package had in 2009, other than on high- more to turn things around than it has so
“We’ve got mortgage way projects. far,” Baker says. “These adjustments are
rates at record lows High-speed rail projects are likely to see taking time to sort themselves out.”
and home prices their first awards late next year, he says,
down, so more people and government agencies are expected to “We’re seeing some
can qualify for and be better equipped to deal with the flood improvements in the broader
afford mortgage pay- of new contracts in 2010 than they were economy and ultimately that’s
ments than ever shortly after President Barack Obama
before, even with a
going to mean good things for
Ken Simonson, signed the bill into law in February. That the construction industry.
”
Chief Economist, 10% unemployment glut of paperwork caused a backup on get-
Associated General rate,” he says. The ting the money flowing, Simonson says,
Contractors of
first-time homebuyers’ What else is on the horizon?
America calling it an unexpected “embarrassment
federal tax credit pro- Simonson says he expects a checkmark-
of riches” the agencies had never seen and shaped recovery, meaning a more gradual
gram has been extended through April 30 weren’t prepared to handle.
and expanded to give some existing home- recovery but no second dip anytime soon.
owners a $500 credit as well. The inclusion of the Buy American provi- Many economists see reason to call for a
sion in the stimulus package slowed many “W-shaped” recovery, meaning a second
Kermit Baker, chief water and wastewater projects, as contrac- dramatic drop in the economy before a
economist for the tors noted the much higher prices of mate- full recovery.
American Institute of rials in the U.S. as opposed to their usual
Architects (AIA) Baker says he expects the economic
overseas suppliers. That quandary is being turnaround to trigger more consolidation
(Washington, DC), sorted out but shouldn’t slow things down
says improvements in across the industry as the largest firms in
in 2010, Simonson says. the arena take advantage of the fear some
the broader economy
such as an anticipated State and local projects could be in the small firm owners have about the future,
Kermit Baker,
increase in the Gross worst shape, he says, since state and local even as things start to turn around.
Chief Economist,
American Institute or Domestic Product in government budgets are still dropping. “There are a lot of owners who’ll decide
Architects Also likely to struggle in 2010 are devel-
the fourth quarter of they don’t want to go through this again,”
2009 and a boost in oper-funded projects, with occupancy Baker says. “There’s a lot of evidence that
the amount of economic stimulus money rates lower than in many years at hotels, bigger can be better from the client’s per-
expected to be doled out in 2010, are good and vacancy rates in apartments and spective, and that could lead to some
starts. multi-family homes continuing to fall. opportunities to take advantage, certainly
“Six months into the recovery, there are Higher education and health care projects, some lower prices.” ■
more surprises on the upside than on the Simonson says, could go either way.
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6. 6 Issue 843: December 21, 2009
Ownership transition and leadership succession—
the planning challenge for the future
> When the time comes divest, owners have leadership while increasing the ownership documents, and closing and post-closing
two options: internal transition or external exit.
of the next generation, as well as institut- matters. The search is typically imple-
> Legal Matters All firms ing a long term program to ensure that mented with the use of an investment
face the the firm is well capitalized and not over- banking intermediary who prepares a
George challenge of leveraged. The key concern is getting the confidential memorandum describing the
Christodoulo
dealing younger generation to buy shares over seller. The seller and the intermediary
with intergenerational leadership and time at favorable purchase terms. Since profile prospective buyers, who are then
ownership. Firms that are growing pose a much of the internal purchases are fund- contacted on an anonymous basis.
more acute challenge because of the ed by bonuses and distributions, the key Interested buyers then sign a confiden-
urgent need for management talent, to success is the sustained profitability of tiality agreement and, if there is mutual
financial resources, and capital. The chal- the firm. Internal purchase programs may interest, the parties then enter into
lenge exists because firms must identify a include different levels of ownership, a discussion.
next generation of managers that has the clear understanding of the criteria for
When discussions progress between a sell-
skills and training to lead the firm’s gov- ownership, communication of an contin-
er and buyer, the parties sign a letter of
ernance, spearhead management and uing share-offering program and an
intent (sometimes called memorandum
administration, continue the firm’s ability explanation of the operation of the firm.
of understanding). This document, which
to generate business, and make the neces-
is typically nonbinding, confirms the key
sary hard decisions. Firms must fund the Once it is decided where the deal points, identifies open topics to be
exit of senior shareholders as well as firm is to go, the question of finalized and sets a timetable for closing.
growth, capital expenditures and acquisi-
how to get there and the best The deal structure of the transaction can
tions with only a limited financial com-
mechanism— internal transition be either an asset sale or share sale. The
mitment from a younger generation that
or external exit, must be components of the purchase price are
is risk-averse and less entrepreneurial
chosen and pursued. cash, promissory note, earnout and/or
than its predecessors.
shares of buyer.
The choice all firms face is to pursue The documentation for such purchases
Immediately following the execution of
either an internal transition, or an exter- includes a share purchase agreement, a
the letter of intent, due diligence of
nal exit. Internal transitions are motivat- promissory note, a share-pledge agree-
quantitative, qualitative and legal matters
ed by paternal/maternal feelings, a loyalty ment and a shareholder agreement, often
is undertaken. Simultaneously, the trans-
to key long-term employees, lack of easy with restrictive noncompetition
action documents of the purchase and
identification of third party partners, a covenants. The management succession
sale agreement and employment agree-
sense that an internal transition is simpler steps include establishing the criteria for
ments are drafted. After due diligence is
and less expensive than an external exit, selection, how to select new leaders and
completed and documents finalized, the
the fear of the unknown third party, and yet retain and motivate unsuccessful
transaction is closed, announcements
the risk of cultural changes. An external internal candidates, and how to build an
made and integration and post-closing
exit is often motivated by a goal of maxi- integrated team. New leaders need train-
business plans implemented.
