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Architecture Firm Billings Pause in November

As the recovery progresses, an upturn in merger and acquisition activity is expected

By Kermit Baker, Hon. AIA

AIA Chief Economist

There was a slight downturn in billings at U.S. architecture firms in November, extending a moderation in design activity during the fourth quarter of 2013. The AIA’s Architecture Billings Index (ABI) stood at 49.8 for the month, following a reading of 51.6 in October and 54.3 in September. Any reading below 50 signifies a decline in billings, so the recent slowdown turned modestly negative in November. This downturn was only the second reading below 50 over the past 16 months, suggesting that the broader design recovery seen so far is unlikely to be reversed in the near future.

In spite of being only a modest decline, the slowdown has been broad-based. Firms in the Northeast reported a downturn in billings activity for the month, while firms in the other three major census regions all reported gains below the pace of the third quarter. By sector, residential firms reported healthy gains, while both commercial/industrial and institutional firms saw a reversal of recent trends, with declines for November. Even inquiries for new projects were at their slowest pace of growth for the year.

Economic conditions improve

In spite of the federal government shutdown in October, and the resulting decline in consumer confidence, the broader economy seems to be on an upswing. Employers on net added 200,000 payroll positions in each of the past two months, the first two-month increase at this pace since late 2012. The construction sector is benefiting from this upturn, adding 29,000 payroll positions over this two-month period—the strongest two-month gain since early 2013. The pace of job growth in the broader economy pushed the national unemployment rate down to 7.0 percent, its lowest level since late 2008.

These gains in the labor market are no doubt one key reason for the late-2013 reversal in consumer sentiment. After dropping 12 points between August and October, leading up to the federal government shutdown, the University of Michigan Consumer Sentiment Index has seen significant recovery, with a two-point gain in November and an additional seven-point increase with the preliminary December reading. With greater optimism in the economic outlook, consumer spending has grown, with retail sales nationally up almost 4.5 percent in October and November, compared to corresponding 2012 figures.

Merger and acquisition activity expected to increase

As the economy continues to expand, and the construction recovery continues to build momentum, there is likely to be growth in merger and acquisition activity in the design professions. Having pared down the size of their firms during the Great Recession, many architects will see the advantage of increasing the scale of their operations during the coming upturn.

Work-on-the-Boards panel members predict a lot of potential merger and acquisition activity on the horizon. When asked whether they thought that merger and acquisition activity among U.S. architecture firms was likely to increase or not over the coming year, well over half of the firms that offered opinions said it would increase, while almost 40 percent felt that it would stay near its current level, leaving very few feeling that these activities would decline.

Within the design professions, almost 60 percent of respondents felt that architecture firms merging with or acquiring other architecture firms would be the most common type of merger and acquisition activity. About 19 percent of respondents thought architecture firms merging with or acquiring other non-architecture firms (such as interior design, planning, engineering, or construction firms) will be the most common type of activity for the coming year, just about equal to those who feel that non-architecture firms merging with or acquiring architecture firms would be the most common scenario.

There are many reasons why merger and acquisition activity might be seen as desirable in this economic environment. At the top of the list was the ability to add new markets by serving a broader area, or develop an international presence, which 74 of respondents felt was a very important reason for a firm currently pursuing a merger or acquisition. The second most important reason was that it would allow a firm to compete more effectively, followed by adding general sector or practice area skills or credentials to the firm. Rounding out the top five reasons for pursuing a merger or acquisition were the unique niche credentials to be gained from joining with or acquiring another firm, and access to a greater diversity of projects as a hedge against economic and construction cycles.

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

  • Most revenues for our firm are from publicly held corporations. Very little activity will be seen in the speculative office market until surplus space is absorbed.
    —14-person firm in the South, commercial/industrial specialization
  • [The] firm is busier in 2013 than in 2012, but the profit margins are still tight. Clients are eager to build again, but don’t want to spend the proper amount of money to cover the time investment.
    —Two-person firm in the Northeast, residential specialization
  • We continue to see a fair amount of work materializing, but it is simply taking longer for projects to go from conception to fruition than in the past.
    —39-person firm in the South, institutional specialization
  • While we are steady and the market is still active, the holiday slowdown seems to have come early this year, as everyone has decided to wait until after the holidays.
    —Six-person firm in the Midwest, commercial/industrial specialization
   

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Reference:

The ABI Work-on-the-Boards Survey 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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