Practicing ArchitecturePracticing Architecture
ABI Increases Modestly for Third Consecutive Month
Growth moderated by stagnant home values and fears of spreading debt
By James Chu
Business conditions remained encouraging at architecture firms, as the first Architecture Billings Index (ABI) reading for 2012 reached 50.9. This marks the third consecutive modest monthly increase, a trend very similar to that of a year ago, when billings moved up in the fourth quarter of 2010 and remained positive through the first quarter of 2011.
Billings in all regions showed growth, with the exception of the hard-hit West, which recorded an ABI score of 45.6. Conversely, firms in the Midwest have recorded the second consecutive month with an ABI score above 53, while the South and Northeast recorded scores of just above 50.
Firms specializing in residential, commercial/industrial, and institutional projects all registered gains, while mixed-practice firms (ones without a majority of their billings in any single major construction sector) were still contracting. The residential sector has been relatively strong for the last five months, reflecting emerging strength in multifamily rental housing.
During this slowly emerging recovery, the commercial/industrial sector has been the most consistently positive. Since April 2010, this sector has maintained scores close to 50, and has shown gains in each of the last five months. The ABI score for commercial/industrial firms in January currently stands at 52.2, indicating reasonable growth.
More mixed signs
The economy created nearly a quarter million jobs in January, according to the Bureau of Labor Statistics. There have been two straight months of job gains above the 200,000 mark, and in January the unemployment rate dropped to a three-year low of 8.3 percent. Architectural services industry employment numbers remained stable in 2011, with less than a 1 percent decrease from the previous year (2010 saw an 11 percent decline from 2009). Payrolls reached a peak in 2008, with 220,500 employed, but this number has fallen to 153,300 with the most recent report. In contrast, the construction employment picture has shown some modest gains over the past year.
After rising for five straight months, confidence among U.S. consumers declined in February, as growing optimism about job prospects failed to ease concerns that wages will stagnate. The Thomson Reuters/University of Michigan index of consumer sentiment dropped to a preliminary reading of 72.5 for the month. Furthermore, a 22 percent increase in the price of gasoline is pinching household finances, and serving as a reminder that the pickup in hiring has yet to boost incomes.
The Federal Reserve noted that declines in home prices have forced many Americans to cut back sharply on spending, and warned that the trend could continue to weigh on the economy for years. As home value fluctuations influence 70 percent of economic activity, the Federal Reserve indicated that the broader economy won’t fully recover until the depressed housing market turns around. Many homeowners are spending less because they are stuck in “underwater” homes, which are worth less than what is owed on the mortgage. And home values are falling because of high rates of foreclosures and tight credit, even in areas with lower unemployment.
On the global front, Greece has passed unpopular austerity measures to deal with its crippling debt, though there’s still much uncertainty surrounding other countries in the European Union. News of spiraling public debt in Europe dragged down the U.S. economy last summer, including the design and construction industry, and instability abroad is likely continue to plague the domestic economy.
Change orders and the economy
The steep downturn in design and construction activity over the past few years has placed tremendous financial pressure on all players and altered the way that business is conducted. There have been reports that these changes have affected the incidence of change orders on construction projects. This month, the AIA’s Work-on-the-Boards survey looked at the prevalence and causes of change orders in this economic environment.
More than half of firms indicate that the current frequency and scope of change orders have remained about the same compared with pre-downturn levels. About 10 percent say that change orders have increased a lot during this downturn, and another 20 percent point to them increasing somewhat. By sector, residential firms were much less likely to report an increase in change orders. Over 32 percent of commercial/industrial firms and almost 31 percent of institutional firms report that the frequency or scope of change orders has increased a lot or somewhat, as compared to before the downturn. In contrast, fewer than 18 percent of residential firms report this kind of increase.
Architecture firms say that the most common reasons for changes in the amount of change orders are contractors underbidding projects in the current competitive environment, or other reasons related to contractor activities. The second most common response is that owners are more indecisive about projects, or other reasons related to owner actions. This is followed by a greater focus on project budgets. Rounding out the top five reasons are that building designs have become more complicated in recent years, and increased requirements from regulatory agencies.
This month, Work-on-the-Boards participants are saying:
• Much of the work in this area is close to starting in construction or is under construction now. New projects seem to be stalling because of indecision. —Large firm in the Midwest, commercial/industrial specialization
• Currently work remains slow, but there appears [to be the] start of a turnaround. Warm weather has helped. —Small firm in the Northeast, mixed specialization
• Business has improved dramatically, to the point that we have hired three new people in the last month. The biggest increase has been in healthcare/hospital work.—Midsized firm in the South, institutional specialization
• There seems to be some sort of a thaw relating to new projects and inquiries. As for inquiries, December and January showed very positive signs. We hope this is representative of the year to come. —Small firm in the West, residential 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.
The ABI panel is open to any AIA member who is principal/partner of their firm. Apply to join the ABI panel by completing a brief background information form on your firm here.