Navigating the Digital Revolution: Exploring the Trends Shaping the AEC Industry
The AEC (Architecture, Engineering, and Construction) industry is undergoing a digital revolution that has been picking up speed over the past ten years, and it has accelerated significantly in recent years. The growth of the industry is being fueled by several economic triggers and changes in regulatory requirements, prompting investment in AEC technology. We’re going to delve deeper into these trends:
There is a growing global requirement for sustained construction activity, catalyzed by enhanced government stimulus and infrastructural investments. This includes initiatives like the United States’ Bipartisan Infrastructure Law, carrying a $1.2 trillion price tag, and Europe’s NextGenerationEU fund worth $800 billion. Additionally, in efforts to make their portfolios more environmentally sustainable, asset owners are pouring money into decarbonization. These trends create a need for digital technologies to augment productivity and fill the void of skilled labor demand and supply.
The flood of digitization infiltrating the AEC sector is also buoyed by alterations in regulatory frameworks. Regulations like the United Kingdom’s Building Safety Act mandate a digital ledger for all data pertaining to newly built residential structures, whereas Sweden’s ID06 law dictates maintaining digital records of construction employees at work sites. These laws are stimulating the uptake of digital tools and methodologies, which will eventually lead to the industry becoming more integrated and efficient.
Investment in AEC technology has surged, and per our findings, a growing cohort of investors are recognizing the transformative potential of AEC tech in reshaping the construction sector and altering value pools on a grand scale. It’s likely that this trend will persist. Of those surveyed, 77% predict investing the same or more in AEC tech in 2023, with 64% foreseeing it offering superior returns relative to other sectors.
The AEC tech sector is maturing, evidenced by a surge in late-stage venture financing and M&A activity. Between 2020 and 2022, AEC technology drew in $11.5 billion in late-stage venture capital investment, more than triple the sum invested over the previous three years. M&A, constituting 48% of all investments and 68% of all exits, remains the primary financing vehicle for digital AEC firms. The increased median deal size and post-money valuation since 2017 reflect the industry’s growth.
AEC tech companies are working to address the issue of customer fragmentation by offering solutions catering to a range of use cases. With the demand for interoperability, about half of the AEC tech companies analyzed provide solutions that serve three or more use cases. Comprehensive platforms developed by larger AEC software firms and virtual platforms created using open standards and processes, such as openBIM, facilitate smooth collaboration and integration across the industry.
Further, there’s a convergence happening between property technology (proptech) and AEC tech. Traditionally, while proptech focused on funding, planning, operation, and maintenance aspects, AEC tech concentrated on asset design and construction. However, the significance of merging the two ecosystems is becoming increasingly recognized. The implementation of digital twins to unify the design and operation of building management systems is a proptech use case that AEC tech companies are progressively addressing.
Despite substantial investment and growth, there are still hurdles to successful scalability and expansion in the AEC tech sector. Let’s analyze these challenges:
The construction industry is extremely fragmented with the average construction firm employing fewer than 10 workers, and each project involving a vast array of suppliers and subcontractors. This scattered landscape makes scaling a labor-intensive and slow process for digital AEC companies. While they need to sell to multiple different firms, this change-resistant and fragmented sector may be hesitant to embrace change, further hampering growth.
Identifying the true customer in the AEC sector can be challenging due to the blurring lines between user and buyer personas. Depending on the project, the customer could be the project manager, IT manager, or procurement manager. Purchase decisions are often made at the project level rather than the corporate level, requiring companies to resell their products for each new project. This results in lower net retention and higher acquisition costs. Successful companies have strategies to sell to the entire organization, not just the project.
Low profit margins and growing economic challenges, such as rising material costs, are inherent to the construction industry. Owing to their limited investment capabilities, AEC firms spend less on IT compared to those in other sectors. In such a low-margin industry, it’s crucial for AEC tech companies to demonstrate their technologies’ cost-saving potential. Although the ROI can be significant, accurately measuring these benefits has proven to be challenging.