An owner's look at why healthcare, education, and government work is drawing the highest buyer interest in the architecture and engineering market. You always hear “healthcare and education are hot sectors right now,” but people rarely unpack the reasons why.
If you run an architecture or engineering firm and most of your work comes from hospitals, school districts, universities, or government agencies, here’s a read that you may find compelling. The business that you have built in these markets, likely to contain a track record of delivered projects and a roster of clients who keep coming back, is probably worth more to an acquirer than you think. Most firm owners compare themselves to industry averages to understand their firm’s relative performance and value. The problem with averages is that they blend two very different kinds of firms together. They include firms whose revenue rises and falls with the private development cycle, AND firms whose revenue is funded by governments and tax-exempt institutions. If you belong to the second group, the market treats your firm differently from the average, and 2026 is shaping up to be an enticing year to find out by how much.
Let me explain why, starting with a wider view of where construction money is flowing.
The Private Market is Quieter Than Headlines Suggest
Walk through any downtown and you’ll see part of the story. Offices are still half empty in a lot of cities. Cushman & Wakefield put the national office vacancy rate at 20.5% at the end of 2025, up from around 15% five years earlier. According to Newmark, new office construction has fallen to its lowest level since 2012. The office and brick-and-mortar retail landscape has been reshaped by e-commerce, and commercial development has cooled down significantly.
Here is the part that trips people up. If you are familiar with the federal construction spending numbers, the office category doesn’t look that grim. That’s because, for some odd reason, the Census Bureau files datacenters under office construction, and data centers are booming on the back of cloud computing and AI. Strip out the datacenters, and the AIA forecast panel projects office construction continue to fall at a double digit rate this year and into 2027. The headline number is being inflated by server farms rather than by the kind of commercial/office buildings most design firms actually staff.
Now flip to the other side of the coin. Public and institutional construction is running hot and outperforms most other markets even in stressed economies. Public construction spending reached roughly a $514B annual rate by mid-2025, with educational construction alone near $112.7B, according to the Census Bureau. The engine behind that spending is the municipal bond market, which had a record year in 2025. Municipalities and institutions issued about $580B of debt, up nearly 13% from the previous record, according to LSEG data reported by The Bond Buyer, and education and general government purposes made up the single largest category at $132.3B. Add the federal infrastructure money still working its way through the system, more than $580B continues to flow to the industry through 2026 from the Infrastructure Investment and Jobs Act and the Inflation Reduction Act, much of it into transportation and other civil work, and you have a public sector funding projects at a pace the private market cannot match right now. If you’re looking for some light reading, PSMJ’s Quarterly Market Forecast takes a deeper dive into an array of end markets, how they've performed throughout economic downturns such as the 2008 financial crisis & the COVID-19 pandemic, and our projections for the future.
So where does all this public money actually come from, and why is it so dependable? Let’s unpack two real deals from the past year to show the mechanism up-close:
A School district, Paid for by Its Neighbors
First, let’s look at the Los Angeles Unified School District. In November 2024, voters approved Measure US, a $9B general obligation bond and the largest school facilities measure in the district's history. This passed with a 68% majority vote. The money will be obligated to repair and modernize a portfolio of over 500 aging buildings, the majority of which are over 50 years old. This general obligation bond will be repaid through local property taxes, so Los Angeles homeowners agreed to add roughly $25 per $100,000 of assessed value to their tax bills to fund the work. For a design firm, this is important because it emphasizes the stickiness of the work. The funding is voter-approved, secured by a broad and stable tax base, and committed to a decade or more of classroom upgrades, seismic retrofits, and new construction. This work will carry on regardless of those pesky aspects of projects that can hinder private development, such as interest rates and the calculus of cost-conscious developers.
A Hospital, Paid for by Its Patients
Next, let’s take a look at how hospitals can secure similarly sticky funding. Dow Jones reported that in 2025, the New Hampshire Health and Education Facilities Authority sold $420M of revenue bonds and loaned the proceeds to Dartmouth Health. The money funds an expanded inpatient facility and new radiology space in Lebanon, NH, along with a new medical office building in Claremont, NH. The important contrast with the school bond is who repays it. These are revenue bonds, secured by Dartmouth Health's own loan repayments and paid back out of the system's patient revenues rather than out of the community’s tax bill. The state authority lends its tax-exempt status to bring down the borrowing cost, while Dartmouth Health is on the hook to pay it back. For the architects and engineers on that project, the practical effect matches the school bond exactly. There is a large, defined pool of capital that has been committed to a multi-year building program, and the work proceeds on the schedule the bonds were sold to finance.
Put the two together, and you can see the muscle behind the public-sector client base. The property-tax machine behind schools and universities and the patient-revenue machine behind hospitals both produce design and construction spending that is planned years in advance and is largely insulated from the swing factors that hinder private development.
What About This Rate Hike?
Interest rates are a wild card when it comes to design projects, and they cut very differently across private and public work. Higher rates raise the cost of issuing municipal bonds, so a school district or hospital system gets a little less square footage for each dollar of debt they take on. With that said, higher rates do not stop public projects at the rate they stop private ones. A voter-approved school bond like Measure US in Los Angeles is already authorized and committed, and these projects need to be completed on schedule. Enrollment pressure, the looming threat of earthquakes, and aging hospital infrastructure do not wait for a friendlier rate environment. Tax-backed debt service is spread across a broad base that doesn’t blink at a quarter point. On the other hand, private development is far more fragile. When borrowing gets more expensive, developers can’t get the pro formas to work, and offices and retail spaces are among the first projects to get shelved.
