Engineering Influence from ACEC

Dodge Chief Economist Richard Branch on his 2021 Economic Forecast

Dodge Data and Analytics Chief Economist Richard Branch joined the Engineering Influence podcast to discuss his 2021 economic and construction market forecast.
 
Host: Welcome to the Engineering Influence podcast sponsored by the ACC Life/Health Trust. With us today is Richard Branch, chief economist for Dodge Data and Analytics. A couple of weeks ago, Richard released Dodge's 2021 economic and construction market forecast. And he's joined us to delve into the numbers. Richard, welcome to the podcast. Click here to purchase the  Dodge Construction Outlook 2021.
Branch: Thanks. Great to be here.
Host: To start, can you give us a broad sense of what the engineering industry can expect in 2021?
Branch: Sure. I think the simplest thing to say is that we do expect construction activity to improve next year. We do expect it to grow, but that pace of growth is going to be fairly modest. It's going to be fairly moderate. Of course, given everything that the industry and we as individuals have been through in 2020, that is certainly good news. But we need to keep in mind here that there are significant headwinds at play as we move into 2021 that make this recovery much more tenuous.
Host: In your forecast, you mentioned several times that it depends on the widespread adoption of a vaccine by the middle of the year and the passage of a substantial stimulus package in the range of $1.5 trillion in the first quarter of the year. Have you ever had a forecast that faced such stark deal-breakers and how stark are they?
Branch: Pretty unique, I'll say that. I think the closest parallel that I can think of is if we go back to 2009 during the Great Recession as Congress was weighing passage of the American Recovery and Reinvestment Act. If we think back to that time, it passed both the House and the Senate pretty much along party lines, but getting it to that point, it was touch and go and it was unclear right up until the last couple of days of how much sacrifice would need to be made in terms of the overall amount in the ARRA funding to get the support needed to get through Congress. Obviously, it ended up passing and it had a tremendously positive influence on the economy in the wake of passage.
Branch: So now we've got not only the uncertainty regarding the passage of further fiscal stimulus, but I would offer it's happening in a much more sensitive political environment. We're currently in a transition period between two administrations and between two congresses because there will be changes in the house and the Senate as well,. Then we need to layer on top of that when we can expect not just the vaccine to be ready, but when we see it adopted widely across the country. Of course, there's been a lot of good news recently with regards to efficacy rates of the vaccines as they make their way through trials. So that certainly good news. And I think at least that knowledge does or should provide a sense of stability in terms of the underpinning of the forecast.
Host: What are your thoughts on that stimulus package? Do you see it going through in the first part of the year?
Branch: So when we did our forecast, we assumed that $1.5 trillion would be adopted in the first quarter. And we were using that 1.5 trillion as I'll call it a median. It could have been a little bit higher, could have been a little bit lower depending upon what the final makeup of Congress was going to be. The Democrats lost a good chunk of their majority in the House. It looks like they're on track to lose about 10 seats of their majority, if not more--there are still a few races where they're counting--and the Senate is still up for grabs. We've got those two run-offs in Georgia to get through, but if you look at just how much split-ticket voting there was in this election, it's probably reasonable to assume that the Republicans will maintain control of the Senate, but it could go either way. Short story long, given that reduced majority in the House, though, I think we can probably expect that $1.5 trillion is a maximum dollar amount instead of a median. That's good news and bad news, right? The good news is a lower dollar value means it's probably going to get through Congress much quicker. So we might see it sooner rather than later. The bad side is the reduced dollar value means less support for individuals for businesses and of course, state and local governments.
Host: Looking at the specific sectors, the warehouse sector is thriving. You mentioned in your forecast that there were 38 warehouses over 1-million-square-feet built in the first nine months of 2020. And then looking at 2021, you forecast a strong market for this sector. How resilient is the warehouse sector?
Branch: Backing up to 2019 in terms of warehouse construction, it set a record in terms of our data, both in dollar value and square footage, and our data goes back to 1967. We do expect it to break a record again this year and next. So over the short term, through 2021and even into 2022, I think this market's fairly resilient. Online shopping is going to continue to gain market share over bricks-and-mortar. And then we layer onto that consumer behavior and consumer attitudes towards shopping and our expectations on delivery--I don't want to wait a week, I want my stuff now. So we're seeing the build-out of these large facilities, and there have been several this year that have been in the 3 to 4 million-square-foot range.
Branch: But I think you get to a point where, within the next handful of years, the market gets a little bit saturated in the sense that you're going to get to a point where the buildup of those large facilities has occurred along most major transportation routes and within a short drive to the major metropolitan areas in the country. So what happens after that? I think the market starts to shift into a more spoke-and-hub approach and you get more suburban/urban development of warehouses. These are smaller facilities, for Amazon and these other distributors, to help them satisfy that last mile of delivery.
Host: Is the data center market a similar type of market or does it have more long-term potential?
Branch: We capture data centers under the office market, so they're not part of the warehouse market, but it's a very similar dynamic except the upside potential in terms of longevity is more powerful on that data center side. As companies and as individuals, our data use increases exponentially, with virtually no limit on the amount we want to stream and the amount of data that gets transferred on a minute-by-minute basis across the U.S. economy. So over the longer term, the data center market is much more resilient.
Host: The situation for public construction is dire in your forecast. You quoted a Kroll Bond Ratings Agency report that projects $690 billion in state and local government revenue losses in the coming fiscal year. Yet you only project a 1% drop in the value of public building starts. So how do those jive?
Branch: Our public building category includes prisons, courthouses, local police and fire stations, armories and military buildings, and whatnot. So as part of our forecast process, we include large projects that we expect to break ground. We include those explicitly in the forecast years, and as we look into 2021, there are several that we expect to break ground. There's a $300 million courthouse that we expect to break ground in Norristown, Pennsylvania, and a handful of similarly sized projects across the country. And when you look at the entire category of all the 22 that we forecast, this is on the smaller side. It's around a $9 to $11 billion per year market. So those large projects have much more of an outsized influence in terms of the direction of the forecast.
Host: I noticed that also in airports. I don't remember the numbers, but there was the projection for the entire market, and the work at JFK was going to account for about 60% of that.
