ABI March 2020: Architecture firm billings plummet as a result of the global pandemic
COVID-19 outbreak already having serious impacts on staffing and business at many firms
Billings at architecture firms plummeted in March as the Architecture Billings Index (ABI) fell by 20.1 points to a score of 33.3 for the month (a score over 50 indicates increasing billings, a score below 50 indicates declining billings). This is by far the largest single month decline the index has seen in its nearly 25-year history, far surpassing the declines of 9.4 points seen at the start of the 2001 recession and 8.3 points seen at the start of the Great Recession. It reflects just how quickly and fundamentally business conditions have changed across the country and around the world in the last month as a result of the COVID-19 pandemic.
In addition, indicators of future work also declined at a staggering rate in March as uncertainty abounds. It remains difficult to know how long the essentially complete shutdown of the economy will last. Inquiries into new projects fell particularly low, and while the value of new design contracts signed for the month did not fall quite as far as some projects that were in the works continued to move forward, that score was also extremely low. Firms also reported a sharp decline in their backlogs, from a near record high of 6.3 months at the start of the year to an average of 5.0 months at the end of the first quarter. 59% of firms reported that their backlogs declined in that period, with a third indicating that they had fallen by 10% or more. Just 10% of firms reported that backlogs increased in the first quarter, while the remaining 31% said that they were generally unchanged.
Billings also declined across all regions of the country and all firm specializations in March, although the declines were more slightly modest than at the national level at this time, since these figures are reported as three-month moving averages. Conditions softened the most at firms located in the Northeast, likely due in large part to the nearly complete shuttering of New York City, as well as the construction stop order in Boston. Firms with a commercial/industrial specialization also reported the softest conditions so far, with so much uncertainty over what the future holds for the hospitality and retail sectors in particular. Billings declined the least at firms with an institutional specialization as some of those firms reported actually seeing a modest uptick in work due to increased demand for healthcare facilities. And some firms reported that school projects are actually getting underway early now that many schools are shuttered for the rest of the academic year.
Significant weakness seen throughout the broader economy
Conditions throughout the broader economy also weakened dramatically over the last month. Nonfarm payroll employment declined by 701,000 positions in March, with the construction sector shedding 29,000 jobs. Reporting for architectural services employment lags national employment by one month so data for March are not yet available, but in February the sector reached total employment of 200,000 for the first time since November 2008. Unfortunately, it never returned to its pre-Great Recession high point, and job losses are a certainty when the March data is released. In addition, weekly national initial unemployment claims have skyrocketed since mid-March, for a total of over 22 million new claims since then.
The University of Michigan’s Index of Consumer Sentiment also sharply declined in March, as consumers became increasingly concerned about the economy. In particular, the expectations portion of the index declined even more sharply, as concern about the impact of the pandemic over the next six months weighed heavily, and concerns about a longer-lasting recession grew.
Firms reporting impacts on staffing, business
This month we asked responding firms a series of questions about what actions they’ve taken so far in response to the COVID-19 pandemic, and how they think the pandemic, and ensuing economic downturn, will impact their firms through the end of the year. In the special survey of ABI panelists that was conducted in mid-March, responding firms estimated that their firm billings would decline by 15% in April due to issues related to the COVID-19 pandemic. When asked now to project their firm’s losses through the end of the second quarter of 2020 (April-June), 94% of responding firms indicated that they expect a decline in revenue during that time, with more than one third of anticipating losses of 25% or more. On average, architecture firms now expect revenue losses of 17% over the next three months.
In order to manage these losses, many firms have considered, and in some cases actually started, making staffing changes at their firms. More than half of firms (53%) have implemented a hiring freeze, and an additional 15% have contemplated one. Nearly one third of firms (32%) have frozen staff salaries, and 12% have reduced salaries. By and large, more serious changes have not yet been implemented, but are being seriously considered: 38% of firms have considered implementing staff furloughs (10% have already done so), 35% have considered reducing the size of their staff (13% have done so), and 30% have considered reducing salaries. Few firms have considered or enacted conversion of salaried staff positions to hourly, and while 23% of firms have considered converting some/all positions from full-time to part-time, just 8% have already done so.
Overall, nearly all firms expect the economic slowdown to have some sort of impact on their firm. While 53% expect that it will be significant but manageable, 36% predict that it will have a serious to devastating impact on their firm. In response, firms expect to have to make a variety of changes to their firm through the end of 2020. More than three quarters of firms (76%) expect that by the end of the year they will have trimmed all unnecessary expenses at their firm to stay in the best possible financial position, while 66% anticipate that their annual revenue will be considerably lower than it is at present, and 59% expect that they will have implemented changes so that their firm will be operating much more efficiently. Few firms believe that there will be a significant change to the type of work their firm does, however, with just 6% expecting to be focused on a more limited set of design and related services, and 8% predicting that they will have successfully diversified into new markets (new facility categories or new geographical areas). And just 1% of firms expect to merge with or be acquired by another firm by the end of the year.
This month, Work-on-the-Boards participants are saying:
- “We work nationwide, and every city's response is different. We have to work with different rules, requirements, and shutdowns in each city.”—15-person firm in the South, commercial/industrial specialization
- “A few projects are going on hold as clients get their own houses in order, but expect them to restart when things calm down. Other projects, though, are going full steam for clients who are well-capitalized.”— 120-person firm in the West, residential specialization
- “Current K-12 and higher education work is mostly proceeding. Bond issues have shifted from April to June and economy at that time will be critical for passage.”— 98-person firm in the Midwest, institutional specialization
- “73% of our backlog is cancelled or put on hold, maybe to never return.”— 40-person firm in the Northeast, mixed specialization