ABI October 2018: Business conditions improve modestly at architecture firms
Just under one quarter of firms have engaged in or actively considered a merger or acquisition in the last year
Billings growth at architecture firms softened again in October, as AIA’s Architecture Billings Index score declined to 50.4, from 51.1 in September (any score over 50 indicates billing growth). Although growth is still occurring, the pace of that growth has continued to ebb and flow through much of the year. But the outlook still remains positive, as inquiries into new work remain strong, and the value of new signed design contracts remains relatively strong as well.
Regionally, conditions look to be changing from the trends that have dominated so far this year. Billings at firms in the Northeast rebounded modestly in October, following several months of softness, while billings declined at firms located in the South and West, where conditions have been strong recently. However, it is too early to say if this is a one-month blip or a more protracted change. Business conditions also softened slightly at firms with a commercial/industrial practice specialization in October, while growth continued at firms with residential and institutional specializations.
Conditions in the general economy remain strong: the GDP increased by an annual rate of 3.5% in the third quarter of 2018, led by increases in personal consumption expenditures, government spending, private inventory investment, and nonresidential fixed investments. And in the latest edition of the Beige Book, the Federal Reserve reported that there is modest to moderate growth across much of the country, despite the fact that labor shortages are increasing for many industries. Nonresidential construction activity increased the Cleveland and Atlanta districts in late September and early October, while residential construction activity increased in the Atlanta and Minneapolis districts. And while real estate markets were notably weak in the St. Louis district, they remained particularly robust in the San Francisco district.
Employment gains were also strong in October. Total nonfarm payroll employment grew by 250,000 new positions, with construction employment alone contributing 30,000. Architectural services employment continued to tick up in September (the most recent data available) to a total of 198,300 employees nationwide. In fact, nearly 10,000 new positions have been added to the industry in the last year.
Looking at mergers and acquisitions
This month’s special practice questions asked architecture firm leaders about recent merger and acquisition activity. Less than one quarter of firms was either involved in a merger or acquisition over the past year, or actively considered doing so. Many more firms considered mergers and acquisitions than actually implemented them. For example, 7 percent have either actively considered merging with, or acquiring another firm, while 6 percent have considered being acquired by another firm, and just 4 percent have gone through a merger with or acquired another firm in the last year. Larger firms were more likely than small firms to have gone through with a merger or acquisition, while firms with a commercial/industrial specialization were more likely to have considered being acquired by another firm.
Of the firms that indicated that they either went through a merger or acquisition in the last year, or actively considered it, many of the reasons rated as very important by responding firm leaders revolved around making their firm more competitive. The ability to add additional skills/credentials to their firm was rated as a very important reason why their firms engaged in, or actively considered, a merger or acquisition in the last year by 61 percent of responding firm leaders. The same share also rated allowing their firm to compete more effectively as very important. Fifty-seven percent of firm leaders indicated that the ability to add new markets or serve a broader area/international market was a very important reason, and 51 percent of firms indicated that the ability to be more competitive for large projects was very important. On the other hand, few firms indicated that clients’ desire for “one-stop shopping” (e.g., multiple design disciplines offered) from their firm was an important reason to consider a merger or acquisition.
Responding firm leaders generally think that merger and acquisition activity will continue to ramp up over the coming year. Six in ten firms think that activity will increase, while an additional 37 percent think it will stay at current levels (just 3 percent expect merger and acquisition activity to decline). And firm leaders predict that architecture firm acquisition of or mergers with other architecture firms will be the most common merger and acquisition activity in the coming year (by 66 percent of firm leaders), followed by non-architecture firm acquisitions of/mergers with architecture firms (by 18 percent of firm leaders), and architecture firm acquisitions of/mergers with other non-architecture firms (by 16 percent of firm leaders).
This month, Work-on-the-Boards participants are saying:
- "Business conditions continue to be strong in our markets, but there has been a softening of the overall real estate market that could lead to a slowdown in multifamily projects in our area in the near future." -50-person firm in the West, institutional specialization
- "Work is steady with ongoing client relationships, while many potential clients are testing the waters and looking for minimal or reduced services." -1-person firm in the Northeast, commercial/industrial specialization
- "Trade and tariff concerns weighing on manufacturing and agriculture sectors may inhibit growth in the next 24 months in the upper great plains economy." -24-person firm in the Midwest, institutional specialization
- "Construction costs are really causing owners to slow down development. They have capital due to the tax cuts, but the costs are making deals not work." -20-person firm in the South, residential specialization