Branch: That's pretty much it. If you look at our transportation building forecast in 2021, it's an 11% gain, which is a pretty bold prediction to make given where transportation is headed currently. But as you said, we do expect those early stages of JFK to break ground in New York City in 2021. That's going to be a multi-year multi-billion dollar project. But it goes without saying that if that project were to be delayed or canceled or scaled back, that could very easily take that 11% gain and shift it to the negative. It's a very similar story with the public construction in that it's about a $10 to $11 billion per year market. So if you take out a billion or two from JFK, if that were to be delayed, scaled back or, or canceled, that would shift that entire market to the negative.
Host: The streets and bridges construction sector is looking at a slight increase in activity. I think it was about 1% or so. How much of that is due to the FAST Act extension and how important is getting a five-year transportation program in place to the resilience of the sector.
Branch: In a word critical. If we recall the FAST Act expired at the end of September 2020,. As part of the continuing resolution that's keeping the government open through December 11th, they extended the FAST Act through the end of September 2021. So that's good news. It did keep however funding flat, so the funding level for fiscal year 2021 is the same as the funding level for fiscal year 2020. That's why our forecast for streets and bridges is showing a fairly tepid gain. In terms of the importance of getting that reauthorized, it's critical given that the dire need of infrastructure in this country in terms of road and bridge work.
Branch: The good news, though, is we're optimistic that the reauthorization of the FAST Act will occur in the summer of 2021. Congress made good progress on it before the election. the Senate Public Works Committee released a plan in the spring or summer that was unanimously... Let me say that again, the Senate Public Works Committee unanimously approved their plan to reauthorize it at around $320 billion. The House, as part of HR-2, or the Moving Forward Act also authorized a five-year plan that would have been an excess of the FAST Act. So the good news is the underlying support for an increase in transportation funding is there and once we get into the new Congressional year, the inauguration takes place, and everybody has a chance to sit back and breathe, we think that goes forward. In our forecast, we've built in $300 billion for the core highway portion or highway bridge portion. That's more than what's under the FAST Act, but that's not going to help us until we get into 2022.
Host: Not surprisingly given the state of the nation's water and wastewater infrastructure, you project a healthy increase in this sector. How do you see that being funded?
Branch: I don't know if I'd use the word healthy. When we look at our environmental public works category--that's the summation of sewer systems, water systems, as well as dams and reclamation projects--we're looking at a 1% gain for that entire sector. In terms of what drives that funding, it's usually through that the Corps of Engineers, the EPA construction budget, as well as state revolving funds. And in general, the appropriation process has been fairly positive to those budgets. And when we look at what the House and the Senate were saying just before the election, we're looking at funding being fairly flat to a slight positive overall for the EPA, for the Corps, and for the State Revolving Funds budget. So that gives us that just a little bit of an increase. We're also looking at the two-year update to the Water Resource Development Act. Again, there was broad bipartisan support for that before the election in both the House and the Senate, so we think that in short order, once we get into 2021, that we'll get that authorized by Congress. And that's likely to be an $8 to $9 billion program over two years.
Host: The power market is remarkably volatile. Going back a few years, the value of starts was up 123% in 2019, then down 48% in 2020, and you forecast a 35% jump in 2021. Why is it so volatile?
Branch: It's essentially the presence, or the absence, of these large LNG import and export facilities. Those projects are measured in the billions of dollars, between $1 and $5 billion per project. So having one of those start in a year, skews the data, because it's not there the next year and pushes it down. When we look at the forecast for 2021, the Federal Energy Regulatory Committee has approved 15 LNG facilities all in the Gulf coast, except for one that's up in Portland, Oregon. Again, multi-billion dollar facilities. So they've approved 15, we're expecting one or two of those will break ground in 2021. And again, at a billion or a couple billion dollars, they certainly will cause that 35% gain.
Branch: But I think if you go broader than just that LNG import and export facility, renewables is also a growth market in the electric power sector. If you look at all electric generation starts over the past 10 years--coal, natural gas, nuclear, utility-grade solar, and utility-grade wind--wind and solar combined have accounted for about 60% of the total. As those technologies come closer and closer to grid parity, where a kilowatt-hour from one is the same as a kilowatt-hour from the other, they're just going to keep ramping up.
Host: What about the transmission line market within the power market? What do you see there?
Branch: I think they go in lockstep. If you think about where these wind and solar projects are, they're not in midtown Manhattan or downtown Boston. They're in Wyoming and Texas and out Wes and generally not in populated areas. As part of building up that renewable infrastructure, you need to build the high-speed transmission lines to get them from Wyoming or Texas into the major markets across the country. So they absolutely move in lockstep.
Host: Finally, you reported in your forecast that the office vacancy rate moved higher in 55 of the 63 metropolitan markets in the third quarter, yet you expect the market to grow in 2021. What's behind your optimism.
Branch: I think there are three reasons here. Despite the fact that vacancy rates are moving higher, and despite the fact that COVID has pushed us all out of our offices and into our living rooms and whatnot, there will still be projects that move forward. I'm not 100% on board with the office-market-is-dead storyline. I think companies will continue to invest in office space. Amazon has been very upfront about that. There is actually a $2 billion office project that broke ground in New York just within the last couple of weeks. So those projects will continue to move ahead, not to the same pace as they've done in previous years, but the office market will continue to move forward. Second, we include renovation dollars in our office data. So if you think about maybe an open space office, cubes and whatnot and converting that back to traditional offices and improving air handling and HVAC that boosts the dollar value as well. And as we previously discussed, we include data centers in our office market. Over the past couple of years, it's ranged between 15% to 20% of total office construction. And I think that's an incredible growth market over the next several years,
Host: If I may just tag onto that. One of the other things besides the death of the office that people have talked about has been the movement of people from living in cities to moving to the suburbs. Do you see that as a continuing trend?
Branch: Absolutely. When you look at our residential data by county and you look outside of the large central metros, like downtown Phoenix and downtown New York, and out in the fringe metro or fringe areas, which are basically the suburbs or even beyond that into micropolitan areas or rural areas, we are starting to see residential activity pick up significantly there. Of course, that creates incredible spinoffs. It'll pull some commercial construction with it, although it'll be a different kind of commercial construction than we've seen, with fewer urban towers and maybe more flat flexible space. It'll pull institutional construction with it, schools and healthcare, and it'll pull infrastructure construction with it. You need roads, you need bridges, and new water. So I think that movement is definitely a silver lining for the construction sector in 2021.
Host: Great. Well, thanks so much for sharing your expertise with us today.
Branch: Happy to do it. Anytime.
 

