Practicing ArchitecturePracticing Architecture
Slow Improvement Continues at U.S. Architecture Firms
Firms plan to begin hiring back employees, although salaries are not expected to increase
By Kermit Baker, Hon. AIA
AIA Chief Economist
U.S. architecture firms reported that business conditions improved very modestly in March, the fifth straight month that billings either held their own or increased, but the third straight month that activity has shown only marginal movement. However, inquiries for new design projects remain strong, as do newly signed design contracts, so it appears as though this emerging recovery in design activity can be sustained.
Firms in all regions reported billings near or above the 50 level, signifying that the improvement in design activity is broad-based in each region. Also, billings for residential and commercial/industrial firms are growing, so improvement is occurring across multiple construction sectors. Still, a relatively weak job market has limited economic growth, and without stronger growth, the need for new nonresidential facilities is limited. Also, banks remain concerned about their real estate lending portfolio, so obtaining financing for most nonresidential projects is still a challenge.
Firms remain nervous about adding staff this year, although 35 percent of firms anticipate that the number of positions at their firm will have increased by the end of the year. This compares to only 10 percent that feel that the number of positions will decrease this year.
Profession generally reporting improvement
The Architecture Billings Index (ABI) was 50.5 in March, indicating that design billings at U.S architecture firms increased slightly over February levels once seasonal variation was factored in. Business conditions have improved only marginally since the beginning of the year, with ABI scores just at or slightly above the 50 level through the first three months of the year.
Still, most segments of the profession are reporting at least modest improvement since the fourth quarter of last year, indicating momentum for a continued recovery in design activity. Regionally, firms in the Midwest have reported billings growth each month since last September. Firms in the Northeast and South have reported a mix of months with modest growth and months of modest declines over the past two quarters. Firms in the West have reported steady declines over this period, but this trend may finally be reversing. Firms in this region reported an increase in billings in March, the first monthly increase since August 2007.
Likewise, billings trends by construction sector concentration hold signs of optimism. Commercial/industrial firms have reported gains each month since last July. Residential architecture firms have reported gains each month since last October, although recent gains have been very modest. The performance of institutional firms–the largest building market for architects–has been mixed. They reported gains from November though January before falling backwards in the past two months.
Economy slowly recovering, but inflation reemerges
Economic indicators in recent months have shown signs of slow but steady growth. Business confidence has been improving. The Conference Board’s CEO Business Confidence index was 67 in the first quarter (any score above 50 indicates a positive outlook), making it the highest reading since early 2004. Consumers are somewhat less thrilled with the state of the economy, with the University of Michigan’s Consumer Sentiment Index hovering around levels seen in 2009 and 2010.
The employment situation is still very troubling, although recent trends have been more encouraging. The U.S. economy has added payroll positions each month for the past six, and over this period total payroll growth is close to 900,000 positions. As a result, the national unemployment rate has declined to 8.8 percent, down almost a full percentage point over the past two quarters.
Even this modest improvement in our economy has ignited growing concern over inflation. While much of the price increases have been a result of the spike in oil prices as well as for generally volatile food commodities, inflation is creeping back into other parts of the economy, particularly at the production level. Producer prices minus typically volatile food and energy costs have increased 2 percent over the past year, and have been steadily increasing over the past six quarters.
Even with the weakness in the construction industry, inflation in basic construction commodities is becoming more commonplace. Over the past 12 months there’s been a growing list of materials (in addition to petroleum products) that have recorded double-digit price increases: steel, copper, brass, and aluminum. Recently, these increases in construction materials have been largely offset by declines in construction costs, as contractors have been aggressive in their project bids in an effort to keep their crews employed. However, at some point, contractors will no longer be able to absorb these rising materials costs.
Firm employment expected to begin recovering
Many architecture firms expect to expand their staff this year. Overall, over a third of firms (35 percent) anticipate that the number of architecture positions will increase by the end of 2011, while just 10 percent anticipate a decrease in the number of positions. The remainder expects them to remain at current levels.
Larger firms (with billings over $5 million annually) are the most optimistic about expansion this year, with just over half expecting to add positions. However, a relatively high share–almost 14 percent–anticipate a decline in positions. In contrast, only 17 percent of smaller firms (with billings under $250,000 annually) expect to add positions, but only 5.5 percent expect decreases. Almost half (47 percent) of commercial /industrial firms expect to add positions, while just 2 percent expect to cut some this year.
By position, architects/designers with four to six years of experience are the most popular choice for potential positions to add. Almost a quarter of all firms expect to add positions at this experience level this year. Intern positions are a close second, with almost 22 percent of all firms expecting to add staff to these positions. Managers and senior managers are least likely to be added this year, with fewer than 5 percent of firms anticipating increases in these positions.
In spite of positions being added, new hires may find downward pressure on starting salaries. Only 9 percent of firms report that entry level salaries have increased over the past year, while more than 22 percent report that they have decreased. The remaining two-thirds of firms report that they have stayed the same.
Larger firms have seen more in the way of salary increases for entry-level positions this past year, with 14 percent reporting that they have increased, and only 9 percent reporting decreases. Likewise, firms in the Midwest, as well as residential firms, have reported above average shares of salary increases for entry-level salaries (11 percent and 15 percent, respectively).
This month, Work-on-the-Boards participants are saying:
• Competition for all projects is fierce. Payments from clients are slower coming in, causing a trickledown effect of slower payments going out to consultants.
—75-person firm in the Northeast, institutional specialization
• It’s looking promising. Lots of inquiries, but people are very hesitant to sign contracts for the work.
• [We’re] having to travel further geographically to find the same amount of work. Projects are generally smaller in size and scope, with less margin due to architects reducing fees to ridiculous levels.
—40-person firm in the Midwest, institutional specialization
• Still very tenuous, and with a governor focused on cutting billions from the state budget, governmental work is not even an option.
—2-person firm in the South, residential specialization
About the AIA Architecture Billings Index
The Architecture Billings Index (ABI), produced by the AIA Economics and 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.org.