Sign In, Renew, Sign Up

Search AIA

Search AIA Go

Practicing ArchitecturePracticing Architecture

Page Tools

Reed Insight and Community

Advertisements

Design Activity Weakness Continues in June

Financing and economic uncertainty listed as top reasons for stalled projects that are hindering recovery

By Kermit Baker, Hon. AIA

AIA Chief Economist

For the third straight month, billings at U.S. architecture firms fell in June, reversing nearly all of the improvement generated during the fourth quarter of 2010 and the first quarter of 2011 when there were five straight months of positive conditions. In spite of this relatively sharp decline in billings down to an Architecture Billings Index (ABI) score of 46.3, inquiries for new projects showed healthy gains in June, hopefully signaling that the decline in billings may moderate in the months ahead.

Regional patterns have undergone major shifts so far this year. Through the first quarter of the year, conditions were very healthy at firms in the Midwest, improving in the Northeast, beginning to stabilize in the South, and deteriorating in the West. As of the end of the second quarter, these patterns have almost completely reversed, with firms in the West reporting gains, while conditions decline in the Northeast and Midwest.

Design activities for the major construction sectors are also shifting. Residential firms reported a modest softening in June after months of healthy gains. Commercial/industrial firms saw conditions stabilize after a couple months of decline. Business conditions at institutional firms, however, remain quite weak overall.

Jobs growth sagging as well

Whatever might be causing weakness in the design sector, the broader economy is not helping. The slowdown that hit the economy in late spring is continuing into summer. The June employment report was particularly disturbing, with only 18,000 payroll positions added after a disappointing 25,000 total jobs were added for May. During the first four months of the year, the economy added about 180,000 payroll jobs per month on average. As a result, the national unemployment rate edged up from 8.8 percent in March to 9.2 percent in June.

In response, the construction sector has taken a step backward. After adding 24,000 jobs nationally in the first quarter--the first quarterly gain for this industry since the third quarter of 2006--the construction sector returned to contraction by losing 9,000 jobs overall in the second quarter. Part of this softness was caused by a still-recovering housing sector. While improving in June, housing starts in the second quarter were below first-quarter levels. Prior to that, the first quarter had seen a housing rebound from the fourth quarter of 2010.

Recent weakness in the economy, coupled with high energy costs, and uncertainly over the (just resolved) government debt ceiling limit has made businesses and consumers nervous. The Conference Board CEO Business Confidence indicator fell from 67 to 55 in the second quarter. Though any score above 50 is considered positive, this survey indicates that businesses are becoming more concerned about the economic outlook. Consumers are even more nervous. The University of Michigan Consumer Sentiment Index fell to 63.8 in July (a score benchmarked to Q1:1966=100), down from an average of almost 72 in the second quarter, and over 73 in the first quarter. At present, the lack of confidence by businesses and consumers in future conditions is undoubtedly the greatest problem in getting the economy moving.

Design activity stalling out

While weakness in the economy has led to a decline in design projects, architecture firms also blame the larger number of stalled projects for the anemic rates of design activity. A majority of architecture firms report that they currently have at least one or more stalled project. According to these firms, the most common reason for lack of progress is the owner’s difficulty in obtaining financing. Over 60 percent of firms with stalled projects cite financing as a reason for projects not proceeding.

Second on the list of reasons for stalled projects is general client nervousness about proceeding on the project—no doubt generated by the unusual level of uncertainly about future economic conditions. The third most common reason is closely related: The economy is too weak at present for a project to proceed.

Ultimately, architecture firms believe that a majority of these projects will proceed through to completion. On average, firms with stalled projects feel that over 40 percent of these projects (by dollar volume) will proceed to construction with, at most, modest modifications. Architecture firms feel that almost a quarter (23 percent) will be significantly modified before proceeding to construction, while a comparable number (24 percent) will be cancelled. Some other resolution will occur for the remaining 11 percent of stalled projects, according to those surveyed.

This month, Work-on-the-Boards participants are saying:

    • Lending is limited to multifamily construction, making financing for other project types very difficult. —Five-person firm in the South, commercial/industrial specialization

    • Architectural firms are willing to go out on a limb to provide services in advance of contracts, and are cutting fees to get on board--not good strategies for [the] long-term health of their firm or the profession.—11-person firm in the Midwest, institutional specialization

    • Domestic work continues to drag along very slowly. Middle Eastern work has almost all disappeared or stalled. [The] only bright spot that keeps moving along is China.—25-person firm in the West, residential specialization

    • There is more competition for small higher-education projects, and the length of time from start of discussion to contract and commencement of design is prolonged. Where there was a deluge of work two-and-a-half years ago, now there is barely a trickle.—50-person firm in the Northeast, institutional specialization

   
   

     

Recent Related:

Declines in Design Activity Suggest a Bumpier Road to Recovery

Architecture Firms Report a Downturn in Business Conditions in April

Slow Improvement Continues at U.S. Architecture Firms

Architecture Firm Billings Increase Slightly in February

Reference:

American Institute of Architects to Develop Database of Stalled Projects Suitable for Investor Financing

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 near 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 AIA.org.

 

Back to AIArchitect August 5, 2011

Go to the current issue of AIArchitect

 

Footer Navigation

Copyright & Privacy

  • © The American Institute of Architects
  • Privacy