February 6, 2024 • 41 mins
Understanding the regions and sectors where you operate is imperative in today's built environment. FMI Partner Jay Bowman joins FMI Consulting President Scott Winstead to talk about our recently released 2024 North American Engineering and Construction Industry Overview. Their conversation includes can’t-miss insights into what’s expected to drive the market over the next 12-24 months.
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Episode Transcript
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(00:00):
Welcome to 2024 for the FMI Built-in Podcast.
(00:04):
I'm Scott Winstead, FMI Consulting President.
I'm really excited about my conversation today with Jay Bowman.
Jay is a senior partner in our strategy practice,
the head of our market research function,
a highly sought-after speaker, and a return guest to the podcast.
In our conversation, Jay talks about our recently released
2024 Market Airview, as well as what he thinks
will drive the market for the next 12 to 24 months.
(00:27):
Good morning, Jay.
Welcome back to the show.
As you know, we recently released our 2024 Market Airview.
Curious how you would summarize the key takeaways for those
that haven't had a chance to dig into it yet?
I think it's a good question.
I think part of it is, what have we seen
sort of in the past couple of years?
So I think that's important as you set up
what the outlook is for 2024.
(00:50):
Because if you just looked at our current forecast,
it's about a 2% increase, which doesn't sound all that great.
I mean, it's obviously better than it being in negative territory,
but it's relatively flat.
But this comes off of two years of double-digit growth.
So we had some of the neighborhood of 10% to 12% in 2021.
(01:11):
And then again, in 2022, this is like the continuation
of almost really a three-year trend.
So we're talking about a lot of growth over the last couple
of years.
So 2% is really just, in essence, holding
serve at a really high level historically.
Jay, you mentioned holding serve, or that 2024
may be a bit more of a flat market.
In your view, how should E&C firms behave in a flat market?
(01:33):
So when we talk about a flat market,
now I think the first thing we have to establish
is we're talking about the overall market.
So in total, so all of non-residential building,
or all of non-building or heavy civil, being relatively flat.
But the biggest takeaway or the thing that, say, contractors
need to think about is, how am I going to manufacture growth
(01:57):
in a market that is not providing it for me,
sort of generally speaking?
So we've all heard the term rising tide lifts all boats.
Well, there is a sub-segment of the AEC industry
that organizations, their futures,
are totally dependent on what the market's doing.
(02:17):
If the market improves, they improve.
If the market contracts, well, their revenue
contracts as well.
But for another sub-segment, and I
hope that it's the larger sub-segment,
I generally think it is, they recognize
that they can't be dependent on that.
It's sort of like, if you think like a cupcake is a bad analogy,
(02:37):
but you got the cake and the icing,
and then the sprinkles on top, that's like the economy.
If the economy is rising, it's just the extra sprinkles.
But I've got to be really thinking about,
where am I manufacturing that growth?
So it's important then to look at it as not non-residential
building or heavy civil construction,
but the individual components of that.
Because I know it's not like a tired, broken record when
(03:00):
I say bull markets and bear markets coexist.
But it is, how do I shift, if you want to call it,
a portfolio around to put more of my efforts,
more of my investment in those areas that will continue
to see growth and limit my exposure on those areas where
there isn't going to be any prior contraction,
(03:22):
to, in essence, manufacture the growth for my organization.
So just focus more on that.
How would you describe the impact inflation
has had on construction spending?
Well, I think we generally think of inflation
and the impact on construction.
And I want to say generally how most people typically think
about it in the conversations I have,
(03:43):
is that a dollar is obviously not worth as much
as it used to be.
So you might look at a forecast and say, OK, well, gosh,
it looks like it's up a whole lot.
But how much of that increase is really
part of what inflation has caused versus what someone might
term as true demand.
And obviously, that is a way to look at it.
(04:04):
But even when you peel back the inflation,
there's actually still been growth.
We're actually higher now, even in real dollar terms,
than where we were at the height of the Great Recession.
Now, it too is holding steady, if not slightly down,
because we kind of project, even though inflation might
subside a little bit this year, it's not going back to zero
(04:24):
or anything like that.
That is one way to look at it.
But I think the other way to think about inflation
is how does that impact investment decisions?
So if I'm a private developer and I
see what's happening from an inflation perspective
and I'm thinking about what my cap rate might be on a project
versus what am I getting from a lending
(04:47):
perspective from a bank, in some cases,
we're seeing these projects being underwater by 150 basis
points on day one.
And so that does tend to slide those projects to the right
and delay them.
However, I think it's one of those things
where the inflation itself is not so much the issue,
(05:07):
it's the volatility in inflation,
meaning that we've seen high rates before.
I mean, the 80s, it was double digit.
So what we need to do is kind of get
to a point where there's not as much fluctuation or change
and people can be accustomed to it.
Sort of like when you're climbing Mount Everest, right?
Yeah, the air gets thinner and thinner,
(05:28):
but they have these base camps.
And people just kind of get acclimated at those base camps,
and then they can kind of move forward.
And I say the same thing in an inflation perspective.
It's just part of the territory,
but it gets to a point where we become kind of acclimated to it.
Things work out, and then demand continues.
Where it's just sort of baked in.
That's right.
So Jay, you smile when you talked about the bulls and the bears,
(05:48):
but I would be curious as to how you would define that for 2024.
Yeah, so let's start with bull markets.
Let's start positive.
If there was ever a bull that ever existed,
it is absolutely manufacturing.
Manufacturing construction grew by almost 80% in 2023.
(06:09):
Now, I haven't been around too long,
but I've been around long enough, I guess.
Started with half of my island.
Yeah, as you know, probably 25 years or so.
I have yet to see any segment grow that much in one year.
This is, when I say 80%, it's like 78,
but let's just say 80% for round numbers.
(06:32):
To put that in perspective,
manufacturing represented 5% of total construction
for the last several years.
It now represents one out of every $10 spent in this country.
So let's say, I mean, doubling it share is no small feat, right?
Especially when you're talking about now
a $2 trillion market, right?
(06:53):
Because we've seen a lot of growth over the years.
So that's one that would say,
what absolutely stands out from a growth perspective.
But then if you think about some of the other areas
where we would consider, you know,
there's still to be bull markets.
I mean, water wastewater continues to be
one of those markets that we see growth in,
particularly when we see more concentration of activity
(07:17):
in some of these sort of metropolitan
or kind of expanded mega-polleton areas.
But even in support of that industrial,
a lot of people don't recognize that,
like private water, if you wanna call it that,
to support some of these major semiconductor plants,
data centers, whatever it may be,
some of the local municipalities just don't have the ability
(07:38):
to supply the utilities they need.
And so this private's one piece of it.
And so those to be areas, you know, there's others,
but those would be kind of some of the main ones.
Unfortunately, like on the bear side, you say,
okay, well, where are we gonna probably see contraction?
Well, we can see obviously contraction in the office market,
meaning like traditional office construction.
(07:58):
And even multifamily, which has kind of been the darling
of the industry for several years,
is probably headed into, I would say,
at least a two, maybe even three year contraction over time.
And it's not because people don't still wanna live
in apartment buildings or other multifamily type
(08:19):
of facilities or building types.
And we still have a housing issue and all that.
It's just that we almost built so much capacity
in so many markets that we're just sort of like
catching up to that.
But those would be some of the ones
that really stand out to me.
That's helpful.
And you kind of touched on it,
but just the two to three year contraction coming off
of what was sort of an unprecedented run up
(08:40):
around multifamily.
Switching gears a little bit,
as part of your work with clients
and your team's strategy work with clients,
you almost talked to thousands of owners in a given year.
Curious what you're seeing with respect
to owner sentiment going into 2024.
As far as the sentiment goes in,
from an owner, project owner perspective going into 2024,
(09:03):
I hate to use the cop out of what it depends,
but unfortunately that's the best I can say.
It really depends.
Because we're talking public sector,
particularly infrastructure.
