Practicing ArchitecturePracticing Architecture
Firm Billings Rebound in November
By Kermit Baker, Hon. AIA
AIA Chief Economist
Revenue at U.S. architecture firms increased in November, only the second monthly increase in billings since early 2008. At 52.0, the AIA’s Architecture Billings Index (ABI) recorded a three point gain from the previous month, and reached its strongest level since December 2007. With ABI scores above the 50 level in two of the past three months, the prospects of a sustainable recovery in design activity are enhanced.
Regional revenue trends also are very encouraging. Firms in the Northeast, Midwest, and South all reported billings increases in November. The billings index for firms in the West increased 2.5 points in November, but since the index for this region remains below 50, it still reflected a modest decline from October levels.
Trends in billings by construction sector were more mixed. On the positive side, residential architecture firms report a solid increase in billings, with the index for that sector increasing to 54.3, its highest reading since mid-2007. On the negative side, the billings index for commercial/industrial firms dipped below 50 for the first time since last April. The billings index for institutional firms held steady, and has been slowly trending up for most of the year.
The AIA has recently begun collecting information on trends in newly signed design contracts, anticipating that this will serve as a leading indicator for future design billings. In November, fewer firms reported an increase in newly signed design contracts than reported an increase in billings, so workloads at architecture firms are not likely to begin to accelerate in the months ahead.
Still, slow going
While the national economic recovery continues, the pace of growth remains disappointing. The gross domestic product grew 2.5 percent in the third quarter when seasonally adjusted and annualized, which is somewhat below the pace of the first half of the year. Recent employment reports point to subpar growth continuing in the fourth quarter. Payrolls increased an average of 105,000 nationally through October and November, only slightly better than the 82,000 average monthly increases through the first three quarters of the year. Consumer sentiment numbers have been largely flat this year, and as a result, there have been only modest gains in consumer spending. Retail sales have increased at about a 6 percent pace through the first ten months of the year. However, these gains may be somewhat better than they appear to be, since inflation is running at only about 1.5 percent compared to year-ago levels, and is less than 1 percent when more volatile food and energy components are taken out.
The recent report on regional economic conditions (released December 1) by the Federal Reserve Board paints a generally negative, although mixed, picture of the commercial real estate markets. According to this report, the New York, Atlanta, and Kansas City districts noted some weakening in nonresidential activity, while the Boston and Dallas districts indicated some modest improvement. Boston, Richmond, Kansas City, and Dallas expressed optimism about the near-term outlook.
An uncertain year ahead
Given the uncertainty in the economy and the slow recovery in design activity, architecture firms are reasonably pessimistic about the outlook for 2011. Overall revenue growth is projected to average in the 2 to 3 percent range, but almost one in three firms expect revenue for 2011 to be below 2010 levels. Over half of these firms expect the falloff to be 10 percent or more. Still, well over four in 10 firms expect to see growth this coming year, with the remaining quarter anticipating that 2011 will be comparable to 2010.
Both residential and commercial/industrial firms are more optimistic about business conditions over the coming year. Half of the firms in each group are expecting revenue increases in 2011, while only one quarter are expecting declines. In contrast, almost half of institutional firms are expecting revenue declines over the coming year, with only 38 percent expecting growth. Regionally, firms in the Northeast and Midwest are expecting more favorable conditions in the future, with half of the firms in each of these regions expecting growth. Almost half of firms in the West anticipate revenue declines in 2011.
This month, Work-on-the-Boards participants are saying:
• “Healthcare continues to be strong in California, and education is seeing more opportunities for proposals.”—220-person firm in the West, institutional specialization.
• “Residential work continues to be additions and alterations. Small commercial tenant fit-ups are increasing.”—2-person firm in the Northeast, residential specialization.
• “Getting projects started has been very slow. We have seen interest from the corporate sector, which has been quiet in the past months.”—17-person firm in the Midwest, institutional specialization.
• “With numerous firms chasing every project, margins for those you win will remain thin.”—8-person firm in the South, commercial/industrial specialization.
About the AIA Architecture Billings Index
The Architecture Billings Index (ABI), produced by the AIA Economics & Market Research Group, is a leading economic indicator that provides an approximately nine to 12 month glimpse into the future of nonresidential construction spending activity. The diffusion indexes contained in the full report are derived from a monthly “Work-on-the-Boards” survey that is sent to a panel of AIA member-owned firms. Participants are asked whether their billings increased, decreased, or stayed the same in the month that just ended as compared to the prior month, and the results are then compiled into the ABI. These monthly results are also seasonally adjusted to allow for comparison to prior months. The monthly ABI index scores are centered around 50, with scores above 50 indicating an aggregate increase in billings, and scores below 50 indicating a decline. The regional and sector data are formulated using a three-month moving average. More information on the ABI and the analysis of its relationship to construction activity can be found in the White Paper Architecture Billings as a Leading Indicator of Construction: Analysis of the Relationship Between a Billings Index and Construction Spending on the AIA web site.