ABI October 2019: Business conditions at architecture firms rebound

October 2019 Architecture billings index improved conditions

Profitability remains strong, but firms anticipate a slowdown in revenue growth in 2020.

Business conditions showed signs of improvement at architecture firms in October, as the ABI score rebounded to 52.0, following flat or declining billings for most of the year so far (a score over 50 indicates billings growth). In general, architecture firms remain cautiously optimistic about the future, despite ongoing concerns about a potential economic downturn in the next year. Inquiries into new projects—and the value of new signed design contracts—were both also fairly strong this month, although slightly fewer firms reported growth in October than in September.

Despite the overall encouraging numbers for the month, pockets of softness remain. Billings declined at firms in the Northeast for the ninth consecutive month in October and were flat at firms in the Midwest. Business conditions remained strongest at firms located in the South and continued to strengthen at firms located in the West, where they increased for the sixth month in a row. By specialization, firms with a multifamily residential specialization remained the only group to report increasing firm billings in October, while billings were essentially flat at firms with institutional and commercial/industrial specializations.

Larger economy sees slow growth

Growth has continued in the larger economy recently, but generally at a slower pace. The Gross Domestic Product (GDP) increased at an annual rate of 1.9% in the third quarter of 2019, which is slightly below the growth reported in the second quarter (2.0% growth) and the first quarter (3.1% growth). It is also a lower growth rate than in the last two and half years, where GDP has grown at an annual rate of at least 2.0% every quarter in that period except for the fourth quarter of 2018. In addition, while nonfarm payroll employment rose in October, only 128,000 new jobs were added, in contrast to average monthly gains of 167,000 for the year so far, and 223,000 in 2018. However, architectural services employment has continued its steady growth, rising to a total of 201,600 total employees in September (according to the most recent available data). The sector has seen gains of 5,000 new positions so far this year, and the industry has now added back 49,600 of the 65,800 jobs that were lost during the Great Recession.

Year-end profitably predictions

This month, nearly half (45%) of architecture firms that responded to this survey reported they expect their firm’s net revenue to increase by at least 5% in 2019. On the other hand, just over one quarter of firms (26%) expect that their firm’s net revenue will decline by at least 5% in 2019, while the remaining 29% expect it to remain flat. On average, firms anticipate net revenue growth of 3.4% for 2019, however, when looking to 2020, they anticipate average growth of just 1.3%, with 38% of firms expecting revenue to increase, and 37% expecting it to remain flat.

Firms anticipate that their profitability will remain generally strong this year, with firms projecting an estimated average profitability of 11.4% for 2019, after all compensation is paid, but before paying out taxes, discretionary bonuses, and profit-sharing. Just 4% of responding firms anticipate a loss for the year, while 19% expect profitability of 20% or more, 36% expect profitability of 10-19%, and 41% anticipate profitability of 0-10%.

Finally, when asked about the current status of their office’s accounts receivable, more than half of firms indicated that they are currently at a typical level for their firm, while 14% indicated that the current status was better than usual, and 28% indicated that it was worse than usual. Three in ten firms reported that they expect to be able to collect all their current outstanding receivables, while 48% expect that they will be unable to collect just 1% to 5% of their current receivables. In addition, firms reported that, on average, three quarters of their current receivables are outstanding at fewer than 60 days, while just 12% are outstanding at 90 days or more.

This month, Work-on-the-Boards participants are saying:

  • “We are growing our build arm to offset payment lag time with developers in our design arm.” —14-person firm in the South, residential specialization
  • “Construction pricing still high due to backlog of work and flood mitigation efforts ongoing, but design firms all report a flat market.” — 17-person firm in the Midwest, institutional specialization
  • “Continued strong. Our diversity in sectors (public and private) and services (planning and architecture) continue to serve us well, and we have a healthy 12-plus month backlog.” —42-person firm in the West, mixed specialization
  • “Still anxious in New York. No obvious slowdown, but continued uncertainty in public sector commitments.” — 65-person firm in the Northeast, institutional specialization

Image credits

October 2019 Architecture billings index improved conditions