EEA Snapshot: WSP's Weekend ABC Superstructure Replacement Project

 
 
Engineering Influence welcomed the project team for the Weekend ABC Superstructure Replacement Project led by Kelly Guild (WSP, Bridge Lead), Gary Runco (VDOT NOVA, The District Structures and Bridge Engineer), and Pooya Azar (Martins Construction Corp., Vice President and Director of Operations for Wilson) to discuss the details of their award winning project.
The project was also featured in the July/August 2020 issue of CE Magazine, which can be read here.
Register for the first ever virtual Engineering Excellence Awards Gala here. 
 

The Role of the Activist Engineer in Society

Engineering Influence welcomed Mike McMeekin, Executive Director of the Engineering Change Lab and Darshan Karwat, Assistant Professor, School for the Future of Innovation in Society, Arizona State University to discuss the evolving role of the engineer in society and the emergence of the activist engineer.  
Background:
Engineering Change Lab - USA (ECL-USA) is a new non-profit that is focused on the future of engineering. ECL-USA’s mission is to be a catalyst for change within the engineering community, helping it contribute at the highest possible level in addressing the challenges of the 21st Century.
ECL-USA has now held nine summits over the last three years. Each summit is a deep dive into an issue that will impact the future of engineering. The summits include a combination of learning from thought leaders, or provocateurs, along with small group and large group exercises and discussion.
“Society and technology are entangled together” according to Thomas P. Hughes, the great historian of technology. Engineers and the engineering community, as creators and stewards of technology, are inextricably woven into this knot. ECL-USA’s recent virtual summit included an exploration of this complex entanglement and the role that engineers, and the engineering community can play in an emergent future to help society anticipate and adapt to these entanglements.
One of the provocateurs for this session was Darshan Karwat, Assistant Professor, School for the Future of Innovation in Society, Arizona State University. Darshan Karwat’s work is centered around the concept of Activist Engineering. According to Karwat, an activist engineer is one who is willing to step back from their work and examine the question, “What is the real problem, and does this problem require an engineering solution?”

