2021 Economic Forecast: Architecture & Engineering Industry

After a tumultuous 2020, the resurgence of COVID-19 threatens a second recession in early 2021. How architecture and engineering (A&E) firms fare will vary by the sectors they serve and rely heavily on how the crisis is affecting consumer activity within each one. Opportunities in hard-hit industries like restaurants and hotels will remain scarce, while needs in the healthcare industry will evolve faster than ever.

According to the November 2020 Architecture Billing Index (ABI), architecture firm billings declined for the ninth consecutive month, with business conditions weakening the most for firms in the Northeast and those with commercial/industrial and institutional specializations. Increased demand for distribution, logistics, data centers and other industrial facilities in Q4 2020 helped soften the blow.

In the 2021 Construction Hiring and Business Outlook released by the Associated General Contractors of America, the outlook is just as bleak, with respondents expecting the majority of construction categories to shrink in 2021. Not surprisingly, leading the predictions of hardest-hit categories are retail, lodging, private office, higher education and public building.

However, most architecture firms remain cautiously optimistic about 2021, according to the November 2020 ABI. Driving this optimism are some unique opportunities we are anticipating in the industry as 2021 unfolds.

New Office Sector Needs

Employers may reassess their real estate needs as remote employees deliver high levels of productivity. While this may present a precarious position for commercial real estate, A&E firms can find opportunity in the need for new office design as employers downsize their space while meeting employee’s social distancing expectations that will remain with us far past the pandemic.

Shifting Client Base

Government budget cutbacks may limit opportunities for public contracts in early 2021, but that could change as President Biden pushes efforts to infuse more capital into state governments.  In the meantime, the healthcare sector will continue to yield new opportunities and possibly take over office vacancies for their administrative purposes. Residential and commercial real estate professionals should expect to see more opportunities outside major cities, as millennials and others who previously preferred city life are now flocking to the suburbs for low mortgage rates and more space to accommodate remote work and family life.

Relatively Low Unemployment

By most metrics, the construction and A&E industry has weathered the COVID-19 crisis better than most industries, with 2020 monthly job growth on par with prior year numbers. This was due to the strong employment numbers pre-pandemic, and construction remaining an essential service throughout the pandemic.

On the flip side, while construction itself hasn’t lost as many jobs, major employment loss in government and education will affect many contracts in those sectors.

Lessons Learned

Perhaps the biggest opportunity to come out of the COVID-19 crisis is the chance to learn from the past and emerge stronger than before. The pandemic exposed many vulnerabilities that were hidden during years of economic expansion but wreaked havoc for businesses when the crisis hit. Among them were insufficient technology for a fully remote workforce, lack of cash flow models to rely on as backlogs dried up, inadequate diversification of projects and sectors, improper overhead and workforce structure, and lack of adequate insurance coverage and business continuity plans. As your business recovers from COVID-19 losses, it is essential to identify and correct the deficiencies that made your business more vulnerable in crisis.

Many economists predict that mass vaccinations, more federal stimulus, low inflation and low interest rates this year will put the economy back on the right track in 2022 and 2023. But the choices you make today will be the biggest factor in whether or not you can say the same for your A&E business.

Robert J. Brewer Robert J. Brewer is a Partner, past Executive Committee Member, and the Architecture & Engineering Practice Leader at Grassi. Rob began his career in 1987 and has extensive experience in tax planning, accounting, estate planning, succession planning, and mergers and acquisitions. Rob’s insight, wisdom and creativity allow him to provide expert business advice to a broad range of industries, including architecture & engineering, construction,... Read full bio

Categories: Advisory