ABI March 2022: Business conditions at architecture firms strengthen further
More than half of firm billings over the past year are from renovations, retrofits, rehabilitations, alterations, additions, and historic preservation work
Architecture firm billings showed strong growth in March, following more modest increases over the previous three months. The Architecture Billings Index (ABI) score of 58.0 for the month is one of the highest scores seen since the economic recovery began just over a year ago. Despite ongoing concerns about rising inflation and the war in Ukraine, business conditions remained robust at most architecture firms. Indicators of future work strengthened this month as well, most notably with the value of new design contracts, which also saw strong growth. In addition, firms reported that at the end of the first quarter of 2022, their firm’s backlogs stood at an average of 7.2 months. This was an increase of more a month from one year ago and a new all-time high since we began collecting data on backlogs in 2010. Looking at design contracts and backlogs together indicates that most firms have plenty of projects in the pipeline to keep them busy over the coming months, although finding enough employees to complete these projects remains challenging.
However, there are still substantial disparities in business conditions at architecture firms in different regions of the country. Firms located in the Northeast continued to report softening billings in March, for the seventh consecutive month. On the other hand, business conditions continued to strengthen at firms located in the Midwest and West regions and remained at robust levels for firms located in the South. Strong growth also continued at firms with a multifamily residential specialization this month, with conditions nearly returning to the high levels seen last spring. Growth continued at a moderate pace at firms with a commercial/industrial specialization, while firms with an institutional specialization saw basically flat conditions, following modest declines in billings in the three previous months.
Inflation continues to increase
One of the biggest issues in the broader economy continues to be inflation, and the US Department of Labor’s measure of inflation, the Consumer Price Index (CPI), continued to increase dramatically in March, rising by 1.2% for the month and 8.5% from one year ago. The monthly increase is the largest in nearly two decades and was primarily driven by higher energy prices (largely due to the war in Ukraine) and continued increases in the prices of groceries/food at home. In a sign of optimism, core goods inflation declined in March; however, core services inflation continued to increase, as there remains strong pent-up demand for leisure travel and activities. Because of the continued growth in inflation, it looks likely that the Federal Reserve will raise interest rates again at their next two meetings in May and June, with many predicting each will be a relatively rare half point increase.
In addition, nonfarm payroll employment growth remained strong in March, adding 431,000 new positions, and it is now just 1% below the pre-pandemic peak. Notable increases in employment this month were found in the leisure/hospitality, retail, manufacturing, and professional and business services segments. Construction employment added 19,000 new jobs this month, finally returning to its pre-pandemic peak, while architecture services employment added an additional 400 new jobs in February, the most recent data available.
Firms report a strong showing on reconstruction projects
This month’s special practice questions asked firm leaders about recent work at their firm on reconstruction projects, defined here as renovations, retrofits, rehabilitations, alterations, additions, and historic preservation. On average, responding firms estimated that just over half of their total design billings over the past year (52%) were from reconstruction projects. Firms located in the Northeast and Midwest, where building stock tends to be older in general, reported a larger share: 63% of billings at firms located in the Northeast were from these projects, as were 55% of billings at firms located in the Midwest.
At firms that have derived at least some billings from reconstruction projects over the past year, the most commonly cited building elements/systems that were replaced and/or upgraded in any of these projects were interior replacements or upgrades (flooring/walls/ceilings) at 91% of firms, HVAC/mechanical (86%), lighting (84%), and exterior replacements or upgrades (roofing/windows/glazing/facades/cladding) at 80%. Responding firms also reported that the principal goals of reconstruction projects that their firm has undertaken over the past year were largely basic updating and modernization of the building interior (68% of firms), adaptive reuse or building conversion (62%), upgrades to basic building systems (HVAC, lighting,) (62%), tenant fit outs (60%), and upgrades to building shell (roof, facade, windows/doors, entrances) at 58%.
When asked to select the single most important goal of recent reconstruction projects, 26% selected adaptive reuse or building conversion, and 25% selected basic updating and modernization of the building interior. However, at firms with a commercial/industrial specialization, tenant fit outs were the most important goal (32%), while adaptive reuse or building conversion was a less important goal to firms with an institutional specialization, selected by just 17% of those firms.
Firms were also asked what share of reconstruction work at their firm over the past year has been directly motivated by concerns or impacts from the COVID-19 pandemic. Responding firms reported that the pandemic has generally not been a key factor, with an average of just 10% of firms’ recent reconstruction projects directly motivated by the pandemic. That share is slightly higher at firms located in the Midwest (12% of projects), as well as those with a commercial/industrial specialization (13% of projects). But overall, more than three quarters of responding firms (77%) indicated that concerns or impacts from the COVID-19 pandemic affected 10% or less of their recent reconstruction projects.
This month, Work-on-the-Boards participants are saying:
- “Our firm is in southern Arizona where we are booming. Manufacturing and housing are leading the markets, but with the influx of people as a result of COVID, remote work, and companies moving to Arizona, the population increase will demand growth in the food/beverage/restaurant, retail, and hospitality markets as well.”—15-person firm in the West, mixed specialization
- “Reports of a robust economy have not been evident in our practice where we continue to see delayed decisions and a reluctance to invest in anything other than necessary replacements.”—10-person firm in the Northeast, commercial/industrial specialization
- “Booming, especially multifamily/mixed use, probably due to the housing shortage”—1-person firm in the South, residential specialization
- “It is very busy at this time. We recently had a project for a very large healthcare organization where no contractors bid on the structural package due to their workloads.”— 18-person firm in the Midwest, institutional specialization