I mean, there's almost, I would say,
in some of the public agencies and representatives
from those public agencies I've spoken with,
(09:25):
almost a concern of how are we going to manage
the volume of work that we have?
And we're talking about billions of dollars in new spending.
And so how do they not only manage a project
but maximize that money as much as possible?
It's just, it's almost,
this is just amazing amount that they're trying to figure out
that there's so much to do and what do I prioritize first?
(09:48):
Versus on the private side, as I mentioned earlier,
how do I make the fundamentals work?
How do I get the pro forma to work?
So you're talking about two people existing in the same time
and having two completely different views of things.
But I think the bigger thing that we should be thinking about
from an owner perspective and the more intriguing conversations
(10:12):
I feel like I've had is talking about
how their business models are changing.
And that has obviously huge implications for the AEC industry
because as their business models change,
as the means in which they deliver services
or produce things, whatever it may be
(10:34):
that represents sort of their business,
even when we're talking about a public agency,
we are entering a period where I see just considerable flux
and shift in how that is occurring
that as AEC participants, we have to be prepared for.
Can you elaborate on some of the business model shifts
(10:55):
that you're seeing?
Yeah, I think the one that really stands out to me,
this both probably easy to illustrate,
but also underscores this really significant change
that we're talking about is in healthcare.
So healthcare construction, if you look at our forecast,
(11:17):
it shows positive growth.
It's not setting the world on fire,
but it is positive.
But if you look at it in terms of
how our healthcare service is being delivered
in this country, a whole different picture emerges
when you look below the surface.
(11:37):
And this is what I mean by that.
So healthcare construction in the United States
is really represented by three types of product, right?
So we have hospitals, which is generally the first thing
most people think of.
There's medical office building,
which would include doctors' offices and clinics,
but also outpatient care, surgical centers,
(11:59):
those types of things.
And then there's specialty care.
So nursing homes, behavioral health, memory care units,
all those types of things.
Those are your three categories.
So historically, hospitals have represented
minimum, say, two thirds of all healthcare construction.
(12:19):
But let's just peg it at two thirds to 70%.
Medical office building, though,
while hospital construction is still very high
and it's relatively flat,
medical office building has exploded
to the point that by my estimation, by 2027,
(12:42):
medical office building construction spending
will exceed hospital construction spending
for the first time.
And so again, hospitals will have gone then from a share
of 66% down to more like 40%.
So the question is, well, why would we see this huge increase
(13:02):
in medical office building
and hospitals just holding steady?
Well, because the delivery of healthcare
is following this pattern of generalized
to specialized to personalized
and what I mean by that is a hospital is where I go
if I need to fix a broken bone or birth a baby, right?
(13:25):
And everything in between.
But now we're seeing where it's getting more
to very specialized services.
So if I want my hip replaced,
there's an orthopedic center that specializes
in doing hip replacements as much as they can,
as often as they can and cranking them out.
But I think the next evolutionary stage,
(13:47):
and I wish I had a crystal ball to tell you,
this is what the facility will look like,
but it will eventually move beyond
even the medical office building side.
So if you use drugs as an example,
aspirin is a very generic drug.
It's a very good drug, but it's like a hospital, right?
It can reduce my fever.
(14:08):
It can be pain relief.
It can be a blood thinner.
It's good for a lot of different things,
but no one thing in particular.
Well, now we have very specialized drugs
for very specific issues.
You watch TV and there's drugs,
put your favorite name in there
(14:28):
for a very specific issue, right?
But now we're even moving beyond
that sort of specialized where it's a drug,
because we moved from small molecule therapies
to biologics to produce these types of drugs,
but the next frontier is in the genomics
and in the gene therapy.
Now we're not talking about a specialized
(14:50):
sort of therapy or way to treat an illness.
We're talking about something at the Scott Winstead level,
the absolute DNA.
Now it is not for a certain group,
it is for a individual.
And just like we're seeing that,
I absolutely believe that we'll see
the same transition from a healthcare,
(15:11):
say facility or construction perspective.
Again, I don't know what it looks like,
but there will be some new evolution of this,
no doubt in the next 10 years.
Where else do you see the biggest risks
over the next three years,
as well as the biggest opportunities
over the next three years?
Well, I think the biggest risk
over the next couple of years,
(15:32):
and this probably, I don't know if this is gonna answer
the question where you think I was gonna answer it or not,
is not paying attention to where the market is headed.
And I'm not talking about overall demand,
I'm talking about these examples like in healthcare,
these evolutionary changes.
I truly believe that we are in the midst
(15:53):
of a major, major shift from an economic
sort of societal, whatever it may be,
however you wanna describe that,
that is truly redefining the landscape.
And so if we're playing yesterday's game,
it will pass us by much faster
and put us at a much greater risk
(16:15):
than if I were doing this, say, 10 years ago
or even 20 years ago.
The rate of change is so different.
And the rate of new things being introduced to me,
that's where the greatest risk is.
It's not that our business goes away,
it's just we weren't paying attention
to where the value is and what is being demanded.
So that is, that's probably my greatest concern
(16:37):
in terms of where the risk is.
Well, you mentioned where the value is,
and I wanna hold that thought
and come back to it in a minute.
If you go back to the healthcare example,
which I think is a great way
to illustrate your point around just,
there's the overall monolithic market
and then there's all the subcomponents
that make up that monolithic market.
What are the other segments that you see
(16:57):
that have similar types of shifts happening within them?
Well, I mean, there are some that were probably easier
to describe like healthcare,
and there's probably some that are gonna be
a little bit more challenging to describe.
But let's start with an easy one.
So offices, data centers are by definition,
(17:19):
according to the census, part of the office.
But that's an evolutionary shift.
In terms of how the segment definition.
How the segment definition.
I would argue though, yes,
a data center is absolutely an office.
You and I have talked about this before.
If you go to an office building 100 years ago,
a lot of the activity was clerical.
Data filing, data manipulation, that sort of thing.
(17:39):
That's in my opinion, and I'm not a tech expert,
but I would say for my limited knowledge,
that is what occurs in a data center.
It's just now a digital workforce
instead of a human workforce.
So that'd be an easy one.
I'd say the healthcare ones made more like,
let's say it's in the middle,
at least to make me feel happy about myself, right?
And then the more challenging ones
(18:00):
are where there's multiple things occurring
at the same time.
So there I would talk about heavy civil.
So you think about in terms of what we're seeing
from an energy perspective.
So we have a grid that is old, it is large,
it is really not predictable in many ways now
(18:22):
from what we've seen.
And we had, Kimber, how many, a couple hundred,
you know, large scale outages, you know,
the last couple of years,
I think it was less than 20, 20 years ago.
That's a huge issue.
But now you're having things like EV and battery storage
and new ways to produce and generate energy.
(18:47):
At the same time we're seeing, again,
from this urbanization, you know,
more concentration in fewer areas
and with the autonomy of vehicles.
So I can see where that's a little bit more difficult
to show where these shifts are
because it's multiple components to it.
But it's a change in transportation
as well as a change in how that power is generated
(19:08):
for that transportation, how it is managed,
that is really, again, going back to more of an autonomous
type of functionality to the infrastructure, if you will,
that doesn't exist today.
That's a really helpful perspective.
We touched on the risks that you see over the next three years,
which I like the way you frame that in terms of just not
(19:28):
paying attention to what's happening underneath the surface.
Flipping that around, where do you see the biggest
opportunities over the next three years?
So the opportunities are actually, in some ways,
the other side of the coin, if you will,
of what we're seeing in this change.
Because, you know, whether it's the delivery
of certain types of services or how we're producing things
(19:50):
are changing, at the same time, those project owners,
is those lines get blurred in terms of the,
let's call it the product, right,
what's being designed and built.
Those lines are being blurred in terms of what the expectation
or the willingness to consider is from different stakeholders.
(20:11):
You know, what we've seen in the past,
obviously things like design build, you know,
that kind of start to blur some of those lines between,
well, what does the architect engineer do
and what does the contractor do?
But it's even expanding beyond that.
