Practicing ArchitecturePracticing Architecture
Architecture Firms Report a Downturn in Business Conditions in April
Just a bump in the road to recovery, or something more serious?
By Jennifer Riskus
The AIA’s Architecture Billings Index (ABI) fell sharply in April--the first slowdown in billings at architecture firms since last October. Business conditions at architecture firms had been slowly improving for the last few months, so it remains unclear if this month’s downturn is a bump in the road to recovery, or indicative of a longer-term reversal in the two-quarter recovery in design activity. Firms reported that the threatened federal government shutdown, tornadoes though the Southeast, and the winding down of federal stimulus funds for building activity all were impediments to design activity in April.
Inquiries for new projects remained strong last month. However, another indicator of future design work paints a less optimistic picture. In April, the share of firms reporting that the value of new design contracts had decreased as compared to March levels was equal to the share that reported that the value had increased. In March, significantly more firms reported a net gain in design contracts over the prior month.
Weak billings in the West and natural disasters in the South
Business conditions at architecture firms located in the Northeast and Midwest regions of the country continued to improve in April, but firm billings weakened at firms in the South and West regions. Firms in the West have still not emerged from the economic downturn, while firms in the South had reported some improvement earlier this year, but have weakened in recent months. However, some firms in the South reported that an uptick in work may be coming in due to the need to rebuild from the recent tornados and storms. The current flooding along the Mississippi River basin may also necessitate future reconstruction activity.
Firms that have an institutional specialization, as well as those with a commercial/industrial specialization, had a fairly significant slowdown in their ABI scores in April. Business conditions remain particularly weak for institutional firms, despite indications of some growth in late 2010 and early 2011. Firms with a residential specialization continued to do relatively well in April, posting their seventh consecutive month of billings growth, reflecting improvement in multifamily design activity.
Credit still feeling the squeeze
In the larger economy, nonfarm payroll employment improved again in April, adding 244,000 positions. In addition, architecture firms added a modest 300 jobs in March (the most current data available), bringing total employment to 151,300, although this data is not seasonally adjusted like the national employment data. The Conference Board’s Consumer Confidence Index also increased slightly in April, climbing to 65.4 (1985=100), an increase of 0.6 points from March. The consumer assessment of the current situation has improved for seven consecutive months, and the consumer assessment of the short term outlook also improved in April. On the other hand, the GDP increased by an annual rate of just 1.8 percent in the first quarter of 2011, much lower than the 3.1 percent growth reported for the fourth quarter of 2010. Growth was much lower this time primarily due to a decrease in government spending at all levels: federal, state, and local.
The availability of construction project financing remains a major issue for many architecture firms, with 57 percent of survey respondents rating the issue as very or extremely serious, and an additional 30 percent indicating that it is a somewhat serious issue. In addition, nearly half of respondents (45 percent) think that the availability of credit has continued to grow more restrictive over the past year, with just 16 percent seeing an easement in credit availability. Larger firms, with annual billings of $5 million or more, were least likely to report that the availability of credit has gotten more restrictive. However, they were most likely to report that they have projects that are stalled due to problems obtaining credit. In fact, nearly two-thirds of panelists (63 percent) indicated that they have projects that are stalled primarily due to difficulties obtaining financing. These firms have an average of three stalled projects at present, with the construction value of these projects averaging $48.8 million per firm. Firms located in the Midwest reported the highest number of stalled projects, as well as the highest estimated value of these stalled projects.
This month, Work-on-the-Boards participants are saying:
• As we do mostly public sector work, financing is not the issue in the typical sense. For us, significant and continuing cuts in public budgets are the issue.—8-person firm in the Northeast, institutional specialization.
• Design and construction in our region is undoubtedly going to be affected by the major tornado outbreak and extensive damage to metropolitan areas. Impacts may range from labor and material shortages to additional opportunities for reconstruction work.—4-person firm in the South, institutional specialization.
• Business has picked up, but the concern over rising oil prices, falling dollar value, some bad legislation through Congress, and increasing inflationary pressure means more uncertainty.—80-person firm in the South, commercial/industrial specialization.
• Some firms are getting bought up by out of state firms and other firms are closing. We have been receiving many RFPs from cities, counties, etc., not necessarily for a specific project, but for on-call services, probably to replace personnel.—3-person firm in the West, 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.