Kermit Baker, Chief Economist, American Institute of Architects
This time last year, market analysts were scrambling to anticipate the realities of an economy gone haywire and to predict how 2009 would shake out in terms of construction, materials, and architectural practice. Looking back on the year that was, the numbers “are coming in well below projections, which were pretty dire to begin with,” says Kermit Baker, chief economist for the AIA. Baker echoes a common refrain among financial analysts: 2009 was a terrible year—and by the looks of things, 2010 isn’t shaping up to be much better. We spoke with five experts in various fields to get their take on the year to come. The running theme? Hunker down and wait out the nuclear winter of a deep global recession.
With the second half of 2009 dipping well below even the worst predictions for nonresidential construction, Baker says there’s little optimism that the construction sector is going to start turning around before the second half of 2010. This year saw nonresidential activity plummet along with property values—nonresidential values are down 40 percent from their high in mid-2007, compared with 30 percent on the residential side. “What we’ve been looking for in the last six months is some evidence that we’re climbing out of this—and I have to say, those signs have been quite elusive,” he says. Design billings, for example, creeped up over the summer, but then they stalled, suggesting that we haven’t seen the bottom yet. Baker’s forecast for 2010 predicts less of a decline across market segments than in 2009, but things will still be in negative territory: retail, -12.6 percent; hotels and office buildings, -17 percent; industrial facilities, -28.4 percent. Institutional buildings will fare slightly better but will still experience negative growth. Baker’s complete market forecast for 2010 will be released in late December.
The cement industry prepared for a tough 2009, but the global recession resulted in deeper losses than expected, says Ed Sullivan, chief economist for the Portland Cement Association. As construction across all sectors stalled, 16 of the 100 or so cement plants in the U.S. were shuttered just as a host of new plants (planned during the boom) came online. The result: Total domestic capacity was down by about 9 percent. There also was a serious decline in cement intensity—the amount of cement per dollar used in construction activity. “One of the surprises, and we probably should have seen it [coming], was the delay in getting stimulus money out there,” Sullivan says. He anticipates that funds will be released in time for the spring construction season but says that decimated local and state budgets will “sterilize some of that impact.”
Looking ahead to 2010, Sullivan predicts that the nonresidential construction decline will be even greater than this year’s, at -22 percent, and that construction—and the demand for raw materials such as concrete and steel—won’t become significantly positive again until 2012. “Recessions clean out the excess of past boom periods,” he notes, adding, “by that time, I think you will see the potential for some good growth.”
Ed Sullivan, Chief Economist, Portland Cement Association
The past year was a turbulent one for infrastructure in the U.S., seeing some major victories—such as the $1 billion Miami Terminal tunnel project reaching financial close—as well as some major losses, like the demise of plans to lease Chicago’s Midway Airport to private investors. In 2010, says Business Monitor International analyst Michelle Karavias, the seesaw may stop, especially if the U.S. can figure out how to get private industry into this traditionally publicly funded sector. “The private sector has the money. States don’t have the money, the feds don’t have the money,” the London-based Karavias says, noting that stimulus spending for infrastructure is paltry compared with the whopping $2.2 trillion needed. “The U.S. needs to get the regulations in place and the public opinion in place to make it more attractive for private industry to fund projects.”
Overall, the worst may be behind us, and Karavias estimates 1.2 percent real growth in the new year. A concerted focus on high-speed rail could yield positive results in the near future. “So many international companies are keen to get into high-speed rail in the U.S.,” Karavias says, but more investment is needed: the American Recovery and Reinvestment Act allots just $8 billion toward rail (compared with $27.5 billion for highways and bridges), when the need is closer to $600 billion. “There’s so much potential,” Karavias says. “It’s all about how much the private sector is going to be let in.”
Just as institutions of higher education see a spike in applications and enrollment during downturns, a recession results in an increase in individuals applying to take the Architect Registration Examination (ARE), says Lenore Lucey, executive vice president of the National Council of Architectural Registration Boards (NCARB). “What we are hearing anecdotally is that many people who are unemployed or underemployed are using the time to take the ARE to better position themselves in the workforce,” she says, despite the fact that fees for the exam’s seven divisions rose this summer to $210 a pop. NCARB had an “enormous reaction” to the ARE in June 2009, Lucey says, likely the result of the organization’s switch to a 4.0 version of the exam: “We had the largest number of people ever taking the exam in June, mostly people trying to finish up 3.1 before it went away.” 64,000 exam units were taken in the past fiscal year. Traditionally, when NCARB releases a new version of the ARE, enrollment wanes for six months to a year, so the organization expects a decrease in registrants in 2010. The past year also saw an increase in the transmittal of records, as architects become more transient in the unstable job market, and that trend is likely to continue. (NCARB will not publicly release its exact predictions for the current fiscal year, Lucey says.)
Mergers & Acquisitions
Lenore Lucey, Executive Vice President, National Council of Architectural Registration Boards
While many architecture firms shed staff and struggled to keep the lights on in 2009, that did not translate into a dramatic increase in mergers and acquisitions (M&A), notes ZweigWhite principal Steve Gido. “There is still a lack of clarity [in] the mid-to-large–sized firms as to how long this [downturn] is going to last,” he says. “Most buyers are not ready to catch the falling knife just yet.” With a few exceptions—such as the midyear merger of Cannon Design and OWP/P—the bulk of M&A activity in 2009 was microdeals: firms under 30 staffers being acquired by regional competitors. Overall, the business was down 35 percent. Gido says there should be a slight increase in 2010, of about 5 percent to 10 percent. “I think a driver will be the expiration of the historically low capital gains rate tax, currently at 15 percent and set to rise back to 20 percent,” Gido says. “For sellers, that’s motivation to consider, even if valuations are lower.”
M&A activity also will be driven by firms looking to fill specific niche needs. Gido points to two acquisitions announced in October: Granary Associates joining the infrastructure and facilities giant Stantec, and AECOM acquiring Ellerbe Becket. “These are a reflection of larger design firms wanting to acquire firms with a strong reputation and a portfolio in healthcare, science, and laboratory projects,” Gido says, “which many feel will be a more resilient sector of the economy over the next five to 10 years. It can be quicker—and possibly cheaper—to buy them” than to build a practice from scratch. Another factor for 2010: aging owners ready to monetize on their business. It used to be that owners frequently passed their practice on to the next generation in-house, but increasingly, Gido observes, younger architects are not interested or in the position to buy, which could result in more acquisition activity in the coming years.