So for me, when I see the opportunities,
it's not only to get, obviously, on the ground floor
of some of these major changes and the types of buildings
(20:33):
and infrastructure we're doing,
but it's in how do I interact with a client?
You know, how am I able to bring solutions
to the problems that they're facing
that put me in a position of essentially being able
to offer more than just the management of a project, right?
(20:58):
I've become almost like an advisor
to their business practices.
It just happens to be the physical space
within which those services occur
or from a heavy civil perspective,
how I meet the needs of a changing demographic in technology.
(21:20):
So you mentioned value a little bit ago
and that's probably a good segue
into the question around value migration.
So as you think about some of the trends
we've talked about so far,
how are those trends really influencing
value migration as you see it?
Yeah.
Well, let's talk about two examples
that I think might illustrate what we mean
by value migration.
(21:41):
So we'll do one as a product
and we'll do one as a service.
So on the product side,
there is a masonry product coming out
that has replaced cement with algae.
Okay, so you think about that.
That's not an incremental change.
This is a major innovative leap, if you will.
(22:03):
And so this is part,
now this is obviously a much further expansion
of value migration.
Now, but think about this.
So if I have this product,
this masonry unit that is now using algae instead of cement
to the right project owner,
that is of tremendous value
(22:23):
because a sustainable cement
is a energy intensive product to make.
Again, for the right owner,
all of a sudden I have really put something out there
that is of tremendous value to them.
From a service perspective, an example here would be
what we're seeing some construction managers
(22:46):
testing from an artificial intelligence perspective
on pre-construction,
where they're incorporating technologies,
whether it's through a combination of generative design,
as well as historical cost databases, et cetera,
to be able to put those together into models
and using artificial intelligence and other things
(23:08):
in order to respond to requests from owners
for help with pre-construction and budgets
at a much faster rate than what they could before.
So it's an ability to, one,
reduce some of the effort that it takes
from a pre-construction standpoint,
but then it's the added value to the owner
(23:29):
of it's getting to them faster,
and I can ask different questions,
I can make modifications,
and I'm not waiting weeks,
I'm waiting seconds to get those responses back.
Something I'm always curious about, Jay,
is just what are the questions
we're most frequently hearing from clients these days?
When they're coming to you and saying,
hey, Jay, can you help with X?
(23:50):
What is X?
What are those two or three things
that you hear all the time?
Well, I think it goes back to what we were talking about
earlier that with a flat market,
what do you do to manufacture growth?
And where I sit in the organization,
that's really the question that I'm fielding
more than anything, which is how do we diversify
(24:13):
the business into those areas that will have,
not only growth near term, but really sustained growth.
And we've talked about the analogy before of,
if I'm going down this road and it might be a good road,
but it's a dead end and there's no off ramp.
You know, how do I ensure that,
(24:35):
well, as long as I'm on it, I'm doing good,
but how do I make sure there's another road
that's got a longer trajectory to it that I can be in?
So that question of diversification
and portfolio diversification has become really big.
I would even say that we're fielding more questions
about geographic expansion than we did during really
(24:57):
the years following the Great Recession,
which that was, everybody was wanting to figure out,
how do I move from this market to that market?
And it's not the typical, I want to go to, you know,
fill in the favorite city or flavor of the month.
It really is thinking in terms of where do I need to be
across the country and what markets do make sense,
given the type of work I do.
(25:18):
But there's also diversification from a segment standpoint,
like where we were talking about earlier,
that bulls and bears, like if I'm not in manufacturing,
can I get into manufacturing?
If I'm healthcare, do I need to do
more medical office building?
And the most important thing in all of that,
so they're truly trying to understand,
which I think this is a positive in all of this,
is they're trying to understand, well, what is it
that the project owners in those markets are really buying?
(25:41):
Right?
In terms of how would I position myself?
I think that's probably one of the things I've learned
the best over the last 20-something years,
is how, you know, whether architects or engineers
or contractors really trying to understand,
is not just me saying what I do well,
but the ones who do it exceptionally well
(26:02):
are the ones who are able to translate that too.
But what does that mean for me, the owner,
and what I'm trying to accomplish?
Jay, as you kind of draw the comparison
to the post-Great Recession, I'm curious,
my read back then was it was more reactive.
You know, clients were reacting to the market conditions,
saying, gee, as my market's down,
looks to not be active or healthy for some period of time,
(26:23):
there's gotta be a better opportunity over here somewhere.
What I hear you saying here is that this is more proactive
and not necessarily that my market is bad
or I'm saturated in my market,
it's just people really using a position of strength
to leverage where should they be long-term
based on where some of these trends are taking them.
Is that accurate?
That's a great point to make because,
(26:46):
you could say that, well,
the Great Recession was no fun for anybody,
but at least there were lessons learned
and you're absolutely right.
I do, I could tell you, and it's a great point,
and really think about it,
that the questions then about diversification
were absolutely reactive.
It was knee-jerk, you know, I'm in this market, it's down,
(27:07):
tell me how to get in this market
before they even knew if that was a good market to be in.
And now it is more proactive.
And I think partly because, like I said,
the market's sort of flat, right?
There is some hesitation out there.
I think there's some cautious optimism.
You look at some of the indices out there.
I mean, they're not really much above 50
(27:28):
or they're just a little bit below 50.
So it's sort of this cautious optimism in market stability.
I wouldn't call it market strength.
And so I think it has afforded people the opportunity
to be somewhat more proactive.
And so it's not just, is this a good market to be in
because there's demand,
(27:48):
but how does that market operate
and do I have a story to tell?
Well, the sort of butchered term in consulting
is trusted advisors.
So what you're describing is, you know,
these service providers, be it the architectural,
engineering or construction firms,
need to move into that trusted advisor position
where they're putting themselves in the position
of the owner and what their business and their business model
(28:10):
and how they generate an earning stream
and then solving problems, you know,
kind of reverse engineering.
What does the building or the facility
or the structure need to look like or do
to be able to help them do that more effectively?
Exactly, because if you can't communicate both ways,
let's say, and I don't mean the owner can communicate to me
and I can communicate, but I mean,
(28:31):
I can communicate both ways.
I can think from the owner's perspective.
How am I ever really gonna frame the problem that they have?
You know, it's like the hammer
that sees everything as a nail.
But if I can frame the problem
because I speak their language, it does put me in that trough.
That's the only way to be in a trusted advisor role
(28:51):
is because you can frame the problem for the owner
or the client or whoever you're serving.
So it's a huge, huge change.
Well, we've been talking quite a bit
and around the future and where we think things are headed.
I'd love for, Jay, if you could kind of fast forward
out another 10 years and think about, you know,
what are the major shifts that you anticipate
(29:14):
if you look at the A, the E and the C industry?
So sort of the built environment.
Where do you see things ahead of long term?
Well, I always think it's best to start
with sort of where we've been
because I'm a big believer that things don't just emerge
as much as they evolve.
So let's talk about megatrends.
(29:36):
So megatrends, in my opinion,
those are things that are decades in the making.
And so if you think about modern society and where we are,
there's really four megatrends, in my opinion,
that have sort of got us to where we are today.
So one of those is the industrial revolution, right?
(30:00):
Going from an agrarian society to an industrial society,
which then also gave rise to urbanization.
People moving off the farm and moving into cities, right?
And specialization and everything that came with that.
Then individualism, you know?
We used to grow up in multi-generation families, you know?
And then wherever we were born,
(30:22):
that's where we would live and die.
And now people move all the time.
And then the last part would be those sort of science
and rational thought, you know,
which gave the way of challenging and thinking of things,
you know, differently than maybe we used to.
And the reason I say those four represent megatrends
is because megatrends, in my opinion,
(30:43):
really just change two things, right?
Or effect or impact two things.
And the first thing it is is societal norms.
Just how do we, how does our culture function?
What is it that we value?
How do we interact, all that sort of thing?
And then the second thing is just how is business conducted?
