Practicing ArchitecturePracticing Architecture
Architecture Firms Rebound in November
Firms are expecting modest growth in 2012, with larger firms and those with residential and commercial/industrial specializations the most optimistic
By Kermit Baker, Hon. AIA
Billings at U.S. architecture firms moved up in November, recording their strongest monthly gain since the end of 2010. Inquiries for new projects also increased sharply. The strongest billings gains were among residential and commercial/industrial firms, as well as firms located in the South.
With an overall billings score of 52, the November rebound marked the fourth month in 2011 that billings increased, plus an additional month in which there was no change. The relative balance in billings over the course of the year supports other evidence that revenue at architecture firms was generally flat in 2011--a welcome relief from the steep declines of past years, but disappointing for those hoping to finally see some substantial recovery.
While overall conditions do not yet indicate a permanent rebound in design activity, some sectors are clearly healthier than others. With normal monthly data revisions based on three-month moving averages, residential firms have now reported three straight monthly billing gains, with the November reading currently the strongest since before the housing downturn. Commercial/industrial firms are matching this performance as well, with three straight healthy months.
Regionally, firms in the South have reported strong growth over the past two months, and Midwest and Northeast firms seem to be on the brink of recovery. All this is reminiscent of a year ago, when firms reported a strong fourth quarter of 2010 only to see business conditions deteriorate once the economy began to soften toward the end of the first quarter. Whether this upturn can be sustained probably also depends on whether the economy continues to generate momentum.
International economic problems persist
Problems in Europe continue to depress growth prospects for the world economy. A recent economic forecast from the Organisation for Economic Co-operation and Development—which tracks the economies of countries using the euro, Japan, and the United States—is projecting just 1.6 percent growth across these economies in 2012, down from an estimated 1.9 percent in 2011. For the euro nations, however, growth is forecast to be only 0.2 percent in 2012, flirting with an outright recession.
While a weak Europe depresses opportunities for exports, the U.S. economy is expected to do better than that its European counterparts. Consumer sentiment has been staging a healthy recovery, with the preliminary December measurements up over 3.5 points from the November rating, according to the University of Michigan Consumer Sentiment Index. Last month marks the fourth straight monthly improvement, with the index climbing from 55.7 in August (indexed to 1966=100) to 67.7 for December. This improving consumer sentiment translates into increased spending, with national retail sales showing steady improvement throughout 2011. Through November, sales were up almost 7 percent for the fourth quarter of 2011, compared to the same period in 2010.
The improvement in consumer spending seems to be outpacing gains on the jobs front. Business payrolls across the nation have increased every month since September of 2010, but growth remains very modest. During this period, the economy has added fewer than 2 million net new jobs, still far fewer that the more than 8 million lost between the beginning of 2008 and the third quarter of 2010.
Economic growth is still too weak to generate much construction activity, and construction payrolls dropped by 12,000 in November. Through the first 11 months of 2011, construction payrolls increased by a mere 24,000 positions, with little effect on the estimated 1.1 million currently unemployed construction workers. As a result, the unemployment rate for the construction sector remains in excess of 13 percent nationally.
Modest gains projected for this year
In 2011, the share of firms reporting revenue declines of 5 percent or more was just about offset by those reporting increases. As a result, firm revenue is estimated to have increased just 0.4 percent on average. For 2012, slightly over a quarter (27 percent) of architecture firms expect their revenues to decline at least 5 percent from 2011 levels. Fortunately, a higher share (42 percent) expects revenue to increase by at least that amount. Overall, firms are forecasting revenue gains averaging just below 2 percent for the year.
Larger firms expect to do a bit better than average in 2012, with firms with annual revenues in excess of $5 million anticipating revenue growth of 3.2 percent on average, compared to 1.6 percent growth for firms with revenues of less than $1 million. Commercial/industrial and residential firms are expecting stronger revenue growth than institutional firms. In terms of staffing needs, just over a quarter of firms (27 percent) think that they probably or definitely will add staff in 2012, but just under 40 percent anticipate that they probably or definitely will not add staff. The remaining third are not sure what their staffing changes will be over the coming year.
This month, Work-On-The-Boards participants are saying:
• Several large projects that were waiting to move forward are now in design. We believe that 2012 will be a better year, with revenue almost returning to 2008 levels. —170-person firm in the Midwest, commercial/industrial specialization
• The monthly ups and downs of the construction environment have made us modify our work model. Most projects are completed in association with a local architect. Any drafting work done in-house is completed by contract draftsmen rather than permanent staff. —2-person firm in the South, institutional specialization
• The value of projects is approximately half of a few years ago. Clients are taking longer to pull the trigger, and the competition for work is high. —8-person firm in the Northeast, mixed specialization
• There is an apparent slowdown in what we would consider larger projects (over $10 million). There are several midsize and smaller projects that all firms can lobby for; therefore, there is great competition, lower fees, and the resulting lower profit margins. —19-person firm in the West, 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.