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Architecture Firm Billings End 2013 on a Sour Note

Firms have a long list of concerns entering 2014, topped by an uncertain national economy

By Kermit Baker, Hon. AIA
AIA Chief Economist

Billings at U.S. architecture firms dipped again in December, the second straight monthly decline and the first two-month downturn since the middle of 2012. At 48.5, the AIA’s Architecture Billings Index dropped below its November level of 49.8. Unusually severe weather conditions in parts of the country could have played a role in the recent dip, but the breadth of the weakness suggests that weather was not the only issue. However, inquiries for new projects accelerated a bit in December, offering hope that revenue may begin to turn up entering the new year.

Firms in both the Northeast and Midwest reported declining business conditions for the month. For firms in the Northeast, this was the third straight monthly decline, and the steepest decline since the depths of the downturn in early 2009. However, firms in the South and West, which had borne the brunt of the downturn during the recession, reported reasonably healthy business conditions for the month.

Residential firms continue to report solid business conditions, as the residential market extends its healthy recovery. However, both commercial/industrial and institutional firms reported declines in December, and in both instances these declines accelerated from November levels.

Economic conditions generally positive

Moving into 2014, the economy appears to be poised for a year of reasonably healthy growth. Paced by expected improvements in spending by businesses on capital investments, economic growth is projected to be close to 3 percent this coming year, compared to just 2 percent in 2013.

The jobs picture remains volatile, as evidenced by the disappointing addition of only 74,000 jobs nationally last month, the weakest monthly increase since early 2011. However, even with the weak December figure, fourth quarter payroll gains matched those for the third quarter. Given the decline in the labor force nationally in recent months, even these modest payroll gains were sufficient to bring the national unemployment rate down to 6.7 percent for December.

The housing market continues to be a prime force behind this overall economic growth. December housing starts came in just below 1 million on an annualized basis, and fourth quarter starts totaled just over 1 million, the first quarter that we have seen residential construction break through this level since mid-2008. Total housing starts for 2013 were just over 920,000, an 18 percent increase over 2012 levels. There were 618,000 single-family starts (up 15 percent), while multifamily starts were 306,000, up almost 25 percent for the year.

Rising interest rates are a concern, both for the overall economy as well as for the construction industry. Given that the Federal Reserve Board has begun scaling back its bond-buying program, higher rates seem inevitable. Some of this has already been factored in, as 10-year Treasury note yields ended the year a full percentage point higher than they were in January of 2013. Much of the increase occurred over the summer, as the debate over the future of Fed bond-buying heated up. Among other things, higher interest rates will likely slow the recovery in commercial property values. As owners see higher financing costs, they will be looking for higher returns, and in turn will lower their value assessments for these properties.

Unpredictable economy tops list of concerns for coming year

In spite of improving conditions in the broader economy, as well as in the design professions, architecture firms have a long list of concerns for 2014. At the top of the list is coping with an uncertain economy. Over a third of respondents (37.4 percent) named coping with an uncertain economy as one of their top three issues for 2014. Uncertainty among owners and developers has meant that many projects have been delayed, pending greater clarity in the feasibility of projects. Economic uncertainty also has affected architecture firms more directly, making it difficult to know how to staff up for projects and manage financial issues.

Other strategy and firm management issues were identified as top concerns for the coming year, including dealing with competition from other architecture firms. This was the fourth item on the list, with 28.3 percent of respondents mentioning it as one of their top concerns. Competition continues to put pressure on design fees, as it has during the entire period of the downturn. Managing the cost of running a firm was the fifth most common concern for the coming year. Not only are traditional healthcare costs and liability insurance among this group of concerns, but rising office rents are an emerging concern, as are the necessary technology investments.

In addition to broader strategy and business management issues, there are several marketing and project management concerns that rank high on the list. Negotiating appropriate project fees was listed as the number two concern, with 35.7 percent of respondents mentioning it as one of their top concerns. Identifying new clients and new markets was also mentioned frequently as a concern, not surprising given that most firms will need to expand their client list if they are going to gain back the losses that they have seen in recent years.

This month, Work-On-The-Boards participants are saying:

    • We're very busy right now and have been advertising for an experienced job captain with substantial Revit experience. We are not getting much of a response, which leads me to believe many architects left the profession over the last three years.—7-person firm in the West, institutional specialization

    • We are dramatically downsizing. [There are] too many cheap work-at-home architects with no liability insurance and staff, if any, that are on a contract basis with no benefits.—8-person firm in the Northeast, commercial/industrial specialization

    • Should show some improvement now that the Federal government has a budget.— 160-person firm in the South, institutional specialization

    • After a six month run of moderate improvement, the near future looks bleak again. Project financing difficulties, along with a weak and uncertain economy, are holding back clients from starting new projects. Very few inquiries for new work.—3-person firm in the Midwest, residential specialization

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With August Gains, Nearly a Year of Steady Non-Residential Billings Growth

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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