Architecture, Engineering & Construction (AEC) Industry Report

The Architecture, Engineering & Construction (AEC) sector is a multi-billion-dollar market that remains on pace to grow steadily in the coming years. Record public-sector spending on new projects will support higher profitability, resulting in solid backlogs, greater project certainty, and improved overall industry health. 

Key Market Trends

Worldwide, market growth is driven by a surge in sustainable homes, comprehensive master planning, pedestrian-friendly communities, disaster-ready infrastructure, and flexible designs. In the U.S., investments in energy, transportation, housing, and manufacturing are driving sustained growth. 

Commercial contractors continue to see high demand for projects associated with chip manufacturing, clean energy facilities, tourism, retail spaces, and national infrastructure.

Small and medium-sized enterprises (SMEs) lead the global AEC market share, driven by growing infrastructure projects. They play a significant role in job creation and economic growth.

Ongoing trends in the AEC sector include digitalization, data analytics, artificial intelligence (AI), virtual reality (VR), and sustainability. Innovations like intuitive design software and earth-friendly materials are the industry’s future.

With technological advancements, construction companies use data analytics to assess productivity, plan projects, predict market patterns, and accomplish other tasks. More businesses are using data analytics to improve decision-making and remain competitive in today’s market. Data analytics are used to increase building efficiency, lower environmental impacts, improve collaboration, improve quote accuracy, reduce human error, and create better timelines.

Buildings are becoming more intricate as owners and residents expect more from their homes, workplaces, and other structures. There are major opportunities for construction and ser­vice providers due to the required maintenance of new systems, and the need to upgrade or replace existing systems. This is a great driver of mergers and acquisitions interest and activity in the sector.

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The HVAC segment plays a significant role in the AEC industry. Important trends in this space include:

• Smart HVAC: The growth of the Internet of Things (IoT) has allowed us to control, monitor, and interact with a range of systems and appliances like never before. HVAC systems are increasingly incorporating this technology. These advanced HVAC systems will include repair notifications that let you know when repairs or maintenance are needed, remote access, and self-regulation, featuring new sensors that help the system regulate itself and determine when and where in the building it is most needed.
• Sustainable Building Design: Sustainability is a primary consideration in the design of new buildings, often referred to as green building design. HVAC is a key component in green building design as it is one of the primary energy consumers. The increased focus on sustainability has led to several advancements in the industry, such as ventilation systems that use more natural airflow to reduce facility energy consumption. HVAC systems using alternative power sources and new building materials that help maintain a more consistent temperature in buildings where a robust HVAC system isn’t necessary.
• DeVAP HVAC: DeVAP (Desiccant Enhanced Evaporative) is changing HVAC as we know it. These systems use evaporative cooling, which turns water into vapor and cools the surrounding air. DeVAP systems also remove humidity from the surrounding air. They provide the same dry, cool air offered by traditional air conditioners. However, DeVAP systems consume considerably less energy and contain no harmful refrigerants.
• Geothermal HVAC: These take advantage of consistent temperatures underground to cool and heat buildings. Using water running through underground tubes, these tubes are heated or cooled by the ground’s temperature. This water then travels to an indoor unit, where a fan, pump, and compressor deliver cool or hot air to other parts of the building.

M&A

Since 1985, the construction and engineering sector has seen more than 100,000 M&A transactions, totaling values in the trillions, underscoring its substantial influence on the global economy (source: Institute for Mergers, Acquisitions & Alliances).  Federal and other legislative funding is driving business performance into the foreseeable future. This supplemented demand has led industry constituents to pursue M&A strategies, both as buyers seeking to improve their market position and as sellers seeking to capitalize on historic tailwinds.

The push for companies to become one-stop shops for all architecture, engineering, and design-related services has driven a surge in demand for specialized firms in this industry. The current business environment of deregulation and tax cuts is primed for well-run companies to experience increased free cash flow. This trend, paired with rising interest rates, is the perfect environment for firms to put funds to work to grow their companies through acquisition.

