ABI July 2021: Business conditions remain strong at architecture firms

ABI Aug 2021

Firm revenue projected to grow further in the second half of 2021

Although the torrid pace of billings growth seen earlier this year eased in July, architecture firms are still reporting very strong business conditions overall. The ABI score of 54.6 for the month indicates that the majority of firms are continuing to see their billings increase. Inquiries into new projects and the value of new design contracts remain extremely high as well, with both still near their all-time historic high points from earlier this year. The rate of growth that firms are reporting now is more typical for a post-recession recovery phase, while the exceptionally high numbers seen earlier this year were more of an aberration due to the precipitous nature of the decline in 2020, and the commensurately strong rebound in early 2021.

Business conditions remained strong in all regions of the country in July as well, with firms located in the Midwest and West reporting the strongest conditions for the second consecutive month. And more firms in the Northeast reported an increase in billings in July than in June, as conditions continued to strengthen in the region that was experiencing weakness even prior to the pandemic. Firm billings remained particularly robust at firms with a commercial/industrial specialization, but were also strong at firms with institutional and multifamily residential specializations.

Recovery remains strong

In the broader economy, employment continued its strong recovery in July, with 943,000 new jobs added. In addition, gains in recent months were revised upwards, with 938,000 new jobs now added in June. Architectural services employment added 300 new jobs in June (the most recent data available), with employment in the industry now just 2.0% below its pre-pandemic high. This is a faster recovery than in the total nonfarm payrolls, which remain 3.7% below their pre-pandemic high point.

Although inflation remains an area of concern, recent data shows that it may end up being more transitory in nature. While the most recent Consumer Price Index (CPI) data showed that consumer prices rose an additional 0.5% in July, that is nearly half of the increase of 0.9% that was seen in June. This indicates that inflation is moderating somewhat, although there are still concerns on the horizon with rising rents and home prices, as well as higher costs for materials and labor.

Firms are optimistic about revenue in second half of 2021

With architecture firm billings surging this year, this month’s special practice questions asked responding firms about how their revenue has changed so far this year versus 2020, and to project how they expect it to change in the second half of 2021. Nearly half of firms (47%) reported that their revenue in the first half of 2021 increased in comparison to their 2020 revenue. Just under one quarter of firms (23%) indicated that it was unchanged from 2020, while nearly one third (30%) reported that their revenue had declined further. Firms located in the Northeast were most likely to report a further decline this year (41%), while firms with a multifamily residential specialization were most likely to report an increase (60%). Overall, firms indicated that the average percent change in their revenue in the first half of 2021 was an increase by an average of 3.6%, with firms with a multifamily residential specialization reporting the highest increase (8.2%), and firms located in the Northeast reporting a small decline of 0.1%.

Conditions look even rosier for the second half of the year, with 54% of firms expecting an increase in revenue in the second half of 2021 in comparison to the first half, for a projected average increase of 6.0%, while just 15% expect a decrease. In addition, 61% of firms in the Northeast predict an increase in revenue, for an average increase of 7.1%, making up for the fact that they had a more sluggish first half of the year than in other regions. Firms with multifamily residential and commercial/industrial specializations also expect a strong second half of the year, with projected revenue increases of 6.6% and 6.8%, respectively.

When asked about the factors that may have an impact on their firm’s revenue projections for the second half of 2021 as compared to the first half, the top issues cited by firms were related to construction material prices and availability (58% cited rising prices of key construction materials and products as a major issue, 53% cited supply chain disruptions and ensuing availability issues for key construction materials and products as a major issue), project delays due to construction worker shortages (28% cited a major issue, 93% cited as an issue overall), and contractor availability for projects (33% cited as a major issue, 89% cited as an issue overall).

Other factors cited as at least a slight issue included strong demand for renovated facilities as economy continues to reopen (86%), finding qualified employees for architecture firms (78%), projects that were stalled restarting (77%), and strong demand for new facilities as economy continues to reopen (76%). On the other hand, the majority of firms indicated that design-related delays due to architecture staff working remotely was not expected to be an issue, nor are emerging demand for “new economy” facilities (e.g., distribution hubs; data centers) or growing demand for sustainable and resilient design.

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

  • “The pickup in work has been as radical as the drop-off in work in March-April of 2020.”—250-person firm in the Midwest, institutional specialization
  • “Somewhat busy, but some of the busyness is due to challenges of working with jurisdictions that are working remotely.”— 4-person firm in the West, commercial/industrial specialization
  • “Good, but still some hesitancy. COVID and the Delta variant are still causing issues, and concerns on moving forward.”—20-person firm in the South, residential specialization
  • “The RFP/RFQ industry is booming, while actual design projects going forward remain mired in deep recession. We are continually astounded by the large number of RFQ’s that come out for A/E selection, only to have the potential project go on hold without an award/selection.”—5-person firm in the Northeast, residential specialization

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ABI Aug 2021