Strategic Considerations of a Contributory ESOP

 
Chris Staloch and Joe Skorczewski of Chartwell visit the Engineering Influence podcast to discuss how to use an ESOP to drive company performance. 
 
Host:
Welcome to the ACC engineering influence podcast brought to you by the ACEC Life/Health Trust. Today, I am joined by Chris Staloch and Joe Skorczewski from the Chartwell Financial Advisory. Chris is a managing director with Chartwell and has been with the firm for over 23 years. He has spent the past 12 years leading Chartwell's architecture and engineering practice. Joe is a director at Chartwell and has been working with Chris in the practice for most of his 15 years at the firm. We've invited Joe and Chris to speak with us today about some of the emerging trends with regard to ownership and compensation in A/E firms.
Host:
To start, what is the state of the current market? What are engineering firms looking for?
Staloch:
After some initial panic, when COVID first broke out, we actually saw a pretty quick return to what we would call normalcy. We actually managed to close a couple of transactions back in April, much to our initial surprise. We're seeing companies come to us looking for not only traditional third party sales transactions, but also new ESOP formations and a fair amount of just consulting around helping them think through their ownership, advisory issues. We see a number of companies that are currently struggling with how do they infuse enough capital into their organizations as companies transition out some of their previous ownership.
Host:
Are there any specific issues that you see as commonplace in the projects that you're working on?
Staloch:
One of the things that has become a recurring theme for us is that the companies that are privately held have this constant issue of having to transition the ownership of the business. And that's true whether the company is formed as an ESOP or whether they just have broad-based ownership in their organizations. And so what is happening right now is given the demographics of society. we're having a lot of people who are retiring from companies and the amount of capital that is available to come back into the organization through investments by other employees to replace those shareholders who are leaving is oftentimes not significant enough to make it worthwhile and to actually effect those transactions in a manner that you would hope to see on a recurring and regular basis.
Skorczewski:
I have a story to add. There's a client of ours who recently came to us. They do a fun Friday--this was pre-pandemic--morning trivia question. Everybody goes to the chalkboard and answers a question. And the question was if you won a million dollars, what would you do with it? And the answers were: A, I would go buy a boat; B, I would put it in savings; or C, I would pay off my student loans or other debts. And 80% of the firm answered C. The owner of the firm came to me and he said, "Joe, who am I going to sell my company to? My employees do not have the personal balance sheets to buy me out. So what should I do?"
Staloch:
That really speaks to the significant shift in the way the ownership has transitioned in businesses today. We've heard stories from our clients and older folks in these firms, who've talked about how they came to their ownership in the business. And they went out and got a second mortgage on their house and did things of that nature to be able to buy into an organization. Today we're not seeing people having the willingness to do that. Or in many cases, really even having the capability of doing that because of the amount of student debt that they're saddled with when they're coming out of school. For a lot of people, it might take them 10 years to pay off that student debt. They don't have the financial resources available to them to actually invest in these firms. So that presents a quandary for firms.
Host:
What are some of the considerations that companies should take when they're thinking about compensation and ownership questions then?
Staloch:
One of the things that we have seen is companies really trying to understand how they align their compensation programs with what they're trying to accomplish from an ownership perspective. Too many times, there's a disconnect between those things. Oftentimes they're thought about in a sort of vacuum. You have a firm that puts together this great compensation program, but it doesn't necessarily get them to where they need to be from an ownership perspective. And by that, I mean, oftentimes you'll see companies utilize stock as part of their compensation programs, either in the form of a long-term incentive program or as part of their annual bonus structure. But if there are not enough dollars or stock being utilized in those programs to actually effect the transitions of the older folks in the organization, that's not going to really work from a sustainable ownership perspective, if indeed the goal is to maintain the ownership of that company as a privately held organization inside the existing construct.
Host:
So what are some of the tools that firms can use to address these issues?
Staloch:
There's a variety of things out there. Oftentimes we see people think about programs such as stock appreciation rights, utilizing stock options, or Phantom stock. Things of those natures that generally are some sort of what we call synthetic equity. So they're equity-like instruments, but they're not actual equity in the organization. And so people will use those as part of their compensation programs, usually in the form of some sort of long-term incentive program. The other component that we often see companies look at is just going to stock bonuses or setting up programs where a portion of the cash bonus that the company is providing to their employees is expected to be utilized as part of the repurchase, or I should say, the purchase of stock in the organization.
Staloch:
There's an interesting psychological element that we hear people talk about, and management teams have different philosophies on this front. Sometimes they'll utilize stock bonuses as part of the program and they feel like they're, quote-unquote, giving stock to their employees. But if they cut them a check for their bonus, and then the employees need to make a decision to actually turn around and write a check back to the company, to buy stock in the organization, that there's a different sort of mentality behind that for the employees. There's more of a feeling of having skin in the game in that regard. So, so that's something that we see frequently as well.
Skorczewski:
One unique tool that we've seen come back to life is deferred compensation. And again, I'll walk through a particular story. As has been well-documented, the talent war in this industry is real. And further, there's a specific gap of these 10-to-15 year folks, project managers, future leaders of the firms. There's a shortage of them actually dating back to the recession of 2008. Many owners of firms don't want to reach down too far to provide ownership to a 30-year-old, for example, but they really want to retain that individual. But that individual is in high demand, and they don't want to lose them. What we've seen happen in that case is there's can be some sort of deferred compensation plan put into place where you might award that individual, a series of bonuses, $10,000, $20,000, whatever the number is that vest over a period of years, say three or five years. The presumption is that at the end of three or five years, that person would then be in a better position. And like Chris said that award would vest, that person would get paid, and that person would turn around and purchase stock in the company. So it's a way to extend a little bit deeper down into the organization, which can be useful depending on the demographics of your specific firm.