And so the reason I say I think you have to go with the past
and then kind of, you know, follow that trend forward
(31:06):
is you can say, okay, well, industrialization, okay?
Well, the last several years,
we have seen the rise of digitalization, let's say.
So in my opinion, the next megatrend
that will have a shift over the next 10, 15 plus years
is the merging of those two things
and sort of this autonomous future, right?
(31:27):
Where I see the implications of those,
because the megatrend in itself is not what's so important,
it's what it infers
or how it changes the landscape on the other side.
So for the AEC industry,
an autonomous future
means that we might see the, you know,
autonomy of different workflows
where they're not separated,
(31:48):
where design is totally, you know,
flows into the BIM model
in an autonomous workflow,
which then flows into estimating and scheduling and procurement.
You know, all these things into one single workflow.
And that's not to say that, that's not a bad thing.
I don't say things to scare anybody
because it creates huge opportunities.
But if those things are true or could be true,
(32:11):
then I have to think about, well, how, you know,
I have to take a look at my operations.
How my structure is an organization.
Am I ready for a change? What would be different?
What kind of roles would I need?
What kind of other resources might I need?
What doors would it open for me
that maybe I didn't have access to before?
If you think about the individualism,
(32:32):
we, you know, said that, you know,
kind of going to that individual,
and I'm not going to go into that, you know,
I don't have access to this, like,
I don't have a term for it yet,
but I'll call it virtualism.
And I think this may be one of the most overlooked megatrends,
I think has perhaps the largest impact
on the AAC industry than any others.
(32:55):
And what I mean by that is,
we've got an entire generation
that sort of grew up buying things online.
E-commerce, right?
We pick out the color and the size
and, you know, how much quantity and it's delivered,
and I never once have to talk to anybody.
Versus, you know, we had to go to the store,
you know, you want a new pair of socks,
(33:17):
you're going to the store.
Well, maybe you used to call a catalog,
and you tell them on page 33,
I want this particular item, and do you have it in stock?
But we still was a person involved.
Well, now that we've seen this migration
of, you know, just no human interaction
in a lot of products,
then what we're overlooking,
(33:39):
where I think we need to start painting,
is when does that migrate into professional services?
And I say when. I don't mean if.
It will, in fact, I think it already has
migrated into professional services.
So think of the real estate industry, right?
Well, now I can go on, you know,
any of the online platforms,
(34:01):
and I can search for the homes that have four bedrooms
and two baths and half an acre lot
and near a lake or whatever.
I don't have to get a real estate agent
necessarily for that.
Now, some people argue, well,
well, that's still a product, it's a house.
Well, fine, I'll grant you that.
But what about the legal profession?
I would argue the legal profession is a professional services.
(34:23):
Well, I can go online and I can put a will together
and some other smaller documents
and never talk to anybody.
There's nothing that makes us special
from an AEC industry that would prevent that same migration
and that same type of, you know,
I'll say interaction or buying devoid of a human.
(34:46):
Now, I'm saying is it always that way?
No, but would there be certain aspects of it
where that's not only expected,
but perhaps preferred? Absolutely.
But if we're not thinking about those things now,
we're at risk because change will happen.
I always think of that song, Tom Sawyer by Rush.
You know, changes aren't permanent, but change is.
(35:08):
Everybody will eventually change
or you'll just be left behind and you'll cease to exist.
But the question is, do I want to change faster?
In fact, I would say your success depends on your ability
to change faster than everybody else.
You're either going to be pulled there
or you're going to choose where you want to go to get there.
So those would be some, as I mentioned,
(35:30):
you know, with the rise of science and rational thought,
we call it objective thought.
I think we're moving to more subjective thought
because there's just preponderance of facts and data
and information that you can pick and choose your own truth, right?
And so what does that have to do with, you know, cultures
and organizations and how we hire
and things that matter in that regard?
(35:52):
And the same thing with the urbanization, in my opinion,
we're going from urban kind of societies
to these more metropolitan or even megapolitan
where this concentration of activity
in sort of fewer and fewer areas,
but sometimes in some ways larger areas.
So the I-35 corridor between Austin and San Antonio
or the I-85 corridor that links Atlanta to Charlotte to Raleigh,
(36:17):
you know, all these areas, Southern California,
wherever you want to go,
these sort of distinct sort of combined concentrated areas
which has huge implications from competition,
from funding, from what do we do from just, you know, housing
and everything else from a social services perspective.
The thing that, when you talked about virtualization
(36:39):
that came to mind initially, I'd be curious,
kind of fact-check me on this if I'm thinking about it the right way,
but if you think about public-private partnerships
in the U.S. versus European countries
or other countries, you know,
one of the challenges that we've had in the states has been
because you've got the federal government,
you've got 50 state governments,
you've got 390-plus, you know, municipal and local governments,
(37:03):
each of which has their own set of regulations, laws, et cetera.
And so there's no monolithic answer
that you can just stamp out across the entire landscape
and says, this is the P-3 model.
So down the road with generative AI, machine learning and whatnot,
do you foresee that that gets easier
because you won't need a human or multiples of humans
(37:24):
to translate that myriad of red tape
to be able to get a project out the door and execute it and build?
I think so. I just don't know how long it takes to get there
because, you know, technology is always just a tool.
And it's generally a tool, in my opinion,
to remove the friction in any activity.
(37:47):
Right. It's great to look at it.
So a, you know, a pneumatic nail gun,
it does remove some friction.
It removes the friction that causes from,
well, how long does it take to train somebody to, you know, hammer a nail correctly?
Well, it's a lot easier to teach someone to pull a trigger
than to know how to drive a nail, right?
(38:10):
So the friction that removed was that time and the skill set.
The same thing that you're talking about,
what's the friction in a public-private partnership?
It's exactly what you said. It's so many different parts.
And it's not that the AI or these different kind of autonomous workflows
or whatever, you know, however we want to describe it,
(38:33):
is eliminating those things.
Those things still exist.
It just reduces the friction because it can do it so much faster
and through so many more iterations than what it would take a person to do.
And the friction is really not so much people don't like, you know, public-private partnerships.
It's the effort that is required to do that is so difficult.
(38:56):
That's the friction.
And so if I can eliminate that, then yes, I think you're absolutely right.
So Jay, just to finish up, I'm curious,
what do you find yourself consistently recommending to clients
given what we've talked about so far?
I think it goes back to one of the things that we were talking about earlier,
which is how are you going to manufacture growth?
When the overall market is not going to provide it,
(39:18):
how are you going to look below the surface to not only see where opportunities exist,
but also how well do those opportunities fit the organization,
meaning that they operate in a way that we like to operate.
They have the same values we value.
They have the same ability to do what we do best.
(39:41):
There is a fit for everyone, but it's really around those two things.
Really, you know, again, thinking about where can I sustain growth?
How the long haul of the market is not going to give it to me.
But where within that do I find those potential sort of avenues of growth
where I can sustain and create opportunities for a next generation that absolutely expects it?
(40:04):
So in other words, if the sands are shifting and overall healthcare is growing,
but at a moderate pace, but it's seismically shifting
or transitioning from hospital construction to MOB construction over the next five years,
that's a pretty significant trend.
Absolutely. I mean, I know it's kind of trite to say,
but I think really what I'm recommending people is in some ways,
(40:27):
is they have to define their business or their organization.
You know, again, it's some of a used story,
but you know, with the kerosene lamp, right?
And then the electric light bulb comes up.
With the manufacture of the kerosene lamps,
mistook their business as we were in the business of building or manufacturing kerosene lamps.
(40:50):
No, they were in the light business.
I don't think it's any different for our contractors.
They can't say, oh, I'm a healthcare contractor.
Well, what does that mean? You know, you've got to think further.
I'm not making kerosene lamps. I'm in the light business.
It's the same thing for, you know, the AEC industry.
(41:11):
I think because of the way things are changing and changing so quickly,
a sober and very deep thought about what type of organization,
what type of company we are, is going to be absolutely necessary.
That's great.
