It’s The Last Seat in Coach, Take It

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Fortune favors the bold.

In a previous life, my architecture practice had 20 offices, 10 outside the United States, and clients scattered across the globe. Depending on the year, more than 50% of our revenue came from international projects, so travel was an essential part of my job as CEO. I learned very quickly how to navigate airports, dodge weather delays and handle flight cancelations. The very best thing to do was to find flights still active outside the storm field, preferably flying in the opposite direction, and book a seat quickly.

It was the only way I could maintain control over my own destiny.

I found if I kept moving, even in the opposite direction of my destination, I created options that would help me find my way home. But, if I hesitated, even momentarily, I was certain to be grounded until the weather cleared and equipment could be redistributed. So, if, for example, snowstorms made travel east or west of Chicago challenging, I’d grab a seat to Miami or Atlanta. And, when I finally did make it home to Dallas, I often learned that others who didn’t keep moving or hesitated were stuck in Chicago overnight. Or longer.

While travel disasters always make good stories, this is a metaphor for where I think many firms in the design industry are at this moment of Covid-19. They are like the traveler passing time by looking at social media on their mobile phone while standing in line to ask the desk agent when their delayed flight is due to take off. 

It isn’t going to happen.

In other words, if you are looking for someone else to solve your problem because your business has been dinged by something beyond your control, whether that’s a government bail-out or promises of forecast revenue that may never happen, you are effectively that traveler standing in line at the airport staring at your phone. Stuck in one place.

Now is the time to be the traveler who rushes through the airport to catch the next flight going somewhere, anywhere, even the opposite direction. Why? Because you need to act. And you need to act now.

Why is this One Different?

Every downturn has its own unique fingerprint, and we are just starting to understand how different this one is. To understand why, let’s take a quick look at the last three recessions. In 1991, a change in the tax laws closed the loophole that fueled the construction of speculative office buildings, amongst other things. Foreclosures ensued and, at the time, they couldn’t give away some of these buildings. The RTC (Resolution Trust Corporation) was established to liquidate some $390 billion of insolvent assets (mostly real estate), including some of the banks themselves.

Now is the time to be the traveler who rushes through the airport to catch the next flight going somewhere, anywhere, even the opposite direction. Why? Because you need to act. And you need to act now.

In the early 2000’s, the attacks of September 11, the ensuing military action in the Middle East and its impact on the price of oil, and the bursting of the dotcom bubble produced a relatively mild recession. GDP shrunk and unemployment peaked in June 2003 at 6.3%, the highest it had been in nearly a decade.

A series of events triggered the recession of 2007 (known, until now, as the Great Recession): a burst housing bubble and the sub-prime mortgage crisis spread dangerously high levels of unsecured debt around the world; and credit default swaps and other risky vehicles were a house of cards. Consumers stopped buying and numerous industries teetered on the brink, sparking a Bush administration response with programs like TARP and the auto industry bailout. GDP shrunk by more than 4% and the domestic A/E industry went into free fall.

In each of these cases, a unique black swan catastrophe came out of (seemingly) nowhere, which is certainly true today, but the country’s economic apparatus (i.e., the Treasury, the Federal Reserve, etc.) had numerous levers and dials to adjust and take corrective measures. Chief among these was the Federal Reserve’s lowering of interest rates to near zero to entice borrowers and grow businesses and the economy. In other words, the economic weather was foul, but they had options. And they used them.

What makes this recession different is that the options are few…beyond sending people (and businesses) checks in the mail. And the key indicators are much, much worse. Consumers, spooked beyond the pale, are buying close to need, manufacturing has taken its foot off the gas pedal, and central banks have little room to maneuver. It’s reflected in the numbers: Real GDP dropped by 4.8% in Q1 of this year, and some economists have estimated that Q2 reductions may go beyond 35%.

So, what does this mean for the A/E/C industry?

My experience has been that architecture and engineering firms usually see their revenue trail off six to nine months after key financial indicators (DJIA and S&P, unemployment, Consumer Price Index, Producer Price Index, etc.) bottom out; and there is usually a 9- to 18-month duration before interest rates and monetary policy kicks in.

But this is a whole new ball game.

What concerns me today is that the upcoming downturn didn’t come from economic malfeasance but a health necessity, so interest rates, having been kept low for political reasons, cannot be used as a corrective lever. A diminished demand for goods and services in the economy due to health concerns will be a very different problem to solve. And, if you don’t think the A/E industry will be affected, just think about this: Ford and GM haven’t rolled a car off the line since mid-March; they are building ventilators instead. Nordstrom and Brooks Brothers are sewing face masks and other PPE gear. 

Well, the good news is that there are signs the market has begun to adjust, which is great, but for the foreseeable future agility is the name of the game. Those firms that can pivot or retool quickly and efficiently will succeed and make it through to the other side.

Fortune Favors the Flexible

So how does your firm book a seat on the next flight in the opposite direction of the storm?

Well, the good news is that there are signs the market has begun to adjust, which is great, but for the foreseeable future agility is the name of the game. Those firms that can pivot or retool quickly and efficiently will succeed and make it through to the other side. For example, I just learned that Texas-based developer Hines has teamed with Well Living Lab, a joint venture of Mayo Clinic and Delos, a “wellness solutions” firm in NY, to develop safer offices when the economy does restart. Sounds like they are also looking for a seat on a flight out of the storm.

We’re already starting to see practices offer new ideas on healthcare facilities which are influencing hotels and resorts, the workplace and other public assembly areas. All good. But we need to see these ideas move from the speculative and exploratory to the here and now—and that is exactly what the design industry does best—but it needs to do it quickly. Check out Thom’s piece on making no small plans.

Look, every decision from here forward won’t be vetted by our Covid-19 experiences alone, but you can bet it will radically re-shape the world as we know it.

Does your firm have the chops to switch gears? As a leader, can you put down your phone and make a dash for another gate? That’s exactly the type of response you’ll need to fly your firm out of the storm.

 

This Post Has 3 Comments

  1. Robb

    Great Article

  2. Chuck Hoffmann

    Lance, great thoughts as always. Chuck Hoffmann

Comments are closed.