Practicing ArchitecturePracticing Architecture
Billings at Architecture Firms Hold Steady in January
With domestic growth expected to be modest, some firms explore international design opportunities
By Kermit Baker, Hon. AIA
AIA Chief Economist
Following a healthy upturn in the fourth quarter, design billings at U.S. architecture firms remained flat in January. The national reading for the AIA’s Architecture Billings Index (ABI) was 50.0, meaning that average billings in January exactly matched December levels. Firms in three of the four major U.S. Census regions reported gains in January (firms in the West continued to report declines), while firms with major facility type specialties all reported at least modest revenue gains for the month. Commercial/industrial firms have been reporting steady revenue growth since mid-2010, while an upturn in institutional design activity is just beginning to emerge.
The recovery in design activity at architecture firms continued in January, although the pace of growth slowed considerably. At exactly 50.0, the January ABI showed no increase in design firm billings over December levels, but also no decline. However, January marks the third straight month with ABI scores at the 50 level or higher, an encouraging sign that architecture firms are in the midst of a sustainable recovery.
This optimism is supported by the breadth of the upturn in design activity. Firms in three of the four major Census regions reported growth in revenue. Firms in the Northeast have seen improved conditions every month since last August, those in the Midwest every month since September, and those in the South since November. Also, the major construction sectors served by architects are seeing healthier conditions. Commercial/industrial firms have reported steady growth in billings since last summer, with the upturn accelerating in recent months.
Residential firms, many of which are heavily involved in the design of multifamily facilities, have reported strong gains in recent months. If gains continue into the higher-volume spring months, this trend may be an early sign that a sustainable housing recovery is underway. Finally, institutional firms have recently reported very modest gains, which if sustained, would be the final piece of a broad based nonresidential building recovery.
Recovery on the way?
The national economy continues on a recovery track. The GDP increased 2.6 percent in the third quarter and 3.2 percent in the fourth quarter on an inflation- and seasonally-adjusted basis. However, economic growth has done little to improve the employment situation. Payrolls increased by only 36,000 positions in January after adding a modest 248,000 through the second half of 2010. A health economy should generate between 2.0 and 2.5 million net new payroll positions a year, and generally needs to create between 1.5 million and 1.8 million a year just to keep the unemployment rate from increasing.
Architecture firms have also seen disappointing results on the employment front. Payroll positions on a not seasonally-adjusted basis were down 300 nationally in December (the most recent data available). For the year 2010, payroll positions were down by more than 20,000 (or 11.5 percent) from 2009 levels, and almost 57,000 (27 percent) from 2008 levels.
In spite of weak job growth and only modest economic growth, there are emerging signs of inflation in basic construction commodities. The Bureau of Labor Statistics reports that as of January, diesel fuel, steel products, plastic resins, and copper have all risen at a double-digit pace over the past 12 months. Prices for many other construction commodities (such as lumber and plywood) have risen at a high single-digit pace. This is of particular concern given the weakness in the domestic construction markets. However, while much of the increase is being driven by energy costs, inflation in core wholesale prices (net of food and energy) is beginning to accelerate, having risen 6.4 percent at an annual rate in January, the largest monthly increase since the end of 2006.
The international front
Most international economies are growing faster than the U.S. economy at present, and as such, a growing share of construction activity is offshore, often in developing countries. Many U.S.-based architecture firms are looking to take advantage of these international opportunities. Among AIA Work-on-the-Board panelists, 12.6 percent had billings from international projects in 2010. A much higher share of larger firms (38.5 percent of firms with over $5 million in billings) had international work. Only about 3 percent of firms with under a million dollars in billings had foreign work last year. Both institutional firms (16.9 percent) and commercial/industrial firms (14.4 percent) had slightly higher shares of firms with international work than average.
In most cases, these projects accounted for only a small share of project activity at their firm. For almost half of firms (45 percent) with international work last year, less than 5 percent of their 2010 gross billings were from foreign projects. International work accounted for at least a quarter of gross billings at only 13 percent of these firms.
For the coming year, international work is expected to be an important, but not dominant, segment of firm workloads, as foreign billings are expected to approximate 2010 levels. Again, almost half of firms with foreign projects in 2010 are anticipating that these projects will account for less than 5 percent of firm gross revenue this year, and only 14 percent expect it to account for as much as a quarter of revenue.
This month, Work-on-the-Boards participants are saying:
• Home addition/remodeling projects are very hard to get because homeowners are cutting their costs by not using an architect or by being able to select from numerous unemployed architects.—1-person firm in the Midwest, residential specialization
• Healthcare projects placed on hold last year continue without concrete dates of when they will be initiated. Probably see major projects start with phases as opposed to the entire project being initiated at once.—156-person firm in the South, institutional specialization
• Private sector commercial projects that are not driven by bank financing are very strong, especially on a region wide basis.—9-person firm in the Northeast, commercial/industrial specialization
• Tech clients are getting busy again and investing in new office space.—36-person firm in the West, 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.