By Nate Berg
This is the second article in a four-part series offering strategies for future-proofing your architectural practice.
Market volatility is inevitable in the building industry. It can be a mere blip, like when new state healthcare regulations dampen demand for healthcare facilities for a year or two. Or, as every architect knows, it can also be devastating, like when the entire housing market collapses and pulls the economy into a multiyear recession.
Avoiding industrywide catastrophes is difficult, but firms can protect themselves against the inevitable ups and downs through diversification. Though common sense suggests looking for counter-cyclical markets—one that’s up when another is down—truly counter-cyclical markets are nearly impossible to find. Instead, architecture firms should be pursuing work in four to five sectors that are affected by different economic forces. Government bonds, for instance, may fuel demand for libraries and civic buildings one year, while changing demographics may drive up the need for senior housing five years from now.
By working in several markets that are “independently cyclical,” firms can cushion themselves against “the blow of a downturn in the economy, or a downturn in any one or a couple of those markets,” says Ray Kogan, AIA, president of the strategic planning consultancy Kogan & Co., in Arlington, Va.
He suggests that firms do a market analysis of each sector in their portfolio to determine which they should focus on, and which could spot others in downturns. Market indicators are available from several sources, including industry-specific billings reported in the AIA's monthly Architecture Billings Index; brokered data from real-estate services; general economic indicators like housing starts or the unemployment rate; and clients knowledgeable about their sectors' economic health. Combining that with demographic trends and knowledge about new legislation and tax incentives can help firms to make educated guesses about which markets may perform well two to three years down the line.
Each quarter, McMillan Pazdan Smith Architecture (MPSA) engages in these types of analyses to monitor its near-term economic health and to determine which markets it should dedicate more resources. Chief operating officer Chad Cousins, who works in the firm's Greenville, S.C. office, says following construction indexes from Dodge Data & Analytics along with regularly analyzing the firm's strengths and weaknesses have helped it become more discriminating about which markets to invest in and how to prepare for market swings.
“There were some markets … that we kind of fired and said, 'We're not doing it anymore,' ” Cousins says. “Either we couldn't be as effective or it wasn't as profitable, or we didn't think the economic conditions were as good to be involved in that market.” For example, some federal government projects weren't worth the amount of preliminary design work, regulatory compliance, and overhead they required.
“We prioritize markets where we're positioned well and the market conditions are good, or where market conditions might be sort of mediocre, but we're well positioned,” Cousins says. “And then below that, [we consider] where market conditions are hot and [if] we're within reach of being able to have strong capability in that market.”
Kogan agrees that examining a firm's reputation within a market is essential. “If you put these two things together—the future of a given market and your current standing—then you can see what, realistically, you need to do to be a go-to firm and whether the investment is working,” he says.
But diversification doesn't necessarily mean operating in disparate markets. Collingswood, N.J.–based architecture and engineering firm Kitchen & Associates (K&A) decided to distribute its efforts within one market: housing. Principal Stephen Schoch, AIA, says the sector is varied enough that different submarkets operate on independent economic cycles. The firm focuses on affordable housing, market-rate multifamily housing, and developer-driven student housing.
“These are all driven by very different market demographics and sometimes economic factors,” he says. “Rarely does every aspect of housing take a strong hit.” Even during the Great Recession, he adds, the firm's multifamily work remained fairly steady.
K&A's approach is actually conservative, Schoch argues. By focusing on similar typologies that operate under different market conditions, the firm is able to build a self-reinforcing expertise as well as a talent pool that doesn't need to be thinned when one market falters. “If you really know your [particular] market, you can diversify by going deeper instead of wider,” he says. “I'm tapping into submarkets that enhance my overall strength as a housing professional.”
This article was originally published in ARCHITECT in November 2016.
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