ABI December 2016: Architecture firms report strong finish to the year
The ups and downs of business conditions listed as the top challenge to firm profitability
Architecture firm billings saw an unexpected surge in December, generating an ABI score of 55.9 for the month. This was far and away the highest monthly growth of the year and brought the average monthly reading for 2016 up to 51.3, almost equaling the 2015 average monthly score of 51.6. Project inquiries and new design contracts both had positive readings but didn’t rise at nearly the same pace as billings. That would suggest that firm billings are likely to see more moderate growth moving into 2017.
The December upturn pushed up billings in three of the four regions of the country. Firms in the Northeast and Midwest reported their strongest monthly growth of the year, while firms in the South saw a continuation of healthy billings gains. That leaves firms in the West as the only region with declines in business conditions, a trend that now extends to five of the past six months.
Economic expansion continues
While our economy continues to grow at a fairly modest rate, the prospects for further growth remain quite high. GDP increased an estimated 1.6 percent to 1.8 percent last year, and most forecasters are projecting that the growth pace will pick up to 2.0 percent to 2.5 percent in 2017. Almost 2.2 million payroll positions were added last year on net, below the 2.7 million in 2015, but still enough to bring the national unemployment rate down to well under 5 percent. The construction industry didn’t fare quite as well, adding just over 100,000 net new positions in 2016 compared to almost 300,000 the prior year, but the slower growth may have as much to do with the lack of available workers as with underlying industry growth.
Interest rates seem certain to continue to increase. Long-term rates have increased about three-quarters of a percentage point since the third quarter of last year. The Federal Reserve Board raised short-term rates a quarter point at their December meeting, and the consensus is that there will another two to three quarter-point hikes this year. While rising rates cause concern in an interest-rate sensitive industry like construction, they remain very favorable by historical standards.
Consumers are feeling positive about their economic prospects. Consumer sentiment scores are at their highest levels since 2004 according to the University of Michigan’s Consumer Sentiment Survey. Businesses are equally optimistic, with the Conference Board’s CEO Business Confidence Survey at its highest level since early 2011.
Boom and bust nature of construction activity listed as top challenge to firm profitability
In a recent AIA survey of business concerns for 2017, architecture firms placed increasing firm profitability at the top of their list, a concern that also topped their list in 2016. This month, firms were asked to discuss the major challenges that they face in increasing profitability.
At the top of the list is “the ups and downs of business conditions in the industry,” which create difficulties for firms in balancing costs and revenues. Fully 20 percent of respondents ranked this as the most important challenge that they face in increasing profitability. The second most common response was “the high cost of running a firm, and the required investments,” which put pressure on firm revenue. Other popular responses were “intense competition from other firms” and that “some competing firms have low cost structures, or are willing to accept lower profits.” Each of these two responses was mentioned as a key challenge to profitability by about 15 percent of respondents.
Larger firms have a somewhat different set of challenges to increasing their profitability. The top of their list was competition from other firms, mentioned by 30 percent of firms with $5 million or more in annual revenue. The next most common response was the high cost of running a firm, mentioned by 19 percent of respondents, followed by other firms’ lower cost structure or willingness to accept lower profits (18 percent) and their limited ability to negotiate with clients (12 percent).
This month, Work-on-the-Boards participants are saying:
- "I believe that we have potential in the healthcare area for 2017, but we will be missing other projects that created a 'bubble' for us in 2016." —7-person firm in the Northeast, institutional specialization
- "High-cost construction is making new development financing difficult." —115-person firm in the West, mixed specialization
- "Oil and gas stabilizing always helps our market. The banks free up more investment capital, and projects that were put on hold during the downturn resurface." —6-person firm in the South, residential specialization
- "There have been a larger number of small projects becoming available to the smaller firms. As the larger firms become oversaturated with work, there should be greater opportunities for smaller firms." —3-person firm in the Midwest, commercial/industrial specialization
ABI December 2016