Firms pursue revenue to offset inflation’s ravages

Inflation and even the prospect of stagflation is on everyone’s mind these days. While economists are trying to find the right levers to lessen inflation’s impact on the economy, architects are trying to find the right levers to lessen its impact on their margins. According to AIA Chief Economist Kermit Baker, Hon. AIA, architecture firms aren’t looking to cut expenses as much as they are to add revenue into 2023. “It’s a competitive environment for firms who want to keep their talent and attract talent,” says Baker, “so it makes perfect sense they would tread lightly around wages and benefits and be more aggressive around revenue.”

We’re hearing a lot about inflation, so why should architects care?

Inflation is characterized by costs going up and the purchasing power of your dollar going down, which simply means life is more expensive. Six months ago, many economists were thinking that  inflation would quickly disappear. Today, it’s clear that inflation is with us, and the question is “how long”—how long will we live with it? How long will food and energy prices be this high? How long will core inflation—or the costs of goods and services—be this high? Now, as we’re up over eight percent in terms of inflation in consumer prices—and even though  it seems to be cresting and we’ll likely begin to see it deflate slowly. Still,  seven and six percent is still too high. So, we are likely at least  a year away from getting back to the Federal Reserve Board’s ideal of around two percent inflation.  Supply chain issues have exacerbated the problem of inflation in the construction industry. Architects have felt the fallout from this in that  it makes it difficult for them to coordinate with clients and contractors as projects  go through the bidding and construction process. But there is also another side of this issue, which is looking internally at how inflation affects their  ability to run a small business— namely the rise in the costs of doing business.

Why are architects anticipating a jump in the cost of doing business—from providing benefits to employees to their technology expenses to their liability insurance?

The cost of services and the cost of products are both going up, specifically in the cost of  staff salaries and cost of healthcare—all of these things are getting more expensive now. Over the years, we’ve asked firm leaders about rising costs, as a function of inflation or otherwise—and it’s always been typical of them to cite higher healthcare costs, higher rents, and higher liability insurance premiums as chief concerns in their firms.  This time around, though, rents and liability insurance were lower on the list of concerns for those firm leaders, and healthcare costs took the lion’s share of concern—30 percent of respondents said it is likely the expense that will increase proportionately the most for their firms in 2022. Healthcare costs have been going up for a long time. Our workforce is getting older and people not only require quality healthcare, but demand it—and in this job market, that’s something employers have to respond to if they’re going to attract quality candidates. The pandemic has also riled up healthcare costs, which in turn has pushed the increased cost of that benefit for firms.

How are firms planning to cope with inflation this year?

There are a number of ways. Nearly 20 percent said they’d outsource IT, HR, and financial services. Nearly another 20 percent said they’d defer capital investments. There were some other actions, too—about 13 percent said they’d consider moving offices and about eight percent said they’d lease supplies rather than buy them. But, what stood out to me was that the largest share of respondents—40 percent—said “none of the above.”  So, we look at what “none of the above” might  mean and two-thirds of those who cited that answer said that they’d try to increase revenue. This makes sense because if the biggest costs at firms are salaries and benefits, and you don’t want to look at reducing those in this competitive employment environment, then increasing revenue is about the only move you can make.

Focusing on space, about three out of five architects don’t anticipate an increase in their rent in the coming year, owing to long-term leases. But, do they anticipate a change in their office space needs?

We asked firms how much space they’ll need now that they’re back to full reopening and, if they aren’t back all the way, how much they’ll probably need when they do fully reopen. I was quite surprised to see this month that almost one in six respondents think they will need more office space this coming year and only 30 percent think they will need less. That leaves the other 50 percent who say their needs won’t change. What’s interesting is that most firms aren’t using this moment to take the opportunity to scale back the amount of square footage they’ll need given that they likely will have a sizeable share of their staff working remotely most days. With all that’s happening to the workplace, it’s surprising that half of the architects we spoke to basically said they were good with the amount of square footage they had—even though, perhaps, they might have plans to renovate their space.

William Richards is a writer and architectural historian based in Washington, D.C., and the author of Bamboo Contemporary: Green Houses Around the Globe (Princeton Architectural Press, 2022).