Staloch:
Two other elements of this to add to the discussion. One of the other tools that we've seen companies utilize is their 401K. What they'll do in some instances is create a stock fund inside the 401K of their own company stock that they allow their employees to invest in, or utilize stock in the company as part of their matching contribution to the employees' dollars to get more shares into circulation in the organization. Frequently we're seeing companies look at that as a creative solution. And then the other element that is becoming more common is a contributory ESOP? The idea behind that is that would use the stock of the corporation to make contributions into a retirement plan for the employees. It works very similar to what I mentioned on the 401k front, but it's really in the form of an ESOP and gives the company certain tax benefits that you do not necessarily have with other forms of compensation that are provided to employees.
Host:
ESOPs are usually thought of within the context of transitioning ownership in a company. Can you explain the difference between a traditional ESOP and a Contributory ESOP
Skorczewski:
An example of a traditional ESOP that most have come to learn and know in the industry space is the ESOP can be any percentage of the company, but traditionally, some pretty big milestones are 30 percent ESOP, 51 percent ESOP, and 100 percent ESOP. I'll walk through an example that's been very prevalent in the industry. You have a company that's a C Corp, let's call it a $30 million company. You might have four or five shareholders getting to retirement age and they might own about 30 percent of the shares. In that situation, the company would set up an ESOP. Next, the company would go to a bank, get a loan for $10 million, which is about 30% of the overall value. Then the company would loan that $10 million to the ESOP and the ESOP would go ahead and purchase those shares directly from the departing shareholders. There is, in that situation, an internal loan that's created between the company and the ESOP, and those shares are essentially collateralized and then released over a period of time, let's say 10 or 20 years. That would be the traditional ESOP, a leveraged transaction, which is a significant event in a company's history.
Skorczewski:
Now let's compare that to a contributory ESOP. What occurs in that situation is the company goes and sets up an ESOP, but rather than entering into a transaction, the company simply issues newly issued shares, let's say 3 percent of qualified payroll, and deposits those shares into the ESOP. Over 10 years, uh, you might get to the same spot, where the ESOP would own 3 percent in year one, 6 percent in year two, 9 percent in year three, etc. Over that period, all of those shares are allocated and you essentially arrive at a similar spot. You just get there in a different way.
Staloch:
And I'll just add to that, that one of the reasons that companies tend to think about utilizing a contributory ESOP, as opposed to a traditional ESOP structure, is that in the concept that Joe just described, you are reducing the fiduciary exposure significantly for the trustee overseeing the plan. Because now the trustee is not necessarily making a decision to purchase stock in the company. They're just accepting a contribution of shares into the plan each year. And so the amount of risk that's associated with that type of a model is substantially less than what it would be under a traditional ESOP construct.
Host:
Are there other benefits or reasons why owners and sellers would choose to go with a contributory ESOP versus a traditional ESOP?
Staloch:
Some companies, particularly as we sit here today, are looking for ways to incentivize the employees to go above and beyond and really drive growth in the organization. A contributory ESOP is a way to provide ownership to the employees and start to build that kind of ownership culture without providing direct ownership in the business, which carries its own complexities that go along with that.
Skorczewski:
In addition, as you compare those two examples. In the contributory ESOP, there's a small amount of capital that's invested in the company, but it's not a $10 million transaction. It's a small contribution of shares. So it doesn't impact the balance sheet in a way that a traditional leveraged transaction would. We've seen it work really well with very long runways, meaning folks that are maybe 50 or in their lower fifties who might have 15 years to retirement. They might feel it is just too early for them to sell. Maybe the next 10 years are going to be really good and they may not want to exit or liquidate their holdings so soon. In a contributory ESOP model, the percent ownership changes slowly over time. So you're not timing the market, so to speak, with a particular transaction on a particular date. It's more of a thought-out interval, a process over 10 years. So if you have good years in front of you, or particularly in the environment that we're in today, if the value is low, you might not want to sell today. But a contributory ESOP would put a market in place, communicate to the employees and the company where we're trying to take this entity over time, and provide clarity to all the stakeholders in the firm.
Host:
Finally, what are some of the challenges of utilizing an ESOP in this manner?
Skorczewski:
On the flip side, if we're dipping our toe into the water, we're creating a lot of flexibility for our departing shareholders, but it takes some time to create meaningful balances into folks' retirement accounts. It will not be an overnight success, and communicating to your employees that they own the company while contributing $575 to their retirement account that they're going to have access to in 40 years isn't a big bang out of the gate. But that's okay. It takes time. And that's not the intent. Over the course of a generation, over the course of a decade, you will start to accumulate shares in your account. The value of that will grow. And over time as you communicate that it will work, it can work very well. But the small dollar amounts right out of the gate are sometimes contradictory to someone feeling like they're an employee-owner.
Skorczewski:
In addition, a lot of folks would rather have a dollar in their pocket today than a dollar in their retirement accounts. So knowing and communicating around that would be important. And, and there are some explicit costs of trustees and valuation firms and third party administration. So, just from a dollars-and-cents perspective, you'd want to make sure that you are committed to going down this path. Otherwise, if you do this for a few years and then revert to something else, you'd have spent some fees that could have been gone elsewhere.
Host:
Great. Well, that's, it's been an illuminating discussion into contributory ESOPs. I appreciate you taking the time.
 