This topic is especially relevant right now because the Federal Reserve just announced its first rate increase since 2023. The target range has held at 3.50% to 3.75% since December 2025, and the quarter-point move has lifted it to 3.75% to 4.00% Since the Fed has hiked, the gap between public and private construction is likely to widen. Private developers will feel it first and hardest while public budgets should continue to fund work. For the acquisitive readers, you may feel the effects of these rate hikes when funding acquisitions with debt.
Why The Market Pays Up for The Public Sector
When buyers compete in an M&A process to acquire a firm, they underwrite future cash flows of the business. These cashflows are heavily impacted by the projects you’ve completed, the margins you’ve held, and the longstanding client relationships you’ve formed over the years. Valuation begins with that demonstrated track record. Where public-sector weighted firms earn their premium is in their ability to demonstrate the fact that those delivered results are repeatable and scalable. Revenue funded by the government or a hospital system is the most durable revenue in the industry, because the funding does not disappear in a downturn. Public capital tends to hold up, and sometimes even grow when the private economy slows down. A firm that keeps working through a recession smooths out a buyer's portfolio, and buyers pay premium money for that kind of resilience.
Additionally, public sector work tends to have larger, multi-year projects, so backlog is often larger. Strong backlog allows buyers to get comfortable around the view of the future, and it acts as a supporting piece of evidence that your delivered performance is likely to continue. Because of this, backlog is another factor that can contribute to a premium valuation for public sector firms.
For the AEC Seller: Why Now, and Not Next Cycle
All of this brings us to timing. If you are considering the sale or recapitalization of your firm, several of the ideal market conditions are lining up as we race to the end of 2026.
Buyer demand is the strongest it’s ever been. The AEC industry has historically been a patchwork of small, employee-owned firms, however M&A activity is at an all-time high as larger strategics and private equity are executing roll-up strategies. PSMJ has seen competition between buyers accelerating as interest in acquiring high-quality firms has increased while available supply of those firms has relatively decreased. More bidders in a process have the single greatest impact on price for a seller.
Another driver is historic industry performance. Margins and utilization across the industry are healthy, pipelines are full, and the American Council of Engineering Companies' late-2025 survey found 48% of engineering firms reporting a workload pipeline of a year or more. Buyers pay for demonstrated performance, and if yours tracks with or is better than the industry average, then this may be an ideal time.
There is speculation that the market for public sector firms may be cooling. Part of the record 2025 bond issuance was a rush to market. Healthcare and education institutions pulled borrowings forward in early 2025 because they were concerned that Congress might curb the municipal tax exemption. This means that some issuance was effectively borrowed from later years. Additionally, school bond passage rates are softening in some states. Take Wisconsin for example, who’s bond passage rates have slipped from about 70% in 2024 toward the low 60% range today. Other states may begin to follow suit. The federal infrastructure money is finite and front-loaded through 2026.
None of this has dented current results yet, which is precisely the point. The moment to sell is while the numbers delivered are strong and the forward story still reads well. Waiting until the softening reaches the figures a buyer underwrites can be risky.
The case for independence, or holding out for a better market, sounds like this: we could grow, rates might fall, multiples might climb, so why not sit tight for a year or two. With the recent Fed hike, this looks shakier than it did last year. Waiting also forces you to simultaneously time two moving pieces. Multiples depend on how deep the buyer pool is and on the strength of your own results and margins, and both of those are closer to a peak than a trough. If the buyer field thins, or your delivered performance cools, a higher multiple on a weaker firm can leave you worse off than transacting today. A strong exit window might not be open forever.
Whether Selling, or Building Your Independence, Here’s How to Position Your Firm For Success
If a sale is on your two-year horizon, the work you do now can materially shape the number you get later. If you’re beginning to think about a transaction, here’s a few things to get in order now: Start with clean, accrual financials going back three years. Valuation multiples are tied to demonstrated results, and you’ll want to prove your historical track record. Also, reduce your reliance on any single rainmaker or customer, because concentration is one of the biggest risk factors buyers see in a business. Then use your backlog to carry the story forward and paint a picture of future success. PSMJ advises its clients that the day to start preparing for an exit is the day you start the business. Even if an exit isn’t in your plan, keeping the firm prepared is a good exercise because it forces you to employ strict financial management, diversify the firm’s service mix & client base, and develop key staff. These features that make a firm desirable for purchase, are the same features that make that firm durable and capable of thriving in an independent future.
A Short Conversation Now Beats Mistiming the Window
The firms that achieve great outcomes are the ones that prepare before they run a process rather than during one. If your firm's book of business leans toward healthcare, education, or government work, the market is likely to value it more generously than the averages suggest. The conditions supporting that premium are the most favorable they have been in a long time. If you would like a confidential read on where your firm would price in today's market, and on what a well-run process could realistically achieve, we would be happy to discuss. A free conversation now costs a great deal less than mistiming the best window this industry has seen in years.
PSMJ has advised AEC firm owners through both buy-side and sell-side transactions across the full range of deal structures, including strategic sales, mergers, private equity recapitalizations, as well as internal successions. Our M&A advisory practice is built on proprietary financial benchmarking data drawn from hundreds of AEC firms, giving our clients the analytical foundation to understand where their firm stands, what it is worth, and which strategic path is right for them. If you are beginning to think seriously about your firm's options, we welcome the conversation. If you'd like to learn more, find out here.
This article is intended for informational purposes and does not constitute legal, financial, or investment advice. Firms considering intellectual property strategy or M&A transactions should consult qualified legal advisors.