I think today it's great talking to you. Thank you for doing this again
and look forward to your next return visit.
My pleasure.
(41:33):
As always, thank you for listening and please don't forget to like or subscribe to the podcast
so you don't miss another episode.
Welcome to 2024 for the FMI Built-in Podcast.
(00:04):
I'm Scott Winstead, FMI Consulting President.
I'm really excited about my conversation today with Jay Bowman.
Jay is a senior partner in our strategy practice,
the head of our market research function,
a highly sought-after speaker, and a return guest to the podcast.
In our conversation, Jay talks about our recently released
2024 Market Airview, as well as what he thinks
will drive the market for the next 12 to 24 months.
(00:27):
Good morning, Jay.
Welcome back to the show.
As you know, we recently released our 2024 Market Airview.
Curious how you would summarize the key takeaways for those
that haven't had a chance to dig into it yet?
I think it's a good question.
I think part of it is, what have we seen
sort of in the past couple of years?
So I think that's important as you set up
what the outlook is for 2024.
(00:50):
Because if you just looked at our current forecast,
it's about a 2% increase, which doesn't sound all that great.
I mean, it's obviously better than it being in negative territory,
but it's relatively flat.
But this comes off of two years of double-digit growth.
So we had some of the neighborhood of 10% to 12% in 2021.
(01:11):
And then again, in 2022, this is like the continuation
of almost really a three-year trend.
So we're talking about a lot of growth over the last couple
of years.
So 2% is really just, in essence, holding
serve at a really high level historically.
Jay, you mentioned holding serve, or that 2024
may be a bit more of a flat market.
In your view, how should E&C firms behave in a flat market?
(01:33):
So when we talk about a flat market,
now I think the first thing we have to establish
is we're talking about the overall market.
So in total, so all of non-residential building,
or all of non-building or heavy civil, being relatively flat.
But the biggest takeaway or the thing that, say, contractors
need to think about is, how am I going to manufacture growth
(01:57):
in a market that is not providing it for me,
sort of generally speaking?
So we've all heard the term rising tide lifts all boats.
Well, there is a sub-segment of the AEC industry
that organizations, their futures,
are totally dependent on what the market's doing.
(02:17):
If the market improves, they improve.
If the market contracts, well, their revenue
contracts as well.
But for another sub-segment, and I
hope that it's the larger sub-segment,
I generally think it is, they recognize
that they can't be dependent on that.
It's sort of like, if you think like a cupcake is a bad analogy,
(02:37):
but you got the cake and the icing,
and then the sprinkles on top, that's like the economy.
If the economy is rising, it's just the extra sprinkles.
But I've got to be really thinking about,
where am I manufacturing that growth?
So it's important then to look at it as not non-residential
building or heavy civil construction,
but the individual components of that.
Because I know it's not like a tired, broken record when
(03:00):
I say bull markets and bear markets coexist.
But it is, how do I shift, if you want to call it,
a portfolio around to put more of my efforts,
more of my investment in those areas that will continue
to see growth and limit my exposure on those areas where
there isn't going to be any prior contraction,
(03:22):
to, in essence, manufacture the growth for my organization.
So just focus more on that.
How would you describe the impact inflation
has had on construction spending?
Well, I think we generally think of inflation
and the impact on construction.
And I want to say generally how most people typically think
about it in the conversations I have,
(03:43):
is that a dollar is obviously not worth as much
as it used to be.
So you might look at a forecast and say, OK, well, gosh,
it looks like it's up a whole lot.
But how much of that increase is really
part of what inflation has caused versus what someone might
term as true demand.
And obviously, that is a way to look at it.
(04:04):
But even when you peel back the inflation,
there's actually still been growth.
We're actually higher now, even in real dollar terms,
than where we were at the height of the Great Recession.
Now, it too is holding steady, if not slightly down,
because we kind of project, even though inflation might
subside a little bit this year, it's not going back to zero
(04:24):
or anything like that.
That is one way to look at it.
But I think the other way to think about inflation
is how does that impact investment decisions?
So if I'm a private developer and I
see what's happening from an inflation perspective
and I'm thinking about what my cap rate might be on a project
versus what am I getting from a lending
(04:47):
perspective from a bank, in some cases,
we're seeing these projects being underwater by 150 basis
points on day one.
And so that does tend to slide those projects to the right
and delay them.
However, I think it's one of those things
where the inflation itself is not so much the issue,
(05:07):
it's the volatility in inflation,
meaning that we've seen high rates before.
I mean, the 80s, it was double digit.
So what we need to do is kind of get
to a point where there's not as much fluctuation or change
and people can be accustomed to it.
Sort of like when you're climbing Mount Everest, right?
Yeah, the air gets thinner and thinner,
(05:28):
but they have these base camps.
And people just kind of get acclimated at those base camps,
and then they can kind of move forward.
And I say the same thing in an inflation perspective.
It's just part of the territory,
but it gets to a point where we become kind of acclimated to it.
Things work out, and then demand continues.
Where it's just sort of baked in.
That's right.
So Jay, you smile when you talked about the bulls and the bears,
(05:48):
but I would be curious as to how you would define that for 2024.
Yeah, so let's start with bull markets.
Let's start positive.
If there was ever a bull that ever existed,
it is absolutely manufacturing.
Manufacturing construction grew by almost 80% in 2023.
(06:09):
Now, I haven't been around too long,
but I've been around long enough, I guess.
Started with half of my island.
Yeah, as you know, probably 25 years or so.
I have yet to see any segment grow that much in one year.
This is, when I say 80%, it's like 78,
but let's just say 80% for round numbers.
(06:32):
To put that in perspective,
manufacturing represented 5% of total construction
for the last several years.
It now represents one out of every $10 spent in this country.
So let's say, I mean, doubling it share is no small feat, right?
Especially when you're talking about now
a $2 trillion market, right?
(06:53):
Because we've seen a lot of growth over the years.
So that's one that would say,
what absolutely stands out from a growth perspective.
But then if you think about some of the other areas
where we would consider, you know,
there's still to be bull markets.
I mean, water wastewater continues to be
one of those markets that we see growth in,
particularly when we see more concentration of activity
(07:17):
in some of these sort of metropolitan
or kind of expanded mega-polleton areas.
But even in support of that industrial,
a lot of people don't recognize that,
like private water, if you wanna call it that,
to support some of these major semiconductor plants,
data centers, whatever it may be,
some of the local municipalities just don't have the ability
(07:38):
to supply the utilities they need.
And so this private's one piece of it.
And so those to be areas, you know, there's others,
but those would be kind of some of the main ones.
Unfortunately, like on the bear side, you say,
okay, well, where are we gonna probably see contraction?
Well, we can see obviously contraction in the office market,
meaning like traditional office construction.
(07:58):
And even multifamily, which has kind of been the darling
of the industry for several years,
is probably headed into, I would say,
at least a two, maybe even three year contraction over time.
And it's not because people don't still wanna live
in apartment buildings or other multifamily type
(08:19):
of facilities or building types.
And we still have a housing issue and all that.
It's just that we almost built so much capacity
in so many markets that we're just sort of like
catching up to that.
But those would be some of the ones
that really stand out to me.
That's helpful.
And you kind of touched on it,
but just the two to three year contraction coming off
of what was sort of an unprecedented run up
(08:40):
around multifamily.
Switching gears a little bit,
as part of your work with clients
and your team's strategy work with clients,
you almost talked to thousands of owners in a given year.
Curious what you're seeing with respect
to owner sentiment going into 2024.
As far as the sentiment goes in,
from an owner, project owner perspective going into 2024,
(09:03):
I hate to use the cop out of what it depends,
but unfortunately that's the best I can say.
It really depends.
Because we're talking public sector,
particularly infrastructure.
I mean, there's almost, I would say,
in some of the public agencies and representatives
from those public agencies I've spoken with,
(09:25):
almost a concern of how are we going to manage
the volume of work that we have?
And we're talking about billions of dollars in new spending.
