Dark clouds are gathering

Arup’s threat to cut 100 jobs post Brexit spells trouble for architects

News that Arup might cut 100 jobs because of Brexit will inevitably have many construction professionals wondering just how secure their jobs might be.

Arup may not be first in the sector to seek redundancies in the wake of the EU referendum. But its reputation for considered progression and the value it places on its organisational culture and staff suggest this announcement will send out ripples of concern.

So how worried should construction professionals, and specifically architects, be about their job security in the light of Brexit?

There’s every reason for architects to be twitchy. Past data show all too readily that if construction sneezes, consultants get the sniffles and architects can end up with a cold.

In reality Arup’s move to consult with its staff is just one signal among many indicators of possible Brexit fallout. It means little if it stands in isolation.

Two things are, however, worth noting – the timing and the content.

On the timing, many who work or have worked within large organisations will recognise the close alignment of major corporate announcements with the autumnal equinox.

In KPMG's recent survey of CEOs, 76% said they are considering moving either their headquarters or operations outside the UK as a result of the Brexit vote

This coincidence is not celestial or spiritually driven. It’s just how things often work out in the corporate calendar in Britain, and in other northern hemisphere nations. Big things often seem to crystallise after the summer break, particularly as autumn is a common business-planning period and, for many firms, the last real chance to salvage potentially poor year-end results.

Firms were unlikely to make announcements after the EU referendum vote, especially with summer holidays looming. However fearful they might have been and whatever contingency plans they might already have made, given the high level of uncertainty following the referendum – not least a new government – they were likely to watch for early signals before finalising any plans. So an early-autumn announcement by Arup on realigning its business to a post-referendum world seems about right.

Regarding content, the focus is on the commercial sector in London, pointing to a particular take on Brexit. This is that we should expect less commercial building work in the capital. The noises emerging from Arup suggest these effects are already being felt, but for a firm of its pedigree to take this sort of action one might reasonably suspect that the business does not see this as a short-term effect.

There is increasing evidence to suggest that Arup has good reason to take this view. KPMG recently conducted a survey of CEOs – its first 100 UK CEOs survey which embraces firms with revenues of between £100 million and £1 billion. In it, 76% said they are considering moving either their headquarters or operations outside the UK as a result of the Brexit vote.

Naturally we don’t know what ‘considering’ actually means. But the proportion of respondents ‘considering’ gives an indication of the scale of the potential risk. The centre of gravity is likely to be London for these firms, but given the high percentage of firms thinking about moving operations from the UK the potential loss of demand for commercial premises may be spread much wider.

More pertinent to London’s prospects, perhaps, was another recent report, The Global Financial Centres Index. In its September 2016 edition, the 20th biannual report since March 2007, London tops the table as it has all but three previous reports, albeit being top jointly with New York once.

While the data supporting the rankings were collected before the referendum, the report is filled with notes and quotes that suggest London’s supremacy as the global financial market is under threat. Explicitly the report says: ‘Looking ahead to GFCI 21 [the next report due in March 2017], assessments given to London in July and August are significantly down from previous levels. GFCI 21 may show some significant changes.’

Commercial building in London is not simply about servicing the financial sector, but as the world’s leading global financial market the effects of a reduction in its popularity among banks and insurance businesses would spill out across the capital.

Taking all the above, there are solid reasons for viewing the commercial sector with serious caution in the wake of the EU referendum, especially in London.

At this point, then, it’s worth getting a feel for how big the London commercial sector is and how much of construction work it represents.

The Office for National Statistics estimated the construction output associated with commercial building was about £28 billion over the 12 months to this June. London accounts for £10 billion, a bit more than a third. In terms of all new build work, London commercial accounts for about 10%. And it accounts for less than 6% of all estimated construction output.

For construction-related professionals, however, the London commercial market will represent more than that 10%. More will be spent on architects and consultants on these higher-profile projects than on average across all building.

So while it may not be most of the work of architects across Britain, the London commercial market is clearly very important, as is the two thirds of UK commercial work outside London. It is particularly important to the larger practices, especially as in periods of solid growth clients spend on plans for potential commercial buildings that may never be built.

Construction work already under way should continue with little immediate impact. Indeed, paradoxically, a threat to the market can speed progress on some projects. So any measure of work on the ground may give the impression of all being fine in the sector. Here it is worth noting the latest Build UK state of trade survey.

This shows expanding workloads among most contractors in the second quarter. That is before the referendum. It also shows that most contractors expect their workloads to expand further in the coming quarter. Interestingly too they expect their work to increase in the coming year.

However, when asked about how they expect the various sectors to grow the picture becomes far darker. They expect work in most sectors to shrink by next year. Their collective view of commercial work changes quite starkly from solidly positive in the coming quarter to quite negative in the second quarter of next year. Clearly the view among contractors is that the commercial sector is weakening. Importantly, this weakening would be expected to be seen first in the work undertaken by architects and consultants, which seemingly it is.

This pattern of solid work among contractors now but weakening work in the pipeline has been also picked up by the Bank of England agents who quiz businesses across the country. 

The latest Agents’ summary of business conditions says this about investment: ‘Projects already under way were largely continuing, however, and contacts across all sectors were still investing to generate cost efficiencies and increase productivity. The slowing in capital spending had been most pronounced among companies providing professional services to the commercial real estate (CRE) market.’

While there is little firm evidence of measured levels of activity, we are seeing a pattern starting to emerge. A rich market for architects, the commercial sector, does appear to be weakening. This is not unexpected. And Brexit clearly seems to be not good news for the industry, in the short term at least.

If all this growing evidence points to a reduction in work in one key area, does it necessarily point to equivalent job losses? The simple answer is ‘no’.

For many architects, while they may not be totally immune to changes elsewhere in the market, the more vulnerable areas of construction at the moment are still at a distance.

Then, take Arup, for example. It is likely that while jobs (or rather roles) will be lost, this does not mean each individual will lose their employment. Hopefully most will be found new roles. The investment in people is high, recruitment is expensive and embedding people into a business takes time, so holding onto people with organisational knowledge is a wise move. There’s a shortage of talent across the construction sector. According to the Build UK survey professional and technical talent is the hardest to find at the moment. And the demographics suggest the construction talent pool may even shrink as a bulge of people retire while uncertainty, fears and future policy may restrict the flow of overseas talent.

From what we can observe at this stage, there is more of a realignment in the mosaic of work being undertaken across construction sectors than a slump in overall workloads. While shifting or losing people in response to such realignments is normal, it can be very uncomfortable for businesses or employees if the change is significant.

One comfort for employees is that firms will have a beady eye on their talent pool and will loathe losing talent when it is short in supply. And, fortunately, practices are likely to be in a stronger position than for some while to hold onto staff. The most recent services producer prices index suggests that for almost two years prices of architectural services have risen solidly above general inflation (Graph 1).

Importantly too, the efforts made by architectural practices to win work overseas will remain a strong card, particularly the larger London based firms, and even stronger now that the pound has dropped, making UK architectural work more competitive on price.

From a jobs perspective, while some dark clouds may be scudding over, there remain silver linings.