Looking into the Future of the Office Market

Carl Shilling, a principal at Stantec, joins the Engineering Influence podcast, to share his thoughts on the current state of the office market sector and how it may change going forward.
 
Host:
Welcome to the Engineering Influence podcast sponsored by the ACC Life/ Health Trust. One of the biggest business impacts of the COVID-19 pandemic has been the transition to working at home for many professional and office workers. In many downtowns and suburbs, offices are dark and empty. Not surprisingly. This situation has raised questions about the concept of the office. Many pundits have speculated that our traditional views on the office must change and that remote work will play an increasingly large role, maybe even a major role in the future. Others promote the benefits of the office, collaboration, teamwork, efficiency, and argue that once the pandemic has abated, we will return to the office. This is an important discussion for the engineering industry and for firms that work in the office space. To discuss these issues and more, we're here with Carl Shilling, a Stantec. He has a principal based in the firm's Butler, Pennsylvania office, and has more than two decades of experience focusing on the sustainability of the built environment. Carl, welcome.
Shilling:
Thanks for having me. I appreciate it.
Host:
So in the initial days and weeks of the pandemic, many companies shut down their offices, and employees began working virtually. Assuming that we eventually have a vaccine for the virus,. do you expect the virtual work environment to perpetuate, will we return to the old normal, or will we find something in between?
Shilling:
We, like many companies, vacated our offices and performed our business remotely. And I will admit, I did not expect it to work as well as it has. The technology has come through. We've been very successful in conducting our business virtually through, like the interview today, Zoom meetings, Team meetings, and others. They have worked very well, but as you're asking, as we're thinking ourselves: What do the next couple months mean? What does the next year mean? How are we going to conduct business in the future? Beyond our personal experience, we have also polled a lot of our clients--over 130 of them actually--to get their perception on what they think is going to happen in the future, so that we can position ourselves to design appropriate space. What we found is that although it's been successful, we're missing the human component. So we're hoping that beyond today, tomorrow that there's still going to be some interaction within the office, whether that's two days a week, three days a week. But people have learned that they can be effective from home, so what we used to be considered a luxury--being able to work from home--is now going to be considered the norm. So I think there's going to be an expectation that we still need the office space where we can go in and collaborate and understand our partners, their in-person reactions to real-life situations, but we also understand that we can be effective from home. And there are some advantages to being home with our spouses or wives or children and conducting business from there. So what we're expecting is that, yes, there's still going to be a demand for office space, but that workers probably won't be coming back five days a week 40 hours like they did prior to the coronavirus situation.
Host:
So, as an office designer, as an engineer, what does that mean in office design? Is this going to change it?
Shilling:
It will. One of the questions that's paramount is do you need the same amount of square footage or space to conduct business that you did prior to entering the pandemic? And what we're coming back with is that the dedicated office space that people are used to having, your cubicle, wherever you do your work, is probably going to change because typically it does not provide the right amount of separation or distancing from coworkers. But if we go into design and expect to be able to provide that, maybe the same amount of square footage works, but we have to reconfigure it so that it still promotes interaction between coworkers. We may need to spread out so fewer people are going to be in the office at any given time. Or it's going to take a larger square footage to accomplish the same thing.
Host:
In your conversations with your clients, what are their concerns?
Shilling:
It's kind of the same thing. How do I get my people into the office safely? How do they interact safely while they're there? We've all been out shopping in the meantime during the pandemic and you see one-way aisles. You see limitations of where we can't all go in at the same time. I think that's what we're going to see. You may go into the office, but you have to enter at multiple points so there isn't a large grouping of people at any one location. When you get into the office, there might be direction, it's probably not going to be arrows on the floor, but there's probably going to be within the design, elements to encourage people to not all go the same way or congregate in the same place.
Shilling:
You're probably going to see people spread out a little more than what you see in today's office, but there are still going to be spaces where you can interact with each other and do your work, There's probably also going to be additional technology within those spaces so that your coworkers and staff that aren't in the office at the time can log in or dial and be a part of the team, whether they're there personally or not.
Host:
You mentioned retail as one area that you can take some lessons from. This is a unique situation. So where have you looked for guidance to make design decisions on health and safety concerns?
Shilling:
I mentioned that we do multiple types of buildings and one of them is health care and doing that kind of design has given us a lot of direction on whether the virus is transmitted through the air or is it mainly a contact risk.
Shilling:
Those kinds of things really go across building types. It's not necessarily just indicative of the office environment. And so the first thing, the biggest risk, is proximity to your coworkers. Now we've heard about six- feet distancing. But given the particle size that you put off wearing a mask, does the mask stop it? As the particles dry, do they float longer than a couple of hours? So we're thinking about these issues between workers. We're thinking about how it is distributed by the air handling systems. There' are many aspects as to how do we keep people safe,
Host:
Focusing on HVAC, what changes do you expect to see in HVAC going forward?
Shilling:
The first thing is ventilation. There are three main bullet points and the first one is ventilation. The minimum that we have to think about is, do the systems within the building provide the minimum ventilation rates required by current code, whether that's the International Mechanical Code, whether that's ASHRAE 62, but a lot of office spaces, for energy efficiency reasons have reduced the amount of outside air, have chosen not to do it when they're not there in off-hours, but I think there's a general understanding out there now that we need to continually ventilate the spaces we're in. The benefit to the personnel outweighs the energy demand on the building.