And so how do they not only manage a project
but maximize that money as much as possible?
It's just, it's almost,
this is just amazing amount that they're trying to figure out
that there's so much to do and what do I prioritize first?
(09:48):
Versus on the private side, as I mentioned earlier,
how do I make the fundamentals work?
How do I get the pro forma to work?
So you're talking about two people existing in the same time
and having two completely different views of things.
But I think the bigger thing that we should be thinking about
from an owner perspective and the more intriguing conversations
(10:12):
I feel like I've had is talking about
how their business models are changing.
And that has obviously huge implications for the AEC industry
because as their business models change,
as the means in which they deliver services
or produce things, whatever it may be
(10:34):
that represents sort of their business,
even when we're talking about a public agency,
we are entering a period where I see just considerable flux
and shift in how that is occurring
that as AEC participants, we have to be prepared for.
Can you elaborate on some of the business model shifts
(10:55):
that you're seeing?
Yeah, I think the one that really stands out to me,
this both probably easy to illustrate,
but also underscores this really significant change
that we're talking about is in healthcare.
So healthcare construction, if you look at our forecast,
(11:17):
it shows positive growth.
It's not setting the world on fire,
but it is positive.
But if you look at it in terms of
how our healthcare service is being delivered
in this country, a whole different picture emerges
when you look below the surface.
(11:37):
And this is what I mean by that.
So healthcare construction in the United States
is really represented by three types of product, right?
So we have hospitals, which is generally the first thing
most people think of.
There's medical office building,
which would include doctors' offices and clinics,
but also outpatient care, surgical centers,
(11:59):
those types of things.
And then there's specialty care.
So nursing homes, behavioral health, memory care units,
all those types of things.
Those are your three categories.
So historically, hospitals have represented
minimum, say, two thirds of all healthcare construction.
(12:19):
But let's just peg it at two thirds to 70%.
Medical office building, though,
while hospital construction is still very high
and it's relatively flat,
medical office building has exploded
to the point that by my estimation, by 2027,
(12:42):
medical office building construction spending
will exceed hospital construction spending
for the first time.
And so again, hospitals will have gone then from a share
of 66% down to more like 40%.
So the question is, well, why would we see this huge increase
(13:02):
in medical office building
and hospitals just holding steady?
Well, because the delivery of healthcare
is following this pattern of generalized
to specialized to personalized
and what I mean by that is a hospital is where I go
if I need to fix a broken bone or birth a baby, right?
(13:25):
And everything in between.
But now we're seeing where it's getting more
to very specialized services.
So if I want my hip replaced,
there's an orthopedic center that specializes
in doing hip replacements as much as they can,
as often as they can and cranking them out.
But I think the next evolutionary stage,
(13:47):
and I wish I had a crystal ball to tell you,
this is what the facility will look like,
but it will eventually move beyond
even the medical office building side.
So if you use drugs as an example,
aspirin is a very generic drug.
It's a very good drug, but it's like a hospital, right?
It can reduce my fever.
(14:08):
It can be pain relief.
It can be a blood thinner.
It's good for a lot of different things,
but no one thing in particular.
Well, now we have very specialized drugs
for very specific issues.
You watch TV and there's drugs,
put your favorite name in there
(14:28):
for a very specific issue, right?
But now we're even moving beyond
that sort of specialized where it's a drug,
because we moved from small molecule therapies
to biologics to produce these types of drugs,
but the next frontier is in the genomics
and in the gene therapy.
Now we're not talking about a specialized
(14:50):
sort of therapy or way to treat an illness.
We're talking about something at the Scott Winstead level,
the absolute DNA.
Now it is not for a certain group,
it is for a individual.
And just like we're seeing that,
I absolutely believe that we'll see
the same transition from a healthcare,
(15:11):
say facility or construction perspective.
Again, I don't know what it looks like,
but there will be some new evolution of this,
no doubt in the next 10 years.
Where else do you see the biggest risks
over the next three years,
as well as the biggest opportunities
over the next three years?
Well, I think the biggest risk
over the next couple of years,
(15:32):
and this probably, I don't know if this is gonna answer
the question where you think I was gonna answer it or not,
is not paying attention to where the market is headed.
And I'm not talking about overall demand,
I'm talking about these examples like in healthcare,
these evolutionary changes.
I truly believe that we are in the midst
(15:53):
of a major, major shift from an economic
sort of societal, whatever it may be,
however you wanna describe that,
that is truly redefining the landscape.
And so if we're playing yesterday's game,
it will pass us by much faster
and put us at a much greater risk
(16:15):
than if I were doing this, say, 10 years ago
or even 20 years ago.
The rate of change is so different.
And the rate of new things being introduced to me,
that's where the greatest risk is.
It's not that our business goes away,
it's just we weren't paying attention
to where the value is and what is being demanded.
So that is, that's probably my greatest concern
(16:37):
in terms of where the risk is.
Well, you mentioned where the value is,
and I wanna hold that thought
and come back to it in a minute.
If you go back to the healthcare example,
which I think is a great way
to illustrate your point around just,
there's the overall monolithic market
and then there's all the subcomponents
that make up that monolithic market.
What are the other segments that you see
(16:57):
that have similar types of shifts happening within them?
Well, I mean, there are some that were probably easier
to describe like healthcare,
and there's probably some that are gonna be
a little bit more challenging to describe.
But let's start with an easy one.
So offices, data centers are by definition,
(17:19):
according to the census, part of the office.
But that's an evolutionary shift.
In terms of how the segment definition.
How the segment definition.
I would argue though, yes,
a data center is absolutely an office.
You and I have talked about this before.
If you go to an office building 100 years ago,
a lot of the activity was clerical.
Data filing, data manipulation, that sort of thing.
(17:39):
That's in my opinion, and I'm not a tech expert,
but I would say for my limited knowledge,
that is what occurs in a data center.
It's just now a digital workforce
instead of a human workforce.
So that'd be an easy one.
I'd say the healthcare ones made more like,
let's say it's in the middle,
at least to make me feel happy about myself, right?
And then the more challenging ones
(18:00):
are where there's multiple things occurring
at the same time.
So there I would talk about heavy civil.
So you think about in terms of what we're seeing
from an energy perspective.
So we have a grid that is old, it is large,
it is really not predictable in many ways now
(18:22):
from what we've seen.
And we had, Kimber, how many, a couple hundred,
you know, large scale outages, you know,
the last couple of years,
I think it was less than 20, 20 years ago.
That's a huge issue.
But now you're having things like EV and battery storage
and new ways to produce and generate energy.
(18:47):
At the same time we're seeing, again,
from this urbanization, you know,
more concentration in fewer areas
and with the autonomy of vehicles.
So I can see where that's a little bit more difficult
to show where these shifts are
because it's multiple components to it.
But it's a change in transportation
as well as a change in how that power is generated
(19:08):
for that transportation, how it is managed,
that is really, again, going back to more of an autonomous
type of functionality to the infrastructure, if you will,
that doesn't exist today.
That's a really helpful perspective.
We touched on the risks that you see over the next three years,
which I like the way you frame that in terms of just not
(19:28):
paying attention to what's happening underneath the surface.
Flipping that around, where do you see the biggest
opportunities over the next three years?
So the opportunities are actually, in some ways,
the other side of the coin, if you will,
of what we're seeing in this change.
Because, you know, whether it's the delivery
of certain types of services or how we're producing things
(19:50):
are changing, at the same time, those project owners,
is those lines get blurred in terms of the,
let's call it the product, right,
what's being designed and built.
Those lines are being blurred in terms of what the expectation
or the willingness to consider is from different stakeholders.
(20:11):
You know, what we've seen in the past,
obviously things like design build, you know,
that kind of start to blur some of those lines between,
well, what does the architect engineer do
and what does the contractor do?
But it's even expanding beyond that.
So for me, when I see the opportunities,
it's not only to get, obviously, on the ground floor
of some of these major changes and the types of buildings
(20:33):
and infrastructure we're doing,
but it's in how do I interact with a client?
