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Business Conditions at Architecture Firms Soften in April

The overwhelming majority of firms hope they will be larger in five years.

By Jennifer Riskus

Architecture firm billings declined in April, falling to an ABI score of 48.4. (Any score below 50 indicates a decrease in firm billings from the previous month.) While this downturn is disappointing after growth was reported for the last five consecutive months, it is in line with other current economic indicators and a more pessimistic sentiment toward the struggling recovery. Indicators of future work, such as inquiries into new projects and the value of new design contracts, continued to expand in April, but the pace of growth has slowed in recent months, indicating that there may be less future work in the pipeline as well.

Softening business conditions also were reported by firms located in the South region, where firms have seen declining billings for two months in a row after showing growth for the prior three. Firms located in the Northeast and Midwest regions continue to report modest growth, but the pervasive weakness in the West region shows no signs of abating.

Architecture firm revenue continued to grow at a moderate clip at firms with a commercial/industrial specialization, as this remains the strongest sector. Firms with a residential specialization reported minimal growth, but this is still the eighth consecutive month of improving conditions for them. Firms with an institutional specialization continue to experience weakness.

Many economic indicators in the general economy have moderated lately as well, with the U.S. GDP growing by an estimated annual rate of just 2.2 percent in the first quarter of 2012, compared to growth of 3.0 percent in the fourth quarter of 2011. While people are spending more, business investment in equipment and software has slowed. In addition, non-farm payrolls added just 115,000 jobs in April, the second month of weak growth following more substantial monthly additions from December to February. The architecture and engineering sector as a whole added 7,000 jobs last month, while the construction sector remained essentially flat. Consumer confidence also dipped slightly in April, with the Conference Board Consumer Confidence Index falling to a score of 69.2 (1985=100) on the heels of a more substantial decline in March. While consumers are guardedly optimistic about the present, their outlook for the future has dimmed in recent months.

After such a protracted period of downsizing for many architecture firms, three quarters of our survey panelists indicated that they hope their firm will be larger in five years. A fraction, just 2 percent, would like their firm to be smaller in the future, while the remaining 23 percent are content with their firm’s current size. Firms that are already large are more likely to want to expand. More than eight in 10 firms with annual gross billings of $1 million or more hope their firm is larger in five years, compared to just 67 percent of firms with annual gross billings of less than $250,000.

When asked why they hope their firm will be larger in five years, the most frequently selected response was that larger firms are better able to compete for desirable projects. This may be a direct response to the increased competition for projects that has cropped up during this economic downturn. Firms also hope to expand to become better able to make investments that will increase efficiency and become more diversified, which will enable them to better cope with future fluctuations in the economy.

This month, Work-on-the-Boards participants are saying:

    • We have had a more sustained couple of months with projects that appear to be moving forward. Despite a dip in April’s billings relative to March, there is considerably more backlog today than there was a month ago.
    —Two-person firm in the West, commercial/industrial specialization

    • There is a lot of pent-up demand for housing, as well as a lot of renovations. These projects are mostly higher-end, owner-occupied-related design and construction.
    —One-person firm in the Northeast, residential specialization

    • The economy is stagnant. Any projects that are being considered are very small, and there are many firms vying for every opportunity.
    —55-person firm in the Midwest, institutional specialization

    • Progress on projects continues to be excessively slow, and we’re having cash-flow and credit issues at a time when newly signed contracts are pushing us to grow our business.
    —Four-person firm in the South, commercial/industrial specialization

   
   



     

Recent Related:

Modest Revenue Increases Continue Through Spring

Another Month of Revenue Growth at Architecture Firms

ABI Increases Modestly for Third Consecutive Month

Firm Billings Continue Rise in December

Reference:

The ABI Work-on-the-Boards 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.

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.

 

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