In June of 2020 McKinsey & Company published a landmark report: The Next Normal in Construction. Now, as we enter 2025, we can see that McKinsey’s 2020 prediction was accurate: most of the nine pivotal shifts are already part of daily practice. Other shifts, like product-based approaches and the integration of industrial supply chains, are gradually being adopted.

Ultimately, the speed of disruption and the ensuing market changes will depend on economic and industry conditions, along with unforeseen geopolitical and societal events.

The following factors are already having a profound influence, and will continue to directly and indirectly affect industry developments and the demand for planning, design and construction services for many years to come:

Ongoing, chronic industry factors:

Labour shortages: The AEC industry is facing a significant shortage of skilled labor, particularly in areas such as carpentry, plumbing, and electrical work. These shortages are impacting productivity and project timelines, leading to increased wages due to high demand. Consequently, this results in project delays and higher costs, complicating the execution of growing infrastructure projects.

Supply chain disruptions and rising material costs: Delays in material deliveries and surges in the cost of essential construction materials like lumber, steel, concrete, and copper have extended project timelines, leading to higher overall project costs, sometimes by as much as 20%. Material shortages are also driving product substitutions, such as using engineered wood instead of traditional lumber.

Unforeseen societal, economic and geopolitical factors:

The COVID-19 pandemic precipitated a shift to remote work, leaving many older Class B and C buildings—and entire downtowns—largely vacant. Tenant demand for modern, high-performing buildings, combined with ongoing economic uncertainty, has further worsened the situation. As a result, many building owners and developers have canceled new investments, reducing demand for planning, design, and construction services. However, the surplus of vacant space has sparked a rise in adaptive reuse projects, converting office towers into residential, educational, and healthcare spaces. While this trend benefits design firms specializing in adaptive reuse, it also reduces demand for new construction in these sectors.
Interest rate hikes: For the past 20 years, a booming condo market fueled the AEC industry, allowing planning, design, and construction firms to thrive. However, interest rate hikes following the COVID-19 economic stimulus have raised mortgage rates, making it more expensive for buyers to finance purchases and for investors to carry their properties. This has led to a significant slowdown in condo sales and an oversupply of new units, greatly reducing the number of new and active projects and significantly affecting many firms.
Major changes to Canada’s foreign student program: Stricter visa regulations aimed at reducing approved study permits are projected to cause a 47% decline in new foreign student permits for 2024 compared to 2023. This is expected to result in a revenue loss of $3.1 billion for Ontario’s colleges over the next two years – a staggering drop that will likely lead to growing deficits, layoffs, and temporary campus closures. This, along with the need to decarbonize and retrofit existing building stock, will likely cause many institutions to halt the development of new buildings over the next couple of years, impacting design firms with substantial higher education practices.
The shift to embodied carbon and policies driving CO2 measurement and reporting: There’s a growing shift from prescriptive building codes to performance-based codes that directly require reductions in CO2 emissions and energy use.

In Montreal, since 2021, owners of large buildings are required to disclose their building energy data to the City of Montreal by June 30 of each year. As of 2024, this by-law applies to any building with a floor area of 2,000 m² or more or with 25 or more dwelling units. www.montreal.ca

In the US, 13 cities have instituted Building Performance Standards [BPS] accounting for about 25% of all US buildings as of early 2024. 30 additional US cities have pledged to pass BPS standards by 2026. These policies will increasingly force building owners to retrofit, further driving construction budgets away from to new build to retrofits.

New economic opportunities and developments

Unprecedented investment activity: One of the most significant, yet least acknowledged, drivers of disruption in the AEC industry is the huge influx of venture capital flowing into the sector. Until a decade ago, AEC investment primarily centered on building ownership. Since 2015, however, the industry has emerged as a top destination for venture capital, driven by virtually limitless greenfield investment opportunities. Between 2020 and 2022, and estimated $50 billion was invested in AEC tech start-ups - an 85% increase over the previous three years. [Source Foundamental]

In May of 2023, McKinsey’s Global Infrastructure Initiative (GII) hosted a roundtable with 50 tech companies, AEC firms, and venture capital/private equity investors to discuss how to leverage this investment momentum to transform the industry, build the next generation of infrastructure, and decarbonize existing assets. Many topics were discussed and debated at the roundtable, but four clear themes emerged: the scale of desired industry change, the importance of collaboration, a focus on functionality, and lastly, disruption support for small and medium enterprises with low-cost, intuitive tech. To wit: “Participants were not focused just on digitizing the industry but transforming it. Investors, tech companies, and AEC players alike are excited about changing the industry structure, with different value pools and different kinds of organizations emerging. However, it is probably not possible for the industry to disrupt itself—rather we need to mobilize private capital and other resources to disrupt faster.”

For architecture, engineering, planning, and interior design firms, this influx of investment and drive for transformation introduces significant challenges. As professionally licensed entities, firms must navigate strict ownership, legal, and practice regulations while adapting to a rapidly evolving industry and competitive landscape.

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