You know, how am I able to bring solutions
to the problems that they're facing
that put me in a position of essentially being able
to offer more than just the management of a project, right?
(20:58):
I've become almost like an advisor
to their business practices.
It just happens to be the physical space
within which those services occur
or from a heavy civil perspective,
how I meet the needs of a changing demographic in technology.
(21:20):
So you mentioned value a little bit ago
and that's probably a good segue
into the question around value migration.
So as you think about some of the trends
we've talked about so far,
how are those trends really influencing
value migration as you see it?
Yeah.
Well, let's talk about two examples
that I think might illustrate what we mean
by value migration.
(21:41):
So we'll do one as a product
and we'll do one as a service.
So on the product side,
there is a masonry product coming out
that has replaced cement with algae.
Okay, so you think about that.
That's not an incremental change.
This is a major innovative leap, if you will.
(22:03):
And so this is part,
now this is obviously a much further expansion
of value migration.
Now, but think about this.
So if I have this product,
this masonry unit that is now using algae instead of cement
to the right project owner,
that is of tremendous value
(22:23):
because a sustainable cement
is a energy intensive product to make.
Again, for the right owner,
all of a sudden I have really put something out there
that is of tremendous value to them.
From a service perspective, an example here would be
what we're seeing some construction managers
(22:46):
testing from an artificial intelligence perspective
on pre-construction,
where they're incorporating technologies,
whether it's through a combination of generative design,
as well as historical cost databases, et cetera,
to be able to put those together into models
and using artificial intelligence and other things
(23:08):
in order to respond to requests from owners
for help with pre-construction and budgets
at a much faster rate than what they could before.
So it's an ability to, one,
reduce some of the effort that it takes
from a pre-construction standpoint,
but then it's the added value to the owner
(23:29):
of it's getting to them faster,
and I can ask different questions,
I can make modifications,
and I'm not waiting weeks,
I'm waiting seconds to get those responses back.
Something I'm always curious about, Jay,
is just what are the questions
we're most frequently hearing from clients these days?
When they're coming to you and saying,
hey, Jay, can you help with X?
(23:50):
What is X?
What are those two or three things
that you hear all the time?
Well, I think it goes back to what we were talking about
earlier that with a flat market,
what do you do to manufacture growth?
And where I sit in the organization,
that's really the question that I'm fielding
more than anything, which is how do we diversify
(24:13):
the business into those areas that will have,
not only growth near term, but really sustained growth.
And we've talked about the analogy before of,
if I'm going down this road and it might be a good road,
but it's a dead end and there's no off ramp.
You know, how do I ensure that,
(24:35):
well, as long as I'm on it, I'm doing good,
but how do I make sure there's another road
that's got a longer trajectory to it that I can be in?
So that question of diversification
and portfolio diversification has become really big.
I would even say that we're fielding more questions
about geographic expansion than we did during really
(24:57):
the years following the Great Recession,
which that was, everybody was wanting to figure out,
how do I move from this market to that market?
And it's not the typical, I want to go to, you know,
fill in the favorite city or flavor of the month.
It really is thinking in terms of where do I need to be
across the country and what markets do make sense,
given the type of work I do.
(25:18):
But there's also diversification from a segment standpoint,
like where we were talking about earlier,
that bulls and bears, like if I'm not in manufacturing,
can I get into manufacturing?
If I'm healthcare, do I need to do
more medical office building?
And the most important thing in all of that,
so they're truly trying to understand,
which I think this is a positive in all of this,
is they're trying to understand, well, what is it
that the project owners in those markets are really buying?
(25:41):
Right?
In terms of how would I position myself?
I think that's probably one of the things I've learned
the best over the last 20-something years,
is how, you know, whether architects or engineers
or contractors really trying to understand,
is not just me saying what I do well,
but the ones who do it exceptionally well
(26:02):
are the ones who are able to translate that too.
But what does that mean for me, the owner,
and what I'm trying to accomplish?
Jay, as you kind of draw the comparison
to the post-Great Recession, I'm curious,
my read back then was it was more reactive.
You know, clients were reacting to the market conditions,
saying, gee, as my market's down,
looks to not be active or healthy for some period of time,
(26:23):
there's gotta be a better opportunity over here somewhere.
What I hear you saying here is that this is more proactive
and not necessarily that my market is bad
or I'm saturated in my market,
it's just people really using a position of strength
to leverage where should they be long-term
based on where some of these trends are taking them.
Is that accurate?
That's a great point to make because,
(26:46):
you could say that, well,
the Great Recession was no fun for anybody,
but at least there were lessons learned
and you're absolutely right.
I do, I could tell you, and it's a great point,
and really think about it,
that the questions then about diversification
were absolutely reactive.
It was knee-jerk, you know, I'm in this market, it's down,
(27:07):
tell me how to get in this market
before they even knew if that was a good market to be in.
And now it is more proactive.
And I think partly because, like I said,
the market's sort of flat, right?
There is some hesitation out there.
I think there's some cautious optimism.
You look at some of the indices out there.
I mean, they're not really much above 50
(27:28):
or they're just a little bit below 50.
So it's sort of this cautious optimism in market stability.
I wouldn't call it market strength.
And so I think it has afforded people the opportunity
to be somewhat more proactive.
And so it's not just, is this a good market to be in
because there's demand,
(27:48):
but how does that market operate
and do I have a story to tell?
Well, the sort of butchered term in consulting
is trusted advisors.
So what you're describing is, you know,
these service providers, be it the architectural,
engineering or construction firms,
need to move into that trusted advisor position
where they're putting themselves in the position
of the owner and what their business and their business model
(28:10):
and how they generate an earning stream
and then solving problems, you know,
kind of reverse engineering.
What does the building or the facility
or the structure need to look like or do
to be able to help them do that more effectively?
Exactly, because if you can't communicate both ways,
let's say, and I don't mean the owner can communicate to me
and I can communicate, but I mean,
(28:31):
I can communicate both ways.
I can think from the owner's perspective.
How am I ever really gonna frame the problem that they have?
You know, it's like the hammer
that sees everything as a nail.
But if I can frame the problem
because I speak their language, it does put me in that trough.
That's the only way to be in a trusted advisor role
(28:51):
is because you can frame the problem for the owner
or the client or whoever you're serving.
So it's a huge, huge change.
Well, we've been talking quite a bit
and around the future and where we think things are headed.
I'd love for, Jay, if you could kind of fast forward
out another 10 years and think about, you know,
what are the major shifts that you anticipate
(29:14):
if you look at the A, the E and the C industry?
So sort of the built environment.
Where do you see things ahead of long term?
Well, I always think it's best to start
with sort of where we've been
because I'm a big believer that things don't just emerge
as much as they evolve.
So let's talk about megatrends.
(29:36):
So megatrends, in my opinion,
those are things that are decades in the making.
And so if you think about modern society and where we are,
there's really four megatrends, in my opinion,
that have sort of got us to where we are today.
So one of those is the industrial revolution, right?
(30:00):
Going from an agrarian society to an industrial society,
which then also gave rise to urbanization.
People moving off the farm and moving into cities, right?
And specialization and everything that came with that.
Then individualism, you know?
We used to grow up in multi-generation families, you know?
And then wherever we were born,
(30:22):
that's where we would live and die.
And now people move all the time.
And then the last part would be those sort of science
and rational thought, you know,
which gave the way of challenging and thinking of things,
you know, differently than maybe we used to.
And the reason I say those four represent megatrends
is because megatrends, in my opinion,
(30:43):
really just change two things, right?
Or effect or impact two things.
And the first thing it is is societal norms.
Just how do we, how does our culture function?
What is it that we value?
How do we interact, all that sort of thing?
And then the second thing is just how is business conducted?
And so the reason I say I think you have to go with the past
and then kind of, you know, follow that trend forward
(31:06):
is you can say, okay, well, industrialization, okay?
Well, the last several years,
we have seen the rise of digitalization, let's say.
