Practicing ArchitecturePracticing Architecture
Latest ABI Reflects Strongest Growth in Nearly Five Years
Federal budget uncertainty, however, dampens optimism for 2013
By Kermit Baker, Hon. AIA
November saw the fourth straight monthly increase in the AIA’s Architecture Billings Index (ABI), with the pace of growth accelerating each month. At 53.2, the ABI is reflecting the strongest growth in billings at architecture firms since the end of 2007, just before the recession in design revenue began.
At present, firms in the Northeast and Midwest are reporting a reasonably sharp upturn in business conditions. Firms in the South are reporting a modest increase, and firms in the West a very modest decline. However, regional revenue trends at architecture firms have been quite variable in recent months, and are likely to continue to vary in the months ahead.
By construction sector, clearer patterns are beginning to emerge. The residential index was 55.9 for November; this index has been above 55 for four straight months, a level of growth has not been seen since late 2005 near the end of the housing boom. The commercial/industrial index moved back into growth territory, and the institutional index remained barely in growth territory, with an index reading just above the 50 threshold. Both of these sectors are currently fragile enough that they are more vulnerable to the fluctuations of the broader economy, particularly the federal budget and debt negotiations.
Housing strong, but rest of economy teetering
In a long-awaited turnaround, the housing market has turned into one of the strongest sectors in the economy. Housing starts in the second and third quarters have been more than 25 percent above the same period in 2011. However, the rest of the economy has been relatively disappointing. Payrolls increased by a modest 146,000 in November, similar to the gains in September and October. Though the national unemployment rate declined from 8.3 percent in July to 7.7 percent, much of this resulted from a decline in the labor force rather than an increase in employment.
Concern over the federal fiscal situation continues to make consumers and businesses nervous. The Consumer Sentiment index declined eight points (approximately 10 percent) with the preliminary December numbers from the University of Michigan, while their Consumer Expectations index declined thirteen points. Small-business optimism declined even more sharply in November. The National Federation of Independent Business Small Business Optimism Index saw its largest one-month drop in the 25 years it has been conducting this survey.
One relatively positive development of a sluggish economy are low rates of inflation. Consumer prices have been increasing at a pace below 2 percent per year in recent months, with producer (wholesale) prices growing less than 1.5 percent. Some of this is the result of falling energy prices, and recent developments point to more stable energy costs for years to come. Domestic production levels of both natural gas and oil are slated to dramatically increase in the United States over the next several years due to increased production from fracking (hydraulic fracturing). A recent report by the International Energy Agency predicts that by 2020 the United States will be the largest international oil producer, surpassing Saudi Arabia. While this is welcome news for consumers and businesses—and should boost growth in the domestic economy—it has serious consequences for strategies to deal with climate change issues.
Only modest growth projected for 2013
Like the last several previous years, 2012 was financially challenging for many architecture firms. Almost 30 percent estimate that gross revenue declined in 2012, while half estimate that revenue increased by at least 5 percent. Average revenue growth is estimated at 2.9 percent for the year. Architecture firms expect 2013 to be only modestly better, with growth of just 3.0 percent, barely above 2012 levels. Twenty percent of firms expect revenues to decline. Larger firms (with revenues of $5 million or more) are the most pessimistic, projecting just 2.8 percent growth in gross revenues for the year with almost a quarter expecting a decline.
Residential firms are the most optimistic. On average they expect a 3.6 percent increase in revenue, and fewer than 20 percent anticipate declines. Institutional firms project only 2.5 percent growth in revenue on average, with almost a quarter of them expecting revenue to decline.
The ongoing uncertainly over the resolution of the federal budget and reduction of the federal debt are critical reasons for the relative pessimism for 2013. Eleven percent of architecture firms report that concern late last year over the “fiscal cliff” caused the cancellation or significant delay of active projects at their firm. Another 27 percent report that it is a major concern for clients of active projects, and could cause cancellations or delays of projects in the future.
This month, Work-On-the-Boards participants are saying:
• People believe that the corner has been turned, and that 2013 will be a growth/recovery year.
—Two-person firm in the Northeast, institutional specialization
• Businesses and individuals are reluctant to commit to significant spending due to the uncertainty surrounding the fiscal cliff.
—15-person firm in the West, residential specialization
• There has been a dramatic slowdown in healthcare this year, waiting for the election. We received several new potential projects once the election was over. We feel that 2013 will be a good year.
—Five-person firm in the South, institutional specialization
• Conditions are about the same despite many new apartment high-rise starts that were shelved from previous years. No new market rate for-sale product coming online at the moment.
—16-person firm in the Midwest, mixed 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.