Another significant driver of M&A in this industry is the need for vertical integration between companies, including equipment manu­facturers and building technology providers. These businesses seek to grow their service capabilities by converging innovation with traditional mechanical and electrical building ser­vices. Target companies that draw the most attention from buyers are often specialty contractors that have proven success in working within the ever-changing technology landscape in the industry. Mechanical, electrical, and plumbing companies that are willing to adopt building information modeling, prefabrication capabilities, and data center expertise are more likely to attract interested acquirers in this sector.

The commercial construction market is a highly dynamic, competitive landscape. As multiple players compete for dominance, they are shaping market trends by finding ways to innovate, pursuing strategic alliances, and creating robust operational frameworks. As demand continues to evolve, companies in the commercial construction sector must be prepared to manage ongoing challenges such as labor shortages, supply chain disruptions, and regulatory issues while implementing sustainable practices that balance client demands with environmental standards. The market has seen significant developments on the M&A front, with major players expanding their portfolios through strategic projects and partnerships, pursuing consolidation to gain a competitive edge, and expanding international reach.

The residential construction market is undergoing significant changes thanks to technological advancements, sustainability initiatives, material innovations, and diverse market segmentation. This creates financing opportunities to support a bright and enterprising future. Major players in the residential construction space are focused more than ever on expanding their global footprints and strengthening their market positions. Companies are turning to strategic partnerships, mergers, and acquisitions to get a competitive edge and consolidate market share. Key market players are investing in research and development to implement new technologies, sustainability practices, and cost-effective solutions, as well as digitalization and automation to boost efficiency and operational productivity. Focusing on sustainable design practices and investing in advanced materials can give companies a competitive advantage in the market, as there is greater emphasis on energy efficiency and environmental responsibility. Stakeholders must remain flexible and informed, and consider forming strategic alliances with technology experts to incorporate innovative software solutions that improve workflow and project management. It is an intensely competitive market where established and emerging players are competing for market share. Staying a step ahead of the game means that companies need to focus on differentiation through specialization, customized offerings, and value-added services. Through strategic partnerships and acquisitions, many companies are expanding their presence and are continuing to pursue growth opportunities in emerging markets.

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M&A activity in the roofing sector has increased in recent years, as small and mid-sized independent companies look for succession strategies and financial partners to create growth opportunities. Even with ongoing recent consolidation trends, the number of roofing companies in the U.S. is forecast to grow. Small, localized companies that continue to enter the market are driving this growth. The key vendors in the global roofing sector are focused on several growth strategies to maintain and expand their market share. These strategies include product innovation, technological advancements, strategic partnerships, and mergers and acquisitions. By continuously evolving product offerings and adopting new technology solutions, vendors can meet customers’ changing needs and stay ahead of the competition. Strategic partnerships and acquisitions, in particular, enable them to expand their physical presence and diversify their product portfolios, thereby catering to a larger customer base and improving their overall position in the industry. Their key growth strategies are focused on driving expansion, increasing market penetration, and sustaining long-term competitiveness.

Construction project delivery methods are also a driver of vertical integration and M&A activity. In addition to the traditional design-bid-build delivery method, there is:

• Construction manager at risk (CMAR): The owner selects a construction manager (CM) to be responsible for the project, based on criteria such as construction cost, quality, track record, project approach, and meeting deadlines. The design and construction are contracted separately, and the CM provides input on the budget, cost estimates, scheduling, and the review of design drawings to identify issues and potential savings. Construction pricing begins early in the design process and is refined as it progresses, resulting in a final guaranteed maximum price (GMP) for the owner prior to construction. GMPs are often comprised of a cost-plus-fixed-fee structure, where the actual project costs for labor and materials are passed through to the owner, and the CM charges a fixed fee on top of that amount.
• Design-build (DB): The owner hires a crew under a single contract to deliver the construction project from start to finish, including both design and construction. Pricing changes are kept to a minimum and usually occur only when unknown conditions or owner requests increase the cost.
• Integrated project delivery (IPD): The owner chooses an architect/engineer and CM prior to the start of the design. All three sign a joint contract after agreeing upon all objectives. Increased collaboration is thought to reduce overall risk.
• Public-private partnership (3P): Under this model, a contract is established between a government entity and a private corporation to fund, construct, renovate, operate, and maintain public infrastructure. The private entity receives income from the project to pay off and eventually profit from the investment.

