Last summer, EDR conducted its 2018 Benchmark Survey of Environmental Consultants. Nearly 500 consultants from across the U.S. took the time to share their thoughts on such hot-button issues as average pricing and turnaround time for Phase I environmental site assessments, top industry challenges, the market forecast and more. Below is the list of five key takeaways that I shared at our fall Due Diligence at Dawn workshops.
1. The race for efficiency is on.
The Phase I ESA industry has been extremely competitive for the 20 years (and counting) that I’ve been analyzing industry benchmarks. Pressure for fast Phase I ESAs is intense, and companies are under extreme pressure from clients to deliver reports efficiently. In the context of today’s commercial real estate market, the need for speed extends to virtually every aspect of closing property deals. And now, as the economic recovery period churns into its 11th year, chatter about the next cyclical downturn is rising. In 2019, time pressure will only intensify as buyers look to close good deals before the market turns or interest rates rise further.
Asked what the standard turnaround time is for a basic AAI/ASTM E 1527 scope report (i.e., no non-scope issues), survey respondents most commonly answered 15 business days, followed by 10 business days. On average, the 2018 TAT benchmark is 14.9 business days, not far from the 2015 benchmark of 14.4 business days.
Roughly one in three respondents agreed with this statement: “Speed is more important than price in winning clients for Phase I ESA projects today.”
In the midst of a high-pressure market environment, it is not uncommon for firms to deliver expedited Phase I ESA reports, but are they getting more money for it? Forty percent of respondents do not charge clients for a faster report. One in three do charge a small premium, but not more than 20 percent of their standard fee. Whether or not to charge for a faster turnaround time often depends on the firm’s workload at the time, or whether the client asking is a long-time loyal one or a one-off client.
2. Moderate increases in average Phase I ESA pricing.
EDR has been tracking average Phase I ESA prices for over two decades. The most recent results tracked with historical data, increasing slightly on average. Comparing this year’s results to the results of the previous benchmark survey conducted in 2015 reveals some interesting results (see table).
Average Phase I ESA prices increased on average by five percent since three years ago, with some variation by firm size. Regional firms experienced the most robust increase (15%), while pricing by national providers remained relatively stable and local firms’ fees increased by an average of 6 percent. The average Phase I ESA price charged to lenders changed little over this time period, averaging approximately $2,400–and $300 below the industry average.
3. Profitability and business growth top the list of concerns.
The survey asked respondents to rate a list of challenges facing their business (from “not at all challenging” to “extremely challenging”). The benchmark survey results indicate that the biggest concerns for EPs today are maintaining strong profit margins, expanding into new geographic markets and forecasting their Phase I ESA business. Also top of mind are the demands of attracting professionals to their firms, and retaining the top talent they have on staff.
Don Kellar, 2017 PRISM winner of the Courage in Leadership award and CEO of Fulcrum Resources Environmental had this to say about today’s business challenges:
“With ever increasing demand for faster turnaround times and discounted pricing, it can be very difficult at times to effectively maintain consistent profitability goals. It is a tight rope–or balancing act–for lack of a better term, to pay your staff what they deserve, but also not let clients take advantage of you. Some firms model their business under discounted pricing with increased volume, some stick to their guns with higher billing rates or lump sum fees but sacrifice volume. The key is to find a middle ground where you can empower trust in your staff by paying them what they deserve, but also educate clients on what the fair and true pricing of your services are.”
~Don Kellar, CEO, Fulcrum Resources Environmental
4. RiskWatch: More Phase I ESAs are proceeding to Phase II ESAs as risk aversion increases in an uncertain market.
As the market prepares for the next cyclical downturn, pressure is on lenders and investors to maintain robust risk management practices. The survey results indicate that underwriting thus far is not showing signs of loosening. On average, 22.4% of Phase Is lead to Phase II investigations. A few years ago, the percentage was only 16% so this year’s results suggest a more cautious environment and lower risk tolerance.
Also reflective of a growing caution in the market are the results to questions about whether clients were changing their risk aversion. Nearly 20 percent of respondents indicated their lender and investor clients were more risk averse in their environmental due diligence, higher than the percentage that were less risk averse–with the majority holding fast to their practices.
5. The bulls beat the bears in the 2019 forecast.
According to EDR’s ScoreKeeper market, U.S. Phase I ESA volume was up by two percent year on year, and in certain high-growth metros like San Francisco, Oakland and San Diego, growth was in the double digits. Yet despite the market’s positive performance in 2018, forecasters at the Urban Land Institute are forecasting declines from the historic highs of 2015 and 2018 to a more sustainable path of transaction activity in 2019 and 2020. The projected slowdown is largely due to the anticipated impact of rising interest rates and the fading stimulus from the federal tax reform package.
Despite the forecasted declines in the commercial real estate market, Phase I ESA professionals are optimistic. While 57 percent expect volume to run about the same this year as last, 25 percent are anticipating growth and only 18 percent anticipate a decline in activity.
Regardless of your prediction about Phase I ESA volume, robust due diligence is critical at this stage of the market. The danger is that the still-strong factors boosting today’s market (good fundamentals, access to capital, interested investors) can mask the risks, and encourage lenders and developers to overreach at this late stage of the cycle. It is comforting to see that these results indicate the market is not relaxing underwriting standards in a quest for growth in a challenging environment.
Other comments from respondents:
“For nearly 30-years, I’ve watched the ESA requirements increase…while the prices charged remain roughly the same. ESAs are the only product I can think of that costs about the same as it did in 1990.”
“Differentiation in a provider-saturated, commodity service (price, speed, quality, delivery) is challenging. What is a true differentiator that will allow for fee to match effort?”
“With the economy improving, attracting—and retaining—qualified staff is biggest challenge this year.”
ABOUT EDR’s 2018 BENCHMARK SURVEY OF ENVIRONMENTAL CONSULTANTS
During the summer of 2018, EDR invited a sample of about 15,000 environmental consultants and engineers to complete a survey to benchmark key metrics such as Phase I ESA pricing, turnaround time, business concerns, and market outlook. Over 500 environmental professionals (EPs) responded to EDR’s survey over a two week period. Respondents represent EPs from almost every US state and a wide cross-section of firm sizes and types.
The complete survey summary is posted here: 2018 Summary, Benchmark Survey of Environmental Professionals.