Practicing ArchitecturePracticing Architecture
Firm Billings Continue Rise in December
Second monthly increase in ABI is tempered by pressure on design fees and profitability
By Kermit Baker, Hon. AIA
December marks the second straight month that the AIA’s Architecture Billings Index (ABI) increased, and the first two-month gain since February and March of 2011. At 52.0 (the same score as the previous month), the billings figures were strong enough to generate growth in most regions of the country and in most major construction sectors. Architecture firms in the Northeast, Midwest, and South all reported average billings scores of more than 50 for December, the threshold that indicates an aggregate increase in firm billings.
Likewise, firms specializing in residential, commercial/industrial, as well as institutional projects all reported gains with their preliminary December scores. That leaves only mixed-practice firms (ones without a majority of their billings in any single major construction sector) reporting declines in December. For institutional firms, December saw the first ABI score above 50 since January 2011, and the highest reading since mid-year 2008.
While the ABI numbers point to continued growth in the months ahead, they seem eerily similar to the pattern established in late 2010. In that case, strong ABI numbers in the fourth quarter of 2010 were followed by modest gains in the first quarter of 2011 before diving downward again in the second quarter of the year.
Economic growth strengthening
The national economy has been moving towards a modest upswing. According to a report by the Federal Reserve Board, most of the 12 Federal Reserve districts report economic activity expanding at a moderate pace from late November through December. Activity remained sluggish for residential real estate markets in most districts, and commercial real estate markets remained somewhat soft overall, but showed signs of ongoing improvement in several districts.
The general improvement in the economy was reflected in the December employment report. The national unemployment rate fell to 8.5 percent, the lowest reading since early 2009. Conversely, this number might overstate the underlying improvements in the employment situation, since in recent months the overall labor force has shrunk, lowering the unemployment rate.
However, the separate U.S. Department of Labor payroll report does indicate that payroll jobs have been increasing at a healthier pace recently. National payrolls increased by 1.3 million in 2011, and by over 400,000 in the fourth quarter. Construction payrolls increased in December, but were down very slightly for the entire year.
This general improvement in economic conditions is helping the consumer outlook. This past year ended with four straight monthly increases in consumer sentiment, according to the University of Michigan, and the preliminary January rate shows healthy growth over the December reading. Retail spending (even with some moderation in growth toward the end of the year) increased 7.7 percent in 2011 over 2010 levels, the strongest rate of increase since 1999.
Design fees still under pressure
While firms might be seeing the beginning of an upturn in revenue, most report that design fees as a share of construction costs are still suppressed. For well over 60 percent of firms, 2011 project fees as a share of construction costs are below the rates for pre-recession projects in 2007. Most other firms indicate that design fees are about the same. Fewer than one in 10 report that fees were higher in 2011. This trend is true in comparable proportions for firms of all sizes and in all construction sectors.
As a result, most architecture firms are reporting that profitability as a percent of gross revenue was lower last year than in 2007. Over half (51.5 percent) of all firms report that profitability was significantly lower in 2011, while an additional 17.1 percent report profitability to be only somewhat lower. Still, almost 11 percent of firms report that profitability was somewhat higher in 2011, and an additional 7 percent report that profitability was significantly higher.
This month, Work-on-the-Boards participants are saying:
• Commercial real estate transactions are up. Speculative commercial real estate construction is nonexistent. Developers with money are buying, (not developing) projects. —20-person firm in the Midwest, commercial/industrial specialization
• We are receiving more RFPs (and in particular, more requests for new projects) with our existing clients. Our outlook has improved considerably in the last four months. —30-person firm in the South, institutional specialization
• Services traditionally done by architects are being offered more and more by contactors. — 2-person firm in the Northeast, commercial/industrial specialization
• The majority of our commercial clients have hoarded cash for the past several years, and are now self-financing. Banks play little role in the majority of our work; where they are involved there are significant delays and hurdles to overcome.—5-person firm in the West, mixed 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.