Shilling:
Number two is filtration. Typical filtration for office environments is like a MERV-6 six, 25-30 percent. I think there's an understanding out there that can the particle sizes that we're dealing with be captured by a filter? It can. We're all wearing masks, right? So masks aren't really a very high particulate filter, but the virus lives in things that are larger, like water drops or things like that. The same thing applies to HVAC systems where if we put higher efficiency filters in, there is a benefit to the office environment. The parallel argument with that is I'm going to need more horsepower and fans to push the air through the higher efficiency filters. So there is an efficiency offset with putting in higher efficiency filters. I'm going to use more energy to do that.
Shilling:
Lastly, there are lots of products coming to market that we all trust, that we've been using, that have a benefit with combatting the virus, whether it is additional filtration, HEPA filtration, whether it's UV lighting, whether it's a technology like bipolar ionization. These are all things we need to have in our toolkit and our approach to making spaces safer that we can employ to respond to the demand that's out there.
Host:
In many office buildings, one choke point would be the elevator because you have to get people up upstairs and the elevator is by its nature, a confined space. What do you see happening with elevators?
Shilling:
I've seen a raft of things coming to light. And again, it's are you dealing with an existing situation or are you dealing with a new design? The most creative thing that I've heard reported to me, and it was experienced by one of our own employees visiting a client site was they entered an elevator. And it was an existing elevator. It was a small facility. The owner had attached a sponge to the wall and put a bunch of toothpicks in the sponge. And whenever you entered the elevator, you were to pick a toothpick and use that to push the button.
Shilling:
That was a very low dollar, very innovative solution to be as safe as they could with what they had. On the other end of the spectrum is we're designing new elevators. There are all kinds of new control technologies out there where instead of going to the elevator lobby and entering an elevator and pushing a conventional button, before you even get to the lobby, there's a panel where you can enter where you want to go. That panel then looks at where are the elevators in the building are, directs you to a specific one, and controls how many participants are in that elevator. That particular car delivers you to the floor without ever having to touch anything within the elevator itself. So there is a lot of technology coming out to address that situation. But we have a whole lot of existing elevators that we're going to have to be creative with. What are we going to do for those specific cases?
Host:
The economic forecasts for the office market are pretty bleak right now. What opportunities does Stantec see?
Shilling:
Again, communicating with our clients, there's a lot of waiting to see what happens. I will say that when I left the office back at the beginning of the year, I never expected that we would be gone this long. It has perpetuated far longer than I ever expected.
Shilling:
I think everybody's in a holding pattern to see where this is going. Is there going to be an additional infection rate here in the fall? As the weather gets colder and the humidity level drops, are we all going to be more susceptible to the virus? I think it's going to be another six months of what we're seeing, but I really think that there is a real desire for offices to open back up and for people to at least get back into the office in some way so that we can continue what we're doing. We're surviving just fine, but we are not thriving. We need to do additional things that we're not doing now, such as getting new people into the workforce. That isn't possible remotely like we're doing.
Host:
From an engineering perspective, is it going to more retrofit and renovation work in the office market in the short to mid-term?
Shilling:
I do. Yes. We're going to have to take a look at the existing systems. We're going to assess them. Are they bringing in any outside air or the right amount of outside air? We're going to look at whether all areas of the office have air distribution. Are there any dead spots?. I think we're going to look at whether existing air handling units can support additional filtration beyond where they're at right now. And then I think we're going to be looking at, can we apply things like UV lighting to sterilize the airflow? Can we employ things like bipolar ionization within the airstream to sterilize the airstream? Ionized hydrogen peroxide has onto the market that can be independent of the air handling system. There are devices that we can just hang on the wall to deliver these ions to the space, to clean the surfaces, to sterilize the air. There are many, many things out there that I think we can apply without spending a lot of money to make the space safer on a broader scale.
Host:
There's been a lot of talk that one of the impacts of the pandemic will be that the downtown business districts will shrink and the offices will move to the suburbs where there's less density. What is Stantec's view on that?
Shilling:
We're not seeing that. We're seeing that companies are still going to make the decision on where they want to locate their offices based upon serving their clients and where it makes the most sense for their office to be. I think what you're going to see is the opportunity for employees to choose whether to go into the office more or less independent of where the office happens to be located.
Shilling:
We are not seeing companies changing their business approach. Some of them are hub and spoke where the hub is within the city and the spokes are into the suburbs. Some, some companies choose to do work in the suburbs. That's where their clients are and where they interact. I don't think the specific office location is necessarily going to change. I think it's going to be focused on the ability to give their workforce the opportunity to say, "I'm going to be there all the time," or "I'm not going to be there all the time." And part of that is attracting new talent. The new generation of employees is going to demand the flexibility to say, "I'm going to work from home" or "I'm going to come into the office." And I think that's where companies will find success, in not necessarily changing the office location, but changing what they're asking their employees to do.
Host:
Great. That gives us some good insight into the office market. I appreciate your taking the time to speak with us.
Shilling:
I appreciate it. Thank you for having me.
 