So in my opinion, the next megatrend
that will have a shift over the next 10, 15 plus years
is the merging of those two things
and sort of this autonomous future, right?
(31:27):
Where I see the implications of those,
because the megatrend in itself is not what's so important,
it's what it infers
or how it changes the landscape on the other side.
So for the AEC industry,
an autonomous future
means that we might see the, you know,
autonomy of different workflows
where they're not separated,
(31:48):
where design is totally, you know,
flows into the BIM model
in an autonomous workflow,
which then flows into estimating and scheduling and procurement.
You know, all these things into one single workflow.
And that's not to say that, that's not a bad thing.
I don't say things to scare anybody
because it creates huge opportunities.
But if those things are true or could be true,
(32:11):
then I have to think about, well, how, you know,
I have to take a look at my operations.
How my structure is an organization.
Am I ready for a change? What would be different?
What kind of roles would I need?
What kind of other resources might I need?
What doors would it open for me
that maybe I didn't have access to before?
If you think about the individualism,
(32:32):
we, you know, said that, you know,
kind of going to that individual,
and I'm not going to go into that, you know,
I don't have access to this, like,
I don't have a term for it yet,
but I'll call it virtualism.
And I think this may be one of the most overlooked megatrends,
I think has perhaps the largest impact
on the AAC industry than any others.
(32:55):
And what I mean by that is,
we've got an entire generation
that sort of grew up buying things online.
E-commerce, right?
We pick out the color and the size
and, you know, how much quantity and it's delivered,
and I never once have to talk to anybody.
Versus, you know, we had to go to the store,
you know, you want a new pair of socks,
(33:17):
you're going to the store.
Well, maybe you used to call a catalog,
and you tell them on page 33,
I want this particular item, and do you have it in stock?
But we still was a person involved.
Well, now that we've seen this migration
of, you know, just no human interaction
in a lot of products,
then what we're overlooking,
(33:39):
where I think we need to start painting,
is when does that migrate into professional services?
And I say when. I don't mean if.
It will, in fact, I think it already has
migrated into professional services.
So think of the real estate industry, right?
Well, now I can go on, you know,
any of the online platforms,
(34:01):
and I can search for the homes that have four bedrooms
and two baths and half an acre lot
and near a lake or whatever.
I don't have to get a real estate agent
necessarily for that.
Now, some people argue, well,
well, that's still a product, it's a house.
Well, fine, I'll grant you that.
But what about the legal profession?
I would argue the legal profession is a professional services.
(34:23):
Well, I can go online and I can put a will together
and some other smaller documents
and never talk to anybody.
There's nothing that makes us special
from an AEC industry that would prevent that same migration
and that same type of, you know,
I'll say interaction or buying devoid of a human.
(34:46):
Now, I'm saying is it always that way?
No, but would there be certain aspects of it
where that's not only expected,
but perhaps preferred? Absolutely.
But if we're not thinking about those things now,
we're at risk because change will happen.
I always think of that song, Tom Sawyer by Rush.
You know, changes aren't permanent, but change is.
(35:08):
Everybody will eventually change
or you'll just be left behind and you'll cease to exist.
But the question is, do I want to change faster?
In fact, I would say your success depends on your ability
to change faster than everybody else.
You're either going to be pulled there
or you're going to choose where you want to go to get there.
So those would be some, as I mentioned,
(35:30):
you know, with the rise of science and rational thought,
we call it objective thought.
I think we're moving to more subjective thought
because there's just preponderance of facts and data
and information that you can pick and choose your own truth, right?
And so what does that have to do with, you know, cultures
and organizations and how we hire
and things that matter in that regard?
(35:52):
And the same thing with the urbanization, in my opinion,
we're going from urban kind of societies
to these more metropolitan or even megapolitan
where this concentration of activity
in sort of fewer and fewer areas,
but sometimes in some ways larger areas.
So the I-35 corridor between Austin and San Antonio
or the I-85 corridor that links Atlanta to Charlotte to Raleigh,
(36:17):
you know, all these areas, Southern California,
wherever you want to go,
these sort of distinct sort of combined concentrated areas
which has huge implications from competition,
from funding, from what do we do from just, you know, housing
and everything else from a social services perspective.
The thing that, when you talked about virtualization
(36:39):
that came to mind initially, I'd be curious,
kind of fact-check me on this if I'm thinking about it the right way,
but if you think about public-private partnerships
in the U.S. versus European countries
or other countries, you know,
one of the challenges that we've had in the states has been
because you've got the federal government,
you've got 50 state governments,
you've got 390-plus, you know, municipal and local governments,
(37:03):
each of which has their own set of regulations, laws, et cetera.
And so there's no monolithic answer
that you can just stamp out across the entire landscape
and says, this is the P-3 model.
So down the road with generative AI, machine learning and whatnot,
do you foresee that that gets easier
because you won't need a human or multiples of humans
(37:24):
to translate that myriad of red tape
to be able to get a project out the door and execute it and build?
I think so. I just don't know how long it takes to get there
because, you know, technology is always just a tool.
And it's generally a tool, in my opinion,
to remove the friction in any activity.
(37:47):
Right. It's great to look at it.
So a, you know, a pneumatic nail gun,
it does remove some friction.
It removes the friction that causes from,
well, how long does it take to train somebody to, you know, hammer a nail correctly?
Well, it's a lot easier to teach someone to pull a trigger
than to know how to drive a nail, right?
(38:10):
So the friction that removed was that time and the skill set.
The same thing that you're talking about,
what's the friction in a public-private partnership?
It's exactly what you said. It's so many different parts.
And it's not that the AI or these different kind of autonomous workflows
or whatever, you know, however we want to describe it,
(38:33):
is eliminating those things.
Those things still exist.
It just reduces the friction because it can do it so much faster
and through so many more iterations than what it would take a person to do.
And the friction is really not so much people don't like, you know, public-private partnerships.
It's the effort that is required to do that is so difficult.
(38:56):
That's the friction.
And so if I can eliminate that, then yes, I think you're absolutely right.
So Jay, just to finish up, I'm curious,
what do you find yourself consistently recommending to clients
given what we've talked about so far?
I think it goes back to one of the things that we were talking about earlier,
which is how are you going to manufacture growth?
When the overall market is not going to provide it,
(39:18):
how are you going to look below the surface to not only see where opportunities exist,
but also how well do those opportunities fit the organization,
meaning that they operate in a way that we like to operate.
They have the same values we value.
They have the same ability to do what we do best.
(39:41):
There is a fit for everyone, but it's really around those two things.
Really, you know, again, thinking about where can I sustain growth?
How the long haul of the market is not going to give it to me.
But where within that do I find those potential sort of avenues of growth
where I can sustain and create opportunities for a next generation that absolutely expects it?
(40:04):
So in other words, if the sands are shifting and overall healthcare is growing,
but at a moderate pace, but it's seismically shifting
or transitioning from hospital construction to MOB construction over the next five years,
that's a pretty significant trend.
Absolutely. I mean, I know it's kind of trite to say,
but I think really what I'm recommending people is in some ways,
(40:27):
is they have to define their business or their organization.
You know, again, it's some of a used story,
but you know, with the kerosene lamp, right?
And then the electric light bulb comes up.
With the manufacture of the kerosene lamps,
mistook their business as we were in the business of building or manufacturing kerosene lamps.
(40:50):
No, they were in the light business.
I don't think it's any different for our contractors.
They can't say, oh, I'm a healthcare contractor.
Well, what does that mean? You know, you've got to think further.
I'm not making kerosene lamps. I'm in the light business.
It's the same thing for, you know, the AEC industry.
(41:11):
I think because of the way things are changing and changing so quickly,
a sober and very deep thought about what type of organization,
what type of company we are, is going to be absolutely necessary.
That's great.
I think today it's great talking to you. Thank you for doing this again
and look forward to your next return visit.
My pleasure.
(41:33):
As always, thank you for listening and please don't forget to like or subscribe to the podcast
so you don't miss another episode.
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