After four years, it appears the U.S. construction market has bottomed out and is beginning the slow climb out of recession. For many large U.S. design firms, this development is cause for both relief and celebration. But for other design firms, particularly in the public infrastructure markets, uncertainty about the future remains a constant.
The signs of the recession's end can be seen in ENR's Top 500 Design Firms list. The Top 500, taken as a group, had overall design revenue of $85.06 billion in 2011, up 6.6%, from $79.82 billion in 2010. This marks the first time in three years the Top 500 experienced revenue growth for the year.
On the domestic side, the picture is not as rosy. The Top 500 did see a gain in revenue from projects in the U.S., but the gain was only 1.6%, to $58.62 billion in 2011 from $57.87 billion in 2010. This is a far cry from the record $68.14 billion in domestic design revenue generated in 2008. The international market showed it is a growing destination for the Top 500 as revenue from projects outside the U.S. rose 20.4% in 2011 to $26.44 billion.
Among domestic market sectors, there was a clear line between traditionally public-sector markets and those associated with the private sector. The largest domestic public infrastructure market was transportation, which fell 0.1%, to $13.01 billion in 2011. Also down were water (down 3.7%), sewer and wastewater (down 8.3%) and hazardous waste (down 6.1%).
Domestic markets that are traditionally in the private sector or a mix of private and public work all rose. The biggest domestic market gainer was industrial process, which rose 24.0%, followed closely by telecommunications (up 23.3%). Manufacturing was up 9.7%, domestic petroleum design revenue was up 4.6% and the power market rose 4.0%. Even the beleaguered U.S. buildings design market rose 2.9% in 2011.
There were 458 design firms on this year's Top 500 that also sent in surveys last year. Of that number, 288 enjoyed a rise in revenue from 2010 to 2011, while 168 had lower revenue. Two firms reported little or no change.
Buildings Show Signs of Life
The general buildings market is the largest design market, but it continues to be stagnant, although some firms say there are signs of life. "We are doing a lot of research facilities for the federal government and universities," says George Little, CEO of HDR. He says that university endowments were hit by the global financial market meltdown of 2008, but they now are bouncing back, freeing up funds for new projects.
The federal market, on the other hand, is struggling over budgetary issues. "The federal government is investing in optimizing existing space and not in major new capital programs," says Carl Roehling, CEO of SmithGroupJJR. "Public architecture was more of a cushion than a savior," says Steve McConnell, a managing partner at NBBJ. The private sector will bring the buildings market out of the doldrums, he says.
There are some bright spots. "While most regions remain slow, the corridor from Washington, D.C., to Boston has become steadily busier," says Brad Perkins, CEO of Perkins Eastman. He says that even housing—primarily multifamily rentals—are moving forward. "Clients such as hospitals and universities who had shelved projects early in the recession have decided that they cannot wait any longer and have restarted their building programs," he says.
McConnell says architects must be able to focus on the value proposition. "In this post-recession market, architects must understand that every dollar deployed in a design must have a return of some sort," he says.
Engineers are also facing owner demands for value. "Owners are looking at return on investment that demands performance as opposed to 'nice to have,' " says Tony Litton, CEO of Sebesta Blomberg. In light of this demand, engineers must understand the business advice they provide, he says.
McConnell also says that green building is becoming part of the overall design process, but architects must be able to calibrate the cost-benefit equation and show energy efficiencies when employing sustainable design elements.
Roehling agrees that sustainability is now a growing part of the design process, rather than simply a bolt-on afterthought. "However, people now are demanding proof of benefits," he says. While many models can show energy efficiencies in a design, "these models are based on a lot of assumptions," Roehling notes. He cautions firms not to make promises about how much a design will save or when a design will pay for itself.
Energizing the Market
AECOM is finding an expanding market on the private-sector side, says Mike Della Rocca, chief executive of North American operations for AECOM. He says the firm has a strong interest in what he calls "extraction" markets: oil and gas and mining. "We have a pretty deep bench in the oil and gas sector," he says. The power market is picking up, particularly in the transmission and distribution area, he says, adding, "Utilities are making billion-dollar investments in upgrading the grid."
The industrial-process and petroleum market has been growing and promises to remain strong. "Our business was up 20% last year, and our industrial work was up 30%," says Bob Giorgio, president of global engineering and technology for CDI Corp.
The resurgence in the industrial market has helped firms across the board. "While there is much talk still about the recession, we have seen a major influx of project work over the past 12 to 18 months," says David J. Blaida, Matrix Technologies vice president. He says clients that have been holding on to a large amount of capital now are spending quickly on their facilities and processes.
This pressure to build now is counter to industry's experience of past election years. "What we have seen in an election year is that owners hit the 'pause' button, and projects tend to be pulled back pending the outcome of the election," says Gregory DiFrank, president, River Consulting. Now, even in industries that have been severely impacted over the past few years, industrial owners are beginning to release money for project design.
"During the first quarter of 2012, our U.S. commercial revenue was up 25% year-on-year, driven by work from projects supporting industry, manufacturing, mining, and other Fortune 500 clients," says Dan Batrack, CEO of Tetra Tech. This is the third consecutive quarter of 25% growth in the commercial/industrial sector for the company, he says.