Practicing ArchitecturePracticing Architecture
Slowdown at Architecture Firms Continues
Firms looking to add or replace staff frequently target competitors
By Kermit Baker, Hon. AIA
Architecture firms reported that the downward slide in billings that began this spring has continued into June. The national Architecture Billings Index (ABI) score was 45.9 for the month, not straying far from the 45.8 rating reported for May. These two steep declines follow a modest drop in April, so the ABI has now seen three consecutive monthly declines after recording five straight monthly increases. Though inquiries for new projects continue to be positive, they remain well below the levels seen earlier this year and in late 2011, so a quick recovery in billings seems unlikely.
The national slowdown in design activity was felt in each of the major regions of the country. The steepest decline in June was reported by firms in the West region, continuing an unbroken string of monthly billings declines dating back to mid-2007. Firms in the Northeast reported another sharp downturn in June, following a significant decline in May.
By sector, the June report demonstrated emerging weakness from firms with a commercial/industrial specialization. These firms had reported a steady string of monthly growth figures dating back to last fall. However, their billings turned down modestly in May and declined more sharply in June. Since the commercial/industrial sector was leading the nonresidential construction recovery, this reversal likely signals that the nonresidential sector is poised for slower-than-expected growth in the coming quarters. Residential firms reported only a modest pullback in June, and therefore could be expected to return to growth with even a slight improvement in market conditions in coming months.
Second quarter swoon continues
The year got off to a strong start for the broader economy, and particularly for the construction industry, at least in part due to warmer-than-normal weather conditions in the Northeast and Midwest. In the second quarter of the year, however, growth began to fizzle. After adding more than 225,000 payroll positions per month on average during the first quarter, for example, businesses added a mere 75,000 per month on average during the second quarter. Construction firms added 3,000 payroll positions overall during the first quarter, but then lost these (and more) during the second quarter.
Reflecting this weakness in the economy, business executives became much more downbeat, as the Conference Board’s CEO Business Confidence Survey fell from a strong reading of 63 in the first quarter (where any score above 50 signifies a positive outlook) to 47 in the second quarter. Consumers generally remained a bit more positive during the second quarter, although the June reading for consumer sentiment from the University of Michigan showed a six-point drop (on a 100-point scale) from the May high, and the preliminary July reading fell an additional point.
One positive outcome from a slow-growing economy is that interest rates have remained low, in large part because inflation is under control. For those that can get financing, business and consumer borrowing costs remain at near-record lows. With short-term interest rates on U.S. treasury bills near zero, the prime lending rate has been locked in at 3.25 percent since the beginning of 2009. Yields for 10-year U.S. Treasury notes (on which many fixed-rate home mortgages are based) averaged just above 1.6 percent for June, down over a full percentage point from a year ago and almost two percentage points from two years ago. Wholesale prices increased only about 1 percent over the past year, mostly due to easing in oil prices. Excluding food and fuel, wholesale prices were up a manageable 2.75 percent over the past year.
Firms often look to competition when adding staff
Even with business conditions softening in recent months, a majority of firms are planning to either add architecture staff positions or replace others due to staff turnover this year. When adding or replacing architecture positions, firms expect to focus on less-experienced candidates. More than a third of all firms (36 percent) expect to hire one or more staffers with 5–10 years of experience, while an additional 33 percent look to hire interns, recent graduates, or students. Only one in five firms expects to hire more experienced staff, with 10–15 years of experience, and fewer than 5 percent plan to hire principals, partners, or other senior managers.
Firms generally feel that they have a lot of options when adding or replacing architecture positions. The most common target for potential candidates—selected by 56 percent of respondents—is staff currently working at other firms. Staff laid off by another firm is the second most targeted category, followed by new entrants to the workforce, such as recent graduates or students.
Potential candidates previously laid off by the firm itself were a less common option, while candidates from outside of private architectural practice, such as those in corporate or government positions, were rarely mentioned for consideration. Larger firms are more likely to target candidates currently working at another firm, while smaller firms expressed a preference for either those previously laid off from another firm or new entrants to the workforce.
This month, Work-on the-Boards participants are saying:
• 100 percent of my projects are funded privately. There are no borrowed funds available.
• After picking up in the late winter through mid-spring, business is slowing once again for the third year in a row. Everybody is studying projects; almost no one wants to build.
• If half of our feasibility studies turn into projects, we will have a very good year.
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.