A Preview of the Fall 2020 Private Industry Brief

 
 
ACEC's Erin McLaughlin joined the podcast to discuss the newly released Fall 2020 special Private Industry Brief, which can be read here.  Erin will be presenting a detailed analysis of the brief during the upcoming 2020 ACEC Fall Conference later this month.  More information and registration details for the event can be found here.  

Government Affairs Update: A Preview of Upcoming Webinars on NEPA and DOD's CMMC regulations

Matt Reiffer and Dan Hilton from ACEC's advocacy team joined Engineering Influence to preview two upcoming webinars of importance to our member firms:
 
September 30, 2020 at 1:30: Changes to NEPA Implementing Regulations and the Potential Impact on A/E Firms and Clients
 
October 8, 2020 at 1:30: New Cybersecurity Requirements Create Significant Responsibilities and Liabilities For Federal Contractors: What you Need to Know to Ensure Compliance 

The Engineering Health Quote from the ACEC Life Health Trust

 
Engineering Influence welcomed back the ACEC Life Health Trust to talk about the new Engineering Health Quote service that helps small and midsize engineering firms save money and time when searching for health insurance.  Find out more here.
 
Also, the 2020 ACEC Fall Conference early bird registration ends September 30th.  Act today to save $100 on your registration for this first ever virtual event!  Learn more about the event program and register here.