Practicing ArchitecturePracticing Architecture
Broader Economy Pulls Monthly ABI Down
Firms are relying more on small project additions and renovations during the downturn
By Kermit Baker, Hon. AIA
Billings at U.S. architecture firms reversed sharply in May, with the AIA’s Architecture Billings Index falling to 45.8 for the month on top of a more modest decline in April. Any score below 50 indicates a decline in revenue at firms, and the May reading represents the steepest decline in almost a year. This pattern in ABI readings mimics 2011, when billings increased in the first quarter and then reversed in the second before recovering later in the year.
The drop pushed firms in all regions of the country into declining billings. The downturn is particularly notable at firms in the Northeast and Midwest, which had been posting generally positive readings for the past several months. Firms with an institutional building specialization remained weak, while residential firms turned slightly negative after several months of positive business conditions. Firms specializing in commercial and industrial facilities were the one major category that continued to show growth in the face of the national downturn.
Economy entering a soft spot
Trends in business conditions at architecture firms are reflecting a slowdown in the broader economy. On the employment front, growth in business payrolls slowed to an average of just over 70,000 in April and May, after averaging monthly gains in excess of 225,000 in the first quarter, and 130,000 in the fourth quarter of 2011. For the first time since late 2010, weak growth in payrolls in May pushed up the national unemployment rate, which now stands at 8.2 percent.
As seen over the past several quarters, a slowdown in overall employment growth has meant a decline in construction employment. Construction payrolls declined by an average of 15,000 per month over the past two months, after recording small gains for the prior three quarters. The unemployment rate in the construction industry is currently 14.2 percent, above the national average but well below its high-water mark of more than 27 percent in early 2010.
Even with weak job growth, there are signs that the housing market has begun to turn around. Annualized housing starts for the first four months of the year have totaled 100,000 more than they did in 2011. Multifamily construction activity has accounted for almost half of this gain, as this market has improved dramatically as an increasing share of households are choosing renting over homeownership until the housing market stabilizes. Sales of existing homes have also improved, but at a somewhat slower rate.
Architects seek out design niches during the downturn
With the steep downturn in construction activity over the past several years, architecture firms have found increased shares of their workloads in less common niches. For example, many construction projects were downsized during the downturn as building owners looked to minimize their exposure to a weak economy. As such, a greater share of project activity was for retrofits and rehabilitations of existing buildings, which are generally much less expensive than new construction.
Members of the AIA’s Work-on-the Boards panel estimate that 10 percent of their billings over the past few years have come from smaller nonresidential construction projects, projects with an estimated construction value of under $500,000. Additionally, almost 20 percent of billings on average have come from smaller additions/alterations/retrofits to existing nonresidential facilities.
Smaller residential additions/remodels have accounted for 7 percent of firm billings in recent years, rising to over 20 percent for firms that specialize in the residential sector. Design modifications to nonresidential facilities that occurred after a construction contract was awarded have accounted for 5 percent of design billings, while designs for nonresidential buildings abandoned prior to construction (or significantly delayed and likely to be abandoned) have accounted for almost 10 percent of design activity.
Smaller architecture firms (those with annual revenues of less than $250,000) report higher average shares of design revenue in these niches: 15 percent for smaller nonresidential construction projects, 25 percent for smaller nonresidential retrofits, and 20 percent for smaller residential remodels. Larger firms report significantly lower shares of revenue for these projects. However, they report above-average shares for design modifications after contracts have been awarded. Firms that specialize in the commercial/industrial sector also report above-average shares of revenue for these smaller project types, particularly smaller nonresidential construction and retrofit projects.
This month, Work-on-the-Boards participants are saying:
• We have had a flurry of contracts signed, but most are for work that had been previously delayed. [It’s] nice to have more cash flow, but still not very promising long term. —Five-person firm in the Northeast, mixed specialization
• Lots of inquiries and requests for proposals, but the hit rate is less than 35 to 40 percent. Still lots of bottom-feeders in our segments.—Six-person firm in the South, commercial/industrial specialization
• This is the second consecutive year that we’ve undertaken a re-budgeting exercise. We are readjusting income and labor projections for the rest of the year based on performance through the first four months. We see this as becoming an annual process. —140-person firm in the West, institutional specialization
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.