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The Winter Doldrums Drag On Through March at Architecture Firms

After seeing many architecture positions eliminated during the recession, about three-quarters are eventually expected to return

By Kermit Baker, Hon. AIA
AIA Chief Economist

Billings at U.S. architecture firms dipped in March to a score of 48.8, the third decline over the past five months. While the modestly positive ABI scores for January and February suggested that the end of the year weakness might have been just a weather-related blip, and that architecture firms could see a recovery in billings in the spring, the weak March reading indicates a broader soft spot in design activity.

This extended weakness also is reflected in the newly released design contracts index. The AIA created the design contracts index to measure changes in the volume of new work coming into architecture firms, indicating how much project activity firms will be billing for over the coming months and quarters. The three-plus years of historical data on design contracts—which are calculated as a diffusion index according to the same formula as billings—show that new project activity was generally flat nationally through 2012 and began showing healthy gains through 2013. This index, however, was negative this January and again in March, indicating that new work coming into architecture firms has not been increasing recently.

Business conditions remain weak for firms in the Northeast and Midwest, where firms have reported negative ABI scores for at least five straight months. Conditions remain strong at firms in the South and moderate at firms in the West. Neither of these regions has seen negative ABI scores over the past two quarters, when the national scores have been more volatile.

By sector, residential firms continue to report healthy conditions. Commercial/industrial firms have seen more volatility in recent months after a generally positive 2013. Institutional firms looked to be stabilizing during the first half of last year, but have since reported seven straight monthly declines.

Severe weather masks underlying economic conditions

Severe weather conditions certainly restrained economic growth in the first quarter, but it’s difficult to tell by how much. Net employment growth was just 162,000 per month on average nationally in the first quarter, after increasing about by 190,000 per month on average for both 2012 and 2013. However, the slowdown in overall payroll gains did not reduce construction employment. There was an average increase in construction jobs of 22,000 per month in the first quarter, compared to an average of 15,000 a month in 2013 and 10,000 in 2012. (Construction employment gains of 20,000 to 30,000 a month over an extended period of time would indicate a healthy construction industry.)

Housing is one construction sector that was either plagued by weather in the first quarter or not fundamentally as strong as it was toward the end of 2013. Monthly housing starts this year averaged 923,000 at a seasonally adjusted and annualized rate, down from over a million in the fourth quarter. How quickly (or whether) these numbers bounce back in April and May will provide a good sense of the underlying strength of the market.

Rising mortgage rates are one factor creating a drag on homebuilding activity and generally slowing the overall construction recovery. Yields on 10-year U.S. Treasury notes hit bottom at just over 1.6 percent in the third quarter of 2012. As of the first quarter of this year, they had risen more than 100 basis points, to almost 2.8 percent. While still extremely low by historical standards, this increase (and further accelerations that we’re likely to see in the months ahead) will cause affordability problems for households that are only marginally able to qualify for a mortgage.

Opportunities reemerging in the profession

Nationally, more than 35,000 architecture positions were eliminated during the Great Recession, according to estimates from the U.S. Department of Labor and the AIA. Over the past two years, some of these positions have begun to return. The practice question put to ABI panelists this month: “To the best of your knowledge, what has happened to architects who lost their positions during the downturn, and how many are likely to return to the profession?”

Panelists estimated that almost half of the architects and unlicensed architecture staff downsized during the recession have resumed working full-time in the architecture profession. An additional 16 percent are back working in architecture positions on a part-time or contract basis, while an another 16 percent are either working outside the profession and expected to return when architecture positions open up, or are not currently working and waiting for architecture positions to open. That leaves 14 percent currently working outside of architecture and unlikely to return, and an additional 10 percent not working, but not likely to return to the profession (or retired).

Essentially, according to the panelists, just under half of downsized architectural staff has returned, a third is in the process of returning or will likely return, and a quarter will not return. While hardly a comprehensive survey, these results provide a general sense of the magnitude of temporary and permanent losses to the profession from this past downturn.

The second part of this practice question looked at the age distribution of downsized architecture staff. According to ABI panelists, almost a quarter (23 percent) of people who lost their positions during the downturn were under age 30, a quarter were in their 30s, just over 20 percent were in their 40s, almost a quarter were between ages 50 and 64, and the remaining 8 percent were 65 or older. Again, while not a scientific survey, it does indicate that staff losses were distributed widely across the age spectrum.

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

  • Project opportunities are thin and very competitive. This is only due to most decision-makers being fearful of taking risks.
    —60-person firm in the Midwest, institutional specialization
  • Looks like work is coming, but currently there is little under contract to start now. Several projects proposed to start in March are not going to start until late April or May.
    —15-person firm in the South, commercial/industrial specialization
  • Still slow; clients are hiring contractors to lead their work and contractors [are] looking for draftsmen to do their [design] work and engineers to sign for them.
    —Two-person firm in the West, residential specialization
  • Still extremely volatile. [There are] mostly small, low-profit projects available.
    —One-person firm in the Northeast, institutional specialization

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Recent Related:

Architecture Firm Billings Increase Modestly in February

Architecture Firm Billings Rebound in the New Year

Architecture Firm Billings End 2013 on a Sour Note

Architecture Firm Billings Pause in November

 

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 leads nonresidential construction spending activity by approximately 11 months. The indicator is a diffusion index developed from the monthly Work-on-the-Boards survey, where survey panelists are asked to report whether billings during the previous month significantly increased, remained about the same, or significantly decreased from the prior month. According to the proportion of respondents choosing each option, a score is generated, which represents an index value for each month. If an equal share of firms report an increase as report a decrease, the score for that month will be 50. A score above 50 indicates that firms in aggregate are reporting an increase in activity that month compared to the previous month, while a score below 50 indicates that firms are reporting a decrease in activity.

In March 2014 the AIA released the white paper “Designing the Construction Future: Reviewing the Performance and Extending the Applications of the AIA’s Architecture Billings Index,” which evaluates how the ABI performed during the most recent construction cycle, introduces the new value-of-design contracts indicator, and discusses how the construction industry can use this information to make better business planning decisions.

 

Back to AIArchitect April 25, 2014

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