As integrated delivery methods gain popularity across more and more markets, contractors look to M&A to add in-house design services through strategic partnerships that give them a competitive advantage.

The construction drilling industry is a very diverse market that handles various private and public contracts, including infrastructure expansion, excavation, road boring, poly piping, trench work, geotechnical drilling, and foundation drilling. The key drivers for mergers and acquisitions in the construction drilling industry for most companies include:

• The objective is to grow and diversify the businesses
• Expansion of services and capabilities
• The need to address qualified labor shortages in an industry where talent is increasingly difficult to find

Consolidation is also being driven by a customer demand for large companies that offer integrated, single-source solutions. This includes the collaboration by design and construction firms looking to integrate and expand their delivery capabilities vertically. Additionally, strategies are about more than the creation of better solutions for clients in the construction drilling industry. They are also motivated to create a better platform for employees. In what is a very competitive labor environment, offering a solid growth platform is just as crucial to employee retention as it is to customer satisfaction and shareholder value. Employees can benefit from the advantages and growth possibilities that come with being part of a larger infrastructure company.

Buyers’ interest in the construction-drilling sector is partially driven by the need to remain competitive by adding capabilities and scale, as competitors expand through acquisitions. With a divide between large integrated firms and smaller niche providers, those that are not growing as quickly as their competitors risk getting lost in the gap.

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Horizontal Directional Drilling (HDD) is a trenchless method used to install underground pipes, cables, and conduits along a predetermined route using a surface-launched drilling rig. It has gained great popularity in the industry because it causes minor damage to the topography of the adjacent areas.

The opportunities for growth in the HDD market are strong due to high demand from the telecommunications sector. As telecom companies expand broadband service availability, demand for cellular tower installations increases. As digitization is steadfast in both developed and developing countries worldwide, cable, broadband, and fiber companies are expanding networks to serve the growing demand. The growth of the HDD market is also heavily supported by the steady demand from utilities such as electric, water, and natural gas distribution. Utilities account for more than half of the overall revenue in this market.

Additionally, some companies are taking vertical integration in the building sector to the next level. In order to cut down on time and reduce costs in a building construction project, they are vertically integrating the model of design, material supply, manufacturing, logistics, and assembly.

As in most industries, the acquisition of technological solutions is an inevitable driver of M&A in the building and maintenance industry. Technology provides a vehicle for differentiation for companies operating in this sector. Construction technology startups are on the rise, offering new software solutions and innovating the way buildings are constructed.

• Building information modeling (BIM) uses 3D models to streamline collaboration.
• Mobile technology enables real-time data collection and communication between job sites and project managers.
• Cloud-based solutions allow job-site employees to perform tasks such as submitting timesheets and expense reports and accessing work records.
• Artificial intelligence is transforming data and predicting future outcomes for projects.
• Virtual reality is being used in training and to improve worker safety.
• Wearable technology is also being used to enhance job-site safety.
• Autonomous heavy equipment is enabling companies to do the same amount of work with fewer workers.
• Robots are being used to monitor construction progress, and drones are being used to photograph sites.
• Site sensors monitor environmental conditions such as noise, temperature, and other factors.

Bringing a wide range of new technologies in-house is a key competitive advantage for companies in this space. The growing role of technology in the construction sector is prompting some companies to revise their acquisition strategies.

AEC operators looking to sell a business have a range of options, from existing family members and executives to large industry conglomerates. Industry tailwinds have led to increased M&A activity to gain market share, improve market position, and establish supply chain redundancies through in-house manufacturing capabilities.

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