28 May COVID-19: A glimpse over the horizon – What we’re looking for.
LOOKING AHEAD, AND BACK, FOR SIGNS OF WHAT’S TO COME
It’s difficult to make predictions about the impact of the current situation on the AEC industry right now. Just the same, early hints seem to be emerging already about how competition will change for architectural and engineering firms. And those first signs tell us what we should be looking for in the months to come.
Yes, it’s true. Some market shifts will be impossible to anticipate. After all, the economic, political and cultural impacts of the pandemic have never been seen before. But others will likely echo what happened in past recessions. That’s because some high-level responses to the economic shock, such as decreases in project volume and increases in stimulus spending, are occurring again.
SHORT TERM INDICATORS ARE KEEPING INDUSTRY CONFIDENCE HIGH
In the near term, there have been some project cancellations and suspensions in recent months, and the depth of the damage varies by sector. But we’re learning that confidence among our clients is surprisingly high. That seems to be because ‘core’ architectural and engineering projects underway now were funded by spending decisions made years ago and are expected to come online after recovery is underway. In fact, many expect a summertime spike in workload as paused projects restart. There’s even some new activity as large-scale tenants reconfigure workplaces for post-pandemic life.
MEDIUM TERM INDICATORS MAY SUGGEST INCREASED DISRUPTION
In the medium term, we’re looking to see what market signals tell us about investment decisions for projects beginning in 2021 and beyond. Will private sector spending slow as confidence in demand for multi-unit residential, office and retail decreases? If past experience holds true, such a dip is likely and will produce real impacts across the AEC industry.
What do we think those impacts may be? Remembering 2008, we anticipate that competition for work – and downward pressure on prices – will intensify. We also learned that Canada’s approach to economic stimulus projects attracted highly professional and effective foreign firms to our market. They disrupted a comfortable Canadian industry – especially in architecture – and have since built up a formidable presence Given the different approach to public spending in the US at the moment, Canada will seem especially attractive to US practices and some of their marketing activity is clearly trending upwards already.
CANADIAN PRACTICES NEED TO BE PREPARED FOR CHANGES & CHALLENGES AHEAD
In our view, the pressure is on for Canadian firms to improve their business development capacities, cost structures and productivity so that they can thrive and grow. For the strongest firms that are looking to diversify and capture market share, the situation will likely drive acquisitions. For many mid-size firms, the emphasis will be on restructuring to preserve profit and enhance sustainability. For smaller firms, and those with weak balance sheets, partnering up in strategic alliances and mergers may be the path forward.
Written by Rowley Mossop, Principal
May 27, 2020