mizing the price to shareholders, certain- ing and a transition period for the chang-
ty of deferred payments, and elimination ing of the guard. The role of outgoing Firm leaders and shareholders should ask
of the concern that the next generation is leadership and the composition of the where the firm is now and where is it
not capable of running the business and board of directors (including both inside going. What is the competition doing
generating the necessary funding to buy and outside directors) must be addressed. and what is the firm’s strategic plan?
out the previous generation of owners. Finally, the firm must identify its culture, Once it is decided where the firm is to
identify the management style of the cur- go, the question of how to get there and
The key elements of an internal transi-
rent leadership, the leadership style of the the best mechanism— internal transition
tion are financial arrangements (owner-
new generation, and decide which is or external exit, must be chosen and
ship), management succession and corpo-
most appropriate for the challenges facing pursued. ■
rate governance (leadership), and cultural
continuity. the firm. GEORGE CHRISTODOULO, PC,
The chronological sequence of an exter- is a senior partner at Lawson & Weitzen,
The financial challenges include decreas-
nal transition includes the partner search, LLP, Boston, MA. He can be reached at
ing the ownership of the current
purchase price/deal structure, transaction GChristodoulo@lawson-weitzen.com.
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8. 8 Issue 843: December 21, 2009
Economy solid infrastructure experience are some- Damon looks forward to the day when the
From page 1 what hard to find,” Benvie says. industry returns to its old worry of attract-
sidiary of WSP Group plc (London, ing and retaining staff. “This is why we are
Executives forecast that the economy will
United Kingdom), a 10,000-person doing everything we can to make certain
eclipse other challenges for some time.
design, engineering, and management our talented staff are treated well through
consultancy service firm. “For us, the most important issue is simply these tough times and will remain with us
business development,” says Tony Damon, when the job market improves,” he says. ■
“With fewer opportunities to pursue, the CEO at SSOE, Inc. (Toledo, OH), a 950-
margin for error is significantly less, and person architecture, engineering, and con- > Firm Index
every firm must maximize the opportunities struction management firm. While SSOE BLRB ARCHITECTS. RW ARMSTRONG.
presented to it,” Smith says. has a significant backlog of work going into Tacoma, WA. 5 Indianapolis, IN. 8
2009, Damon says, “over the course of the C|A ARCHITECTS. SSOE, INC. Toledo,
Finding those opportunities is one thing. Long Beach, CA. 5 OH. 8
Getting paid for taking advantage of year, we worked through that backlog and CUBELLIS. Boston, TECTONIC.
them— at least getting paid on a timely due to changes in capital programs by many MA. 3 Mountainville, NY. 8
of our clients, we were not able to replace FPM GROUP , WSP GROUP PLC.
basis— can be quite another. Ronkonkoma, NY. 5 London, UK. 1
the backlog at the same pace.” LAWSON & WEITZEN, Some firm names
“We’re looking at a 30-to-34% increase in
LLP Boston, MA. 6
. were omitted due
revenue in 2009, but our biggest issue has At TECTONIC, Benvie says, “the backlog to space constraints.
been cash flow,” says Roland Salman, presi- is there for 2010, but the big question is:
dent of RW Armstrong (Indianapolis, IN), Where will the backlog come from for
a 600-person global design and manage- 2011?... The most pressing issue we are fac-
ing is the shrinking markets we serve in
> Got Ideas? Talk Back
ment consulting firm. “People are holding
on to their money longer. You just have to both the public and private sector and how Bill Lewis, Senior Editor.
to remain competitive on a cost basis with- Call me at
trust that you’re working with the right
800-466-6275, ext. 262, or e-mail
clients and that you’re ultimately going to out sacrificing the quality for our work.” blewis@zweigwhite.com.
get paid.” Those shrinking markets have lead to
João Ferreira, Editor.
A year ago, following the credit meltdown increased competition, firm leaders’ second Call me at
and bank bailouts, the economy emerged as most-cited challenge. “Companies that 800-466-6275, ext. 245, or e-mail
the top challenge listed by firm leaders, but were doing private work are now shifting to jferreira@zweigwhite.com.
finding qualified staff remained the third public sector projects, and larger firms are Craig MacCormack, Senior Writer.
most important challenge listed (with the going after small and medium-type pro- Call me at 800-466-6275,
cost of health care listed as the second most jects, where you wouldn’t expect them to ext. 209, or e-mail
submit a bid,” Salman says. cmaccormack@zweigwhite.com.
pressing concern). However, as business
slowed and thousands of architects and In a continuing slump, Smith says, long-
engineers joined the ranks of the unem- term planning gives way to concern about
ployed, Smith says, “the dynamics of staff “short-term business issues.”
recruitment and retention has become less
pressing of an issue. With that said— all “I expect a similar focus” for 2010, “though
firms are focusing on retaining their key we are working to position ourselves for a The voice of reason for architecture,
staff and, as a result, highly qualified star positive change in the economy,” he says. engineering, and environmental consulting firms.
employees are still hard to come by.” “We have done this primarily by continuing Published continuously since 1992 by ZweigWhite,
Wayland, Massachusetts, USA. ISSN 1068-1310.
our marketing and sales efforts in our weak-
Donald Benvie, president and CEO of er areas, so we are properly positioned when Issued weekly (50 issues/yr.). $475 for one-year
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TECTONIC (Mountainville, NY), a 312- the market changes.” Mailing Address: The Zweig Letter
person civil, geotechnical, structural, survey, 321 Commonwealth Road, Suite 101
environmental, construction management, Those changes will come, and the economy Wayland, MA 01778
homeland security, materials testing and will recover, says SSOE’s Damon, but “we
Tel: 508-651-1559 Fax: 508-653-6522
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