Positioning for Continued Success

Kacey Clagett, LEED AP BD+C
2022-01-01 6:20:00

January typically prompts business planning for a new year. However, since early 2020, the Covid-19 pandemic has made business planning and operations much more volatile. While we all have learned to be more resilient to thrive, it is difficult to gauge when companies will experience more stable economic conditions. This article offers some insight into economic conditions and how to position your company to continue to be successful in the coming months.

Even in regions where there have been fewer governmental pandemic restrictions, the economic effects of Covid outbreaks have been broad, affecting entire market sectors, the availability of design and construction labor, and supply chains. In 2021, office vacancy rates in cities like New York and San Francisco approached 20%, putting further pressure on construction financing and stalling new building starts. As Barry Sternlicht, CEO of the real estate investor Starwood Capital Group, said at the time, “It [is] very hard to underwrite these cities.” Mary Corley of Rosen Consulting Group, real estate economists, observed, “Covid has been an accelerant of trends we were already seeing before March 2020, such as the growth of suburbs and secondary markets, and we expect to see continued growth there. We don’t know if it’s to the long-term disadvantage of gateway markets. Gateways have a lot of existing infrastructure, which is not something to walk away from.” With such uncertainty, buyers will continue to look for ways to reduce risk in budgets and schedules.

At the same time, construction has continued robustly in such markets as residential, industrial, science, and technology. And while the pandemic has temporarily disrupted the office, retail, hospitality, higher ed, and government sectors, these will bounce back, likely with some fundamental changes. Many expect that economic problems will abate soon. In July 2021, Appleseed Strategy surveyed a national focus group of 39 design and construction companies. Asked about their predictions moving to the immediate future, respondents were largely positive:

Across the spectrum, expect opportunities to retrofit existing buildings to new uses. Owners who can find the funding will reposition buildings in anticipation of a future boom. Underused shopping malls might be remade into logistics centers and mixed-use communities, and offices and retail eyed for multifamily. Some building owners will try to convert to science and technology tenants. Temporary outdoor dining parklets will become permanent. Distressed properties will be bought up and reused.

A real boon to design and construction is the recently enacted $1.2 trillion federal infrastructure bill that ushers new funding for infrastructure, sustainability, and resilience. The bill provides $65 billion in clean energy; $50 billion in infrastructure resilience; $66 billion for Amtrak; $25 billion for airports; and $100 billion for roads, bridges and other projects.  We can expect to see more federal projects as standalone commissions or as part of indefinite-quantity, indefinite-definite delivery contracts. However, because federal spending is proposed to be funded by increasing real estate taxes, critics argue that the infrastructure plans will depress commercial real estate. This snag will likely be ironed out. Much federal funding will trickle down as state and local government projects. This presents excellent opportunities for minority, disabled, and woman-owned businesses and companies who make meaningful actions toward diversity, equity, and inclusion in staffing and teaming.

Sustainability and resiliency design will continue to rise due to public policy, pressure from insurers, and severe weather events. For owners using institutional capital or those who are publicly traded, the adoption of ESG policies – environment, social, and governance standards – will increasingly demand that engineering companies help owners reduce their carbon footprint, use less water and energy, and avoid red-listed materials. Mary Corley of Rosen Consulting Group underscored the increasing influence of ESG policies on the real estate market.

As with retail, technology is accelerating significant changes across market sectors. Corley noted that remote work has become a significant force in the real estate strategies of many companies, causing them to rethink how much physical space they really need. Now, a change management outlook and approach comes before any real estate decision. Can a company thrive by relying on technology? Smart companies are focusing first on achieving the kinds of behaviors at work that will reach their desired outcomes. For many, a physical presence will be an option, not a given.

The design and construction market will reach equilibrium as the pandemic subsides, but any disruptive event at this scale leaves lasting marks, bringing new market demands and ways of working. Make your business planning more resilient by taking advantage of the positive aspects of these disruptions. As you develop your plans and budgets, probe whether you are adequately assessing the inherent risks and opportunities in the markets and regions you work in:

We recommend that engineering companies pay increasing attention to several areas: