ABI February 2020: A solid business performance heading into a period of economic upheaval

AIA WOB Feb 2020

February marked the sixth straight of month of revenue growth for architecture firms. The Architecture Billings Index (ABI) score of 53.4 for the month reflected the strongest growth in billings at firms over this six-month period, demonstrating a healthy start to the year through the first two months. Project inquiries and new design contracts also showed healthy gains, although both grew at a slower pace than in January. The score for project inquiries was 56.5, somewhat below the average of recent months. The new design contracts score was 52.0, again a solid figure, but suggesting slower growth in new project work coming into architecture firms as compared to recent months.

Regionally, billings scores at firms in the Northeast and West were essentially flat from their January readings. Even though firms in the Northeast recorded a very modest decline for the month, it was the strongest reading in over a year. Conversely, firms in the West also saw a very modest drop in billings, but this was the first hint of softness in this region in nine months. Firms in the Midwest and South were seeing uniformly healthy business conditions in February. Growth in billings at Midwestern firms was at its strongest level in over a year, while Southern firms reported their highest reading in several years.

By sector, firms of all specializations were seeing healthy conditions in February. Multifamily residential firms extended their string of growth to seven straight months with a billings score of 53.5. Institutional firms and commercial/industrial firms were doing almost as well, with billings scores for the month of 52.8 and 52.4 respectively. February was the third straight monthly gain for institutional firms, and the fifth straight month for those specializing in the commercial/industrial sector.  

Economy continues to look for stability

As public health concerns continue to grow, the economic outlook has been increasingly difficult to predict. The steep declines in equity (stock) markets reflect in part what many felt was a general overvaluation of equity prices, but also the fear that corporate profitability will suffer as more and more consumers pull back on their spending. With travel cutbacks, fewer people attending public events, and more people sheltering in place, a large segment of our economy is at risk of revenue declines. However, until there is better information on when the economy will return to more “normal” conditions, its very difficult to predict the extent of the economic fallout.

The Federal Reserve has been very proactive in its efforts to undergird the economy. In early March, the Fed lowered short-term rates by a half percentage point in an effort to stem the downturn in stock markets and boost economic activity. In mid-March it followed up with an additional move of lowering short-term rates effectively to zero percent interest. Additionally, the Fed has attempted to increase liquidity to banks by reducing their reserve requirements, allowing them to lend a larger share of their funds. The Fed also started purchasing short-term commercial debt to help keep private businesses afloat, earmarking up to $1 trillion for this initiative. Economic forecasters generally have been downgrading their forecasts, but given normal delays in collecting and reporting economic information, it is extremely difficult to measure the current status of our economy.

As staffing difficulties continue, architects are extending their careers

Throughout our economy, employees tend to be working later into their careers. Part of this is likely due to a predicted longer lifespan for today’s retirees, and therefore more years of retirement to fund. Older workers today are often healthier than their counterparts of prior generations, and therefore able to work later into their life. A final factor may be that many firms are having difficulties staffing up to the levels that their workloads require, and therefore may be offering incentives to their staff to extend their careers.

Regardless, most architecture firms are reporting that architects have been retiring later as compared to prior decades. Well over half of firms (58%) report that architects have been retiring later in recent years. A significant share of firms (17%) report that architects are retiring much later. Over a third of firms report that architects are retiring at about the same age as in prior periods, leaving only about 8% of firms indicating that architects are retiring earlier.

However, given the size of the baby boom generation, even delaying retirement means that there will be a sizeable number of architectural positions to be replaced over the coming years due to retirements. Almost 30% of firms estimate that they will lose 10% or more of their current architectural staff over the coming five years due to retirements. One in six firms estimates that they will lose 20% or more of their staff over the coming five years due to retirement. For many smaller firms, the retirement of a firm leader may well lead to that firm ceasing operations.

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

  • “While there has been an uptick in RFQs since the beginning of the year, to date they have been of a lower quality than in the past.”—20-person firm in the Northeast, institutional specialization
  • “Oil price reductions are slowing things down in Texas somewhat.”— 20-person firm in the South, residential specialization
  • “The effects of federal tariffs on products continues to drive up costs on projects.”— 4-person firm in the West, commercial/industrial specialization
  • “Very good, hoping the recent stock market slide and coronavirus scare are not harbingers of changing conditions for the worse.”— 35-person firm in the Midwest, institutional specialization

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AIA WOB Feb 2020

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