November 6, 2008

AEC industry waits for the other shoe to drop

  • The underlying economic fundamentals in our region remain strong because people still want to move here, live here, work here and raise families here.
    Ruffcorn Mott Hinthorne Stine


    Barry Asmus, senior economist with the National Center for Policy Analysis, stated that “economists are pessimists; they’ve predicted eight of the last three depressions.” Similarly, the architecture, engineering and construction industry has spent the past several years waiting for the other shoe to drop on one of the longest cycles of economic prosperity our region has ever experienced.

    Past prosperity

    Over the past decade, the AEC industry has embraced and benefited from a seemingly insatiable demand for our services, drinking from the fire hose of opportunities across both the region and the “flat world” in which Thomas Friedman suggests we all live. As recently as June, Governor Chris Gregoire suggested with confidence at a Downtown Seattle Association luncheon that while other regions were already feeling the weakening economy, the Northwest was somehow recession-proof, as if the sheer number of tower cranes in the sky would keep the other shoe suspended.

    In our little corner of the flat world, jobs were being created across market sectors. Airlines were buying airplanes, coffee was exploding as an industry rather than a beverage, people were buying software from a company whose biggest challenge was hiring enough talent, condos on top of hotels on top of grocery stores were selling at record prices, and local/global companies were building their own headquarters here. The masses were buying everything from peanut butter to cars from one of two locally based mega-retailers: one which sells everything from giant warehouses but allows us to order it on-line and then delivers it to us; and the other, which sells everything from giant warehouses but allows us pick it up ourselves while we get free granola bar samples.

    Images courtesy of Ruffcorn Mott Hinthorne Stine
    A projected 1.4 million people expected to arrive in the region by 2020 will need housing provided by such projects as 3031 Western, which will have 75 apartments overlooking Elliott Bay and the Olympic Sculpture Park.

    In addition to the private-sector boom, every large or small city in our region was happily managing their growing pains and every major institution was expanding. The UW culminated its $2.5 billion Creating Futures campaign while WSU received its largest single private financial commitment ever from the world’s largest philanthropic organization, which happens to be building its world headquarters in Seattle.

    Also, we imploded one functioning stadium that wasn’t paid for yet and built two more to replace it. Then we built two more partial transportation systems (light rail and a streetcar) to augment our other partial transportation systems (buses, ferries and trolleys) while we processed another partial system to a slow death (monorail). The Seattle Art Museum expanded by sharing new facilities with a formerly major bank and converting contaminated property into the world-class Olympic Sculpture Park.

    All of this prosperity and progress occurred in a region of 3.8 million people and in a city whose population barely exceeds 600,000. And, all of it occurred in spite of a series of temporary economic contractions over the past decade.

    Regardless of whether one chooses to attribute these past economic retractions to any particular president, Hurricane Katrina, the dot-com bust, 9-11, or any combination thereof, the reality is that Governor Gregoire was correct in suggesting that our region has been fortunate to date. Our collective confidence in our ability to sustain unprecedented growth has allowed firms of all types and sizes to thrive, and even provided the catalyst for some smaller firms to emerge.

    Recent events

    However, over the past several weeks, cautious optimism has given way to the realization that the rules just changed. Some of the most venerable financial institutions in the history of the country, including local icon Washington Mutual, have failed. The stock market swings wildly every day, and most people don’t know how much “money” they really have at any given minute. Consumer confidence has waned, there’s still a war going on, and we just had a historically significant election.

    The Institute for Health Metrics and Evaluation is a premiere example of Seattle’s growing global health community. IHME houses multi-disciplinary collaborative research programs with support from the Gates Foundation and the University of Washington.

    By all accounts, it appears the other shoe has probably dropped, and it’s a bigger size than we thought. Most of the economic experts seem to have concluded that “it” actually is a recession, and are now merely debating severity and duration. Regardless of what we call it, most have concluded that it will feel different than recent smaller economic hiccups, primarily because the last one of similar severity is so far removed from our memory banks. So now what?

    Moving forward

    Moving forward, what matters is not who or what caused it, which administration will get blamed for it, or how long it will last, but what we’re going to do differently to get through it now that we’re wearing a big shoe on our head. It may actually be that the old rules are new again.

    In an article on the front page of the Oct. 21 Seattle P-I regarding the credit crunch, a Wells Fargo Bank representative is quoted saying that “the best-conceived projects are being built for something there will be demand for” — as if for the past several years that was not amongst the criteria.

    As a small firm that opened our doors four years ago, the old rules of our survival phase are still fresh in our memory. We still treat every project as if it’s our last and every client as if we owe them something for placing their trust in us. We don’t borrow more money than we’re worth, we work with clients and hire staff whose values are in alignment with ours, we only commit to work that we can do well, we don’t buy plane tickets to Dubai because things are taller there, and we focus on making decisions that are in the best long-term interest of our clients, families and community.

    Based on absolutely no expertise, I’d like to believe that just as the stock market fluctuates over time as it continues to grow, the underlying economic fundamentals in our region remain strong and sustainable. People still want to move here, live here, work here and raise families here. We’ll still have growth to manage, people will still fly planes made here, drink coffee brewed here, cure cancer with research done here, and receive a world-class education from state universities. Perhaps if we get hit on the head enough times with falling concrete and spend enough time sitting on Interstate 5, we might even replace a crumbling viaduct and complete a transit system.

    Through all of this, the AEC industry will continue to have a significant impact on the immediate and near-term success of our region as we work together to accommodate the 1.4 million people that are projected to move here by 2020.

    As we attempt to thrive long term, our immediate challenge is to survive (again) in the short term with fewer project opportunities from which to select. Our immediate success will not be measured by volume of work, net revenues or number of employees. Rather, success and growth will be measured by how we work together to innovate and do better with less, how we are able to increase efficiency through BIM and other technologies, and how we integrate sustainable strategies into our practice and our region.

    In other words, growth and success are not measured by the old metrics, but on fundamentals that apply regardless of the economic circumstances.

    Brad Hinthorne, AIA, is a founding member of Ruffcorn Mott Hinthorne Stine, a Seattle design firm.

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