ABI September 2018: Business conditions strong heading into fall
Firm revenue remains robust but is projected to slow in 2019
Business conditions remained generally positive at architecture firms in September, with the Architecture Billings Index (ABI) showing another month of growth in firm billings. Although the pace of billings growth slowed somewhat from August, billings have remained positive for the entire year so far, indicative of generally strong conditions at firms. The value of new signed design contracts increased in September as well, after a modest decline in August, and inquiries into new projects remained strong. Firms also continued to report very strong project backlogs, currently averaging just over six months.
Mirroring conditions nationally, architecture firms located in the Midwest and South regions of the country continued to report very strong billings in September. Business conditions have also been strengthening at firms located in the West over the last few months. On the other hand, billings remained very soft at firms located in the Northeast, where they have declined or been flat for the entire year so far.
Architecture firms of all specializations reported increasing firm billings in September, with those with a residential or institutional specialization reporting particularly strong billings. Business conditions have softened somewhat in recent months at firms with a commercial/industrial specialization but remain positive overall.
Conditions remained positive in the broader economy as well in September. Nonfarm payroll employment grew by 134,000 new jobs for the month and, while below the average monthly gains of 201,000 for the previous 12 months, both construction employment and architecture services employment have continued to grow in recent months. Architecture services employment grew to a seasonally adjusted total of 197,900 positions in August—the most recent data available—as the industry has now regained 45,900 of the 65,800 jobs that were lost during the economic downturn.
Consumer confidence is also strong, as the Consumer Confidence Index increased in September on the heels of particularly strong growth in August. It is now approaching its all-time high from 2000. The share of consumers reporting good business conditions increased for the month, and their short-term outlook improved as well. The only negative aspect was that the share of consumers reporting that jobs are “hard to get” increased, but it remains relatively low overall.
A look at revenue trends
This month’s special practice questions asked about trends in firm revenue and profitability. Overall, responding architecture firms anticipate net revenue growth of an average of 7.5 percent for 2018, with more than half of firms (56 percent) reporting that their net revenue will increase from 2017 to 2018. An additional 23 percent expect net revenue to remain about the same as last year, and the remaining 21 percent expect a decline. Large firms tended to report more revenue growth than small firms (estimating 8.2 percent growth in 2018 for firms with annual billings over $5 million versus 5.1 percent growth for firms with annual billings of less than $250,000), as did firms with a residential specialization (estimating 7.9 percent growth for 2018).
The outlook for 2019 revenue was more mixed. Architecture firms project net revenue to grow by an average of 3.8 percent in 2019, about half as much as in 2018, with just 43 percent of firms expecting an increase in revenue for the year. The share of firms expecting a decline in revenue in 2019 is about the same as in 2018 (23 percent versus 21 percent), but one third of firms (34 percent) expect revenue to be flat in 2019.
Architecture firms also report that profitability remains generally strong; more than half of firms estimate that their 2018 profit (after all compensation is paid but before paying out any taxes, discretionary bonuses, or profit-sharing) will be 10 percent or more, with 15 percent of firms estimating profit of 20 percent or more, and just 5 percent of firms projecting a loss for the year. On average, 2018 profitability for all firms is estimated to be 14.6 percent, with higher rates for large firms (19.4 percent for firms with annual billings of more than $5 million) and firms with institutional and residential specializations (15.4 and 17.5 percent, respectively).
This month, Work-on-the-Boards participants are saying:
- "Despite a leveling off of home prices, we are still experiencing strong activity in new multifamily projects. Condominium projects (in lieu of rentals) are on the upswing." -42-person firm in the West, mixed specialization
- "Slow and steady, but the election will determine 2019 movement in infrastructure and capital spending." -32-person firm in the Northeast, institutional specialization
- "Strong year with reduced costs has provided better profits. Projects and inquiries are consistent, although unrealistic expectations of construction costs by owners are dampening potential." -11-person firm in the Midwest, commercial/industrial specialization
- "Many complaints about material costs, but everyone is very busy, and unwilling to bid." -1-person firm in the South, residential specialization