Practicing ArchitecturePracticing Architecture
Pace of Billings Decline Slows in October
Few firms considering mergers or acquisitions in this economic climate
By Jennifer Riskus
The AIA’s Architecture Billings Index (ABI) reported another decline in billings at architecture firms with a score of 49.4 in October, albeit a decline at a slower pace than in September. Business conditions remain relatively tenuous overall, with two consecutive months of declining billings coming on the heels of a slight increase in August. Inquiries into new projects remain strong, and while the value of new design contracts fell this month, it also declined at a slower pace than in September.
Since billings by sector and by firm specialization are reported as rolling three-month totals, there were some bright spots in October despite the overall downturn. Firms located in the Northeast reported gains in billings for the second month in a row, as did both firms with a residential specialization and those with a commercial/industrial specialization. In fact, with the exception of three months of declines during the summer, billings for firms with a residential specialization have grown during every month of the year, a modest turnaround from the persistent weakness of the previous several years.
An ambiguous jobs picture
Nonfarm payroll employment grew very modestly in October, adding just 80,000 new jobs. Construction employment declined by 20,000 during the month, effectively offsetting the gains in the sector from September. In addition, architectural services employment declined by 1,500 in September (the most recent data available). Architectural services employment is not seasonally adjusted, and it’s likely that firms are shedding temporary summer employees, as their highest payrolls of the year thus far were reported in June, July, and August.
Conversely, more businesses seem to be hiring. The U.S. Bureau of Labor Statistics Job Opening and Labor Turnover Survey for September indicated an increase of 300,000 job postings from August, to a total of 3.4 million. This represents an overall increase of 38 percent since the official end of the recession more than two years ago. In addition, the first estimate of the GDP for the third quarter of 2011 indicates an annual growth rate of 2.5 percent, much higher than the 1.3 percent growth rate for the second quarter. One of the largest contributors was an increase in personal consumption expenditures, as consumers increased their discretionary spending on goods and services.
Weak interest in mergers
In this current economic downturn, architecture firms have shown little interest in mergers or acquisitions. Just 11 percent of responding firms reported any such activity in the last year, with 4 percent reporting that they’ve considered acquiring another firm, and 7 percent indicating that they’ve considered merging with another firm. Firms located in the Northeast and South were most likely to report merger and acquisition activity over the last year, as were firms with an institutional specialization. In the starkest disparity, nearly 30 percent of larger firms with annual billings of $5 million or more reported interest in acquisitions and mergers, compared to just around 5 percent of smaller firms.
Of firms that have actively considered acquiring or merging with another firm over the last year, more have approached another firm about a merger than have been approached (71 percent versus 56 percent). Three quarters of these firms indicate that they think architecture firms merging with/acquiring other architecture firms will be the most common activity over the coming year, as opposed to mergers with/acquisitions of non-architecture firms or firms with other design disciplines. When firms that are already interested in mergers and acquisitions consider the reasons for doing so, the largest share of respondents (69 percent) rated the ability to add new markets/serve a broader area/develop an international presence as very important. Sixty-five percent felt it was very important to use mergers to add additional skills and credentials to their own firm, and 60 percent felt it was very important that acquisitions allow their firm to compete more effectively.
This month, Work-on-the-Boards participants are saying:
• Things are still very slow in the public markets, and some smaller firms have gone out of business. But the private market seems to be picking up, and there is a general sense that there may be some light at the end of the tunnel.—31-person firm in the West, institutional specialization
• Very small projects have been picking up, and there are newly proposed projects being considered, indicating that some construction work will continue.—6-person firm in the Northeast, commercial/industrial specialization
• Business is still very weak in central east coastal Florida. Things seem to be improving, but clients are slow to move forward.—2-person firm in the South, residential specialization
• Things seem to have slowed in our region. There is less state spending on capital projects, corporate spending is mixed but generally slowing, and higher education is somewhat mixed.—116-person firm in the Midwest, 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.