ABI July 2020: Business conditions remain soft at architecture firms, as clients are reluctant to move ahead with new projects
Most firms that received a PPP loan anticipate having to reduce staff and/or staff hours as their loan is exhausted
The majority of architecture firms continued to report a decline in their firm’s billings in July, as the pace of that decline remained at about the same level as in June, with an ABI score of 40.0 (a score below 50 indicates a decline in firm billings). Inquiries into new projects continued to show just a modest decline, but more seriously, the value of new signed design contracts slipped from its June level. Unfortunately, with the continued resurgence in COVID-19 cases in many areas of the country, clients may be interested in starting new projects, but remain reluctant to sign on the dotted line.
Firm billings remained soft at firms in all regions of the country in July as well, with firms located in the Northeast continuing to report the weakest conditions, although the pace of the decline did continue to stabilize again this month from the low point in April. By firm specialization, firms with a multifamily residential specialization came close to seeing billings growth in July, for the first time since January, but still fell short and continued to experience a slight decline instead. Conditions remain softest at firms with a commercial/industrial specialization, while firms with an institutional specialization saw their decline in billings stabilize somewhat.
This month we also asked responding firms to estimate how they think their firm’s revenue will change in the third quarter of 2020, as compared to the second quarter. On average, firms expect a decrease of 4.6% in their revenue, although more than one quarter of responding firms (27%) anticipate that their revenue will increase. Differences in expectations were most stark by firm specialization, with firms with a commercial/industrial specialization expecting their revenue to decline by 5.7%, and firms with an institutional specialization predicting a loss of 5.4%, while firms with a multifamily residential specialization expect revenue to be flat from the second quarter to the third quarter, and nearly half (46%) actually expect to see an increase in revenue during that period.
Construction jobs hold steady, while small business uncertainty jumps
In the broader economy, nonfarm payroll employment had another month of significant gains in July, with a total of 1.8 million jobs added; however, that is well below the gains seen in the previous two months, and remains 8.4% (12.9 million jobs) below the February pre-pandemic peak. Construction employment was essentially flat following strong gains in June and May, while architecture services employment shed 2,800 positions in June (the most recent data available), falling below the previous pandemic low-point and erasing the gains that were seen in May. Architecture services employment currently stands at a total of 188,900, which is 11,800 fewer positions than the most recent high mark in February.
Meanwhile, the National Federation of Independent Business reported that their Small Business Optimism Index declined in July. The uncertainty component of the index increased, and just 25% of small businesses reported that they expect better business conditions in the next six months. However, small businesses did indicate that their job creation plans increased slightly.
PPP loans provide temporary relief, but half of firms anticipate staffing impacts ahead
This month’s special practice questions followed up on architecture firm usage of loans from the Payroll Protection Program (PPP) under the Federal CARES Act, and the impacts they expect to see on their firm now that the loan period is winding down. Overall, 85% of responding firms reported that they applied for, and received, a PPP loan. Just 1% applied for a loan but did not receive one, while the remaining 14% did not apply for a loan at all. Firms with an institutional specialization were most likely to report receiving a PPP loan (89%), followed by firms with a commercial/industrial specialization (81%), and firms with a multifamily residential specialization (75%).
Of firms that received a PPP loan, nearly half (48%) do not anticipate that they will have to make any staffing changes at their firms as the initial PPP loan period winds down (and absent any further loans available through the PPP in the future). Small firms were more likely to indicate that they do not anticipate any staffing changes (64% of firms with annual billings of less than $250,000, and 60% of firms with annual billings of $250,000 to $1 million), as were firms with a multifamily residential specialization (56%), versus firms with a commercial/industrial specialization (50%), and firms with an institutional specialization (48%).
Of the 52% of responding firms that do expect to have to take actions related to staffing as the initial PPP loan period winds down, 27% expect to lay off full-time employees, 25% expect to reduce the hours of some/all staff, 22% expect to reduce the salaries of some/all staff, 20% expect to furlough employees, and 9% expect to lay off part-time/contract/temporary employees. Nearly 10% of respondents indicated that they will be making some other change to their staffing as the PPP loan period ends, with 7% indicating that they are actually planning to hire additional staff in the near future.
This month, Work-on-the-Boards participants are saying:
- “We are getting a lot of RFP requests and calls, but the clients still won’t sign contracts to move forward.”—3-person firm in the South, commercial/industrial specialization
- “Construction activity continues, but with added cost related to COVID-19. This has led to some projects slowing.”—140-person firm in the West, institutional specialization
- “There has been an uptick in business for the third quarter, but it is largely projects that were on hold restarting, and primarily multifamily residential. The fourth quarter is a big question.”—185-person firm in the Midwest, residential specialization
- “Very hard to find subcontractors to bid on new construction or renovation projects.”—2-person firm in the Northeast, institutional specialization