Practicing ArchitecturePracticing Architecture
Recent Downturn in Architecture Firm Billings Accelerates
July data reveals fourth monthly decline in ABI
By Jennifer Riskus
Even before the debt ceiling agreement, the historic downgrading of the U.S. credit rating, and the resulting wild stock market gyrations, the current down trend in billings at architecture firms had already started to accelerate. In July, the AIA Architecture Billings Index (ABI) declined for the fourth month in a row, falling to 45.1. What’s in store for the U.S. economy--and the architecture profession--in the upcoming months is still very unclear.
In a little bit of good news, inquiries for new design activity have continued to improve modestly in July, indicating that new projects are still under consideration. However, the value of new design contracts softened, so many of these inquiries are not translating into signed projects.
Business conditions are declining at firms in all regions of the country. The weakest score (44.9) was recorded for firms in the Midwest, which had previously reported seven months of growth in late 2010 through early 2011. Firms located in the West are in the midst of the most protracted downturn, now stretching to four years without an increase in billings.
Firm billings also continue to soften at firms of all specializations, despite growth reported by firms in all sectors earlier this year. Those with a residential specialization have seen the sharpest reversal recently, after reporting nearly three consecutive quarters of growth. Scores for firms with an institutional specialization continue to moderate, but remain negative overall.
Unemployment declines slightly
On the employment front, 117,000 new jobs were added in July and the unemployment rate declined slightly, but this still represents fewer jobs than are needed to sustain healthy economic growth. Construction employment remained relatively unchanged, but architecture services employment edged up slightly in June (the most current month available) to 153,200--the highest point yet this year.
Regional construction trends remain mixed, according to the most recent edition of the Federal Reserve’s Beige Book. Residential real estate remains weak, and home prices are still flat or falling. On the other hand, residential rental property construction has increased in the New York, Chicago, Dallas, and San Francisco districts, and nonresidential real estate activity is on the rise in the Boston, Philadelphia, Cleveland, Chicago, St. Louis, and Dallas districts. The Chicago district, in particular, reported a heightened demand for industrial projects.
More firms buying more insurance
Despite the economic downturn, the majority of firms continue of carry some kind of professional liability insurance. Nearly eight in 10 firms carry firm-wide coverage, with 14 percent carrying firm-wide insurance plus supplemental coverage for specific projects. (Multiple responses to this question were permitted). While respondents report that the amount of coverage their firms carry has changed little over the last three years, nearly twice the number of firms added or increased coverage in comparison to the amount of firms that eliminated or reduced coverage. This applies for both firm-wide and project-specific liability insurance coverage, although 26 percent of firms added or increased project-specific coverage, compared to 19 percent that added or increased firm-wide coverage. Several respondents noted that government projects tend to require more coverage, and as such firms have accordingly adjusted their insurance amounts.
Firms in the South were more likely to have increased firm-wide coverage than those in other regions, but the West had the largest share of firms reporting a decrease in project-specific coverage. Small firms, with annual billings of less than $250,000, were the most likely to report a decline or the elimination of firm-wide coverage compared to larger firms.
This month, Work-on-the-Boards participants are saying:
--Still very slow. Overall project inquiries have picked up in 2011 versus 2010, but even when we are selected, the projects frequently do not move forward.—Three-person firm in the West, commercial/industrial specialization
--We are currently busy with very strong profits for the year, with a lack of depth in future projects. Businesses seem to be paying down debt and not risking investment in new ventures.—Five-person firm in the Midwest, residential specialization
--Industrial and manufacturing (as well as all oil-related) industries continue to improve in the Houston area.—24-person firm in the South, commercial/industrial specialization
--While we are so far having a quite profitable year, we feel the pressure caused by Congress’s long delay on the debt ceiling increase and the wrangling about deficit reduction. It contributes a lot to economic uncertainty.—10-person firm in the Northeast, institutional 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 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.