Between the trend lines

economic trends

AIA’s Architecture Billings Index slipped just slightly this month, but that’s no reason to be alarmed, according to AIA’s Chief Economist Kermit Baker, Hon. AIA. In the following interview, Baker explores how the ongoing economic recovery is affecting the construction industry differently than the architecture and design industry.

We talked last month about labor issues within architecture, and indeed, 55% of firms reported that finding qualified employees is either a major or moderate issue for them over the coming months. Notably, more than two-thirds, or 67%, of firms cited contractor availability as a major or moderate issue. Is this typical? Or are there times in an economic cycle when contractor availability isn’t an issue?

Architects have had about six months of revenue gains since ABI turned positive in February, whereas contractors are still seeing declining levels and revenue. This is the gap between ABI and construction spending. Construction activity is falling at a high single digit rate on a year- over-year basis, and will end up on a negative note in 2021. So why are architects saying there are worker shortages among contractors and they’re concerned about that? The answer is that construction is one of those sectors that have just had a hard time during the pandemic. They’ve had a hard time retaining staff and attracting staff. When I talk to contractors, my takeaway for them is that if they think it’s tough today, it’ll be a lot tougher next year when activity picks up.

Why has it been harder for construction than architecture?

It’s almost entirely men in the trades and construction. It’s heavily reliant on a largely immigrant workforce. Lastly, it hasn't been able to attract younger domestic workers because millennials aren’t attracted to those jobs. I think this is a serious problem. The solution might be to throw more money at workers to attract them, and we’ll see if this happens. On the other hand, architects do have a pipeline of folks who went through accredited programs and want to become an architect. The problem happens when the market gets a lot stronger, and firm leaders have to ask where they’ll get new architects once they’ve exhausted the new grads. It’s going to be a tough issue for them.

If more than half of firms now expect a positive change in revenue by the end of 2021, what sectors are those firms working in and why do they have such a sunny outlook when supply chain disruptions and material prices are both high on the concern list?

The residential market is going gangbusters. But you make a good point that the commercial and institutional markets are facing some difficulties. On the other hand, up until a month ago, there was a real sense that we’re coming out of this pandemic and we’ve got a lot of catching-up to do. People are going to be traveling, and they need hotels. People are going back to work, so we need office space. People are shopping again, so retail needs to be responding. In the context of a healthy economy and construction sector, if commodity prices weren’t spiking and the supply chain wasn’t troubled, things would be roaring a lot faster. But they are roaring nonetheless.

Regarding the ABI’s slight dip this past month, is it a case of gravity or do you see something more concerning at play?

I don’t see anything concerning. Any score above 50 means work is growing. The higher the number, the faster it’s accelerating. I’d be nervous if we saw sustained scores in the mid- to upper-50s, which would mean firms would have trouble keeping up. Recently, we asked ourselves on the research team what a single point increase translates to, and the simple relationship was that construction spending goes up about 1.8% as fast as a 1 point increase in the ABI. So, a five-point increase in ABI is a nine-point increase in construction spending. If you had numbers in the mid- to upper-50s consistently, you’d have double digit increases in construction spending, which is unsustainable. So what goes up should definitely come down.

How do we square evidence of steady growth and evidence of volatility over the next six months in terms of an outlook?

In a global economy when a manufacturer is sourcing from 15 suppliers around the world, all it takes is one to go wrong and the house of cards comes tumbling down. There are just unique, idiosyncratic issues going on that are creating problems. I’m in the camp that says, “Be patient.” But if I’m a contractor, my question is about when things will resolve and how painful it will be until it does. I’ve got to deal with volatility now, so I don’t care about a year from now. The reason that I, and others, say that things will resolve themselves is if you track the Department of Labor’s construction inputs, there is a ton of volatility in some commodities, not much in others, and not much on the services and labor side. Construction wages have been going up 2% or 3% per year, architecture less than that. But once those numbers change, then you’ll see evidence of inflation in the system in the form of sustained rising costs.

What are some of the common experiences among small- to medium-size architecture firms lately?

If I’m an architecture firm now, first, I’ve got a growing backlog. Second, the buzz of inquiries is growing stronger, and I’m being asked to bid on things. I’m seeing hard measures that work is going to increase, and I think the third and fourth quarters of this year will be good based on real project activity. On the other hand, I’m going to get caught in the crossfire of being asked to design something while contractors are submitting bids that are more than I expected thanks to the rising cost of materials or sourcing issues. There’s more, but this is a pretty common scenario that demonstrates this situation of growth and prosperity mixed with volatility.

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