Design Activity Weakness Continues in June

The American Institute of Architects’ Architecture Billings Index slipped once again in June, marking the third straight month of decline in billings. Recent figures have been disappointing, especially considering the promising increases seen in the fourth quarter of 2010 and into the first quarter this year, with five consecutive months of positive conditions.

The Architecture Billings Index (ABI) serves as the leading economic indicator of construction activity, and reflects the approximate 9-12 month lag time between architecture billings, and actual construction spending. The monthly ABI scores are centered around 50, with scores above 50 indicating an aggregate increase in billings, and scores below 50 indicating a decline.

The ABI registered a score 46.3 for the month of June, an even more substantial decrease than the 47.2 recorded in May. In spite of this relatively sharp decline in billings, inquiries for new projects showed healthy gains in June; hopefully a sign of improving conditions in the months to come.

ABI results by region have changed drastically since the beginning of the year. Through the first quarter, conditions were very healthy at firms in the Midwest, improving in the Northeast, beginning to stabilize in the South, and deteriorating in the West. As of the end of the second quarter, these patterns have almost completely reversed, with firms in the West reporting gains, while conditions decline in the Northeast and Midwest.

Design activities for the major construction sectors are also shifting. Residential firms reported a modest softening in June after months of healthy gains. Commercial/industrial firms saw conditions stabilize after a couple months of decline. Business conditions at institutional firms, however, remain quite weak overall.

Jobs growth sagging as well

Employment rates that started declining in spring have continued to do so into the summer. There were only 18,000 payroll positions added in June, after a disappointing 25,000 total jobs were added for May. During the first four months of the year, the economy added about 180,000 payroll jobs per month on average. As a result, the national unemployment rate edged up from 8.8 percent in March to 9.2 percent in June.

Unemployment, raising energy costs, and economic uncertainty over the government debt ceiling clearly have consumers nervous. While there are many factors that contribute to economic decline, lack of confidence to spend (and build) by consumers and business are clearly a driving force.

Design activity stalling out

While weakness in the economy has led to a decline in design projects, architecture firms also blame the larger number of stalled projects for the anemic rates of design activity. A majority of architecture firms report that they currently have at least one or more stalled project. According to these firms, the most common reason for lack of progress is the owner’s difficulty in obtaining financing. Over 60% of firms with stalled projects cite financing as a reason for projects not proceeding. Second on the list of reasons given for stalled projects is general client nervousness about proceeding on the project - no doubt generated by the unusual level of uncertainly about future economic conditions. The third most common reason given is quite blunt - the economy is too weak for a project to proceed. It is becoming increasingly clear that if the design industry, as well as the economy on a whole is to improve, both consumer and business need the will to spend, build and have faith that things will turn around for the better in the months to come.

Statistics

By region, the ABI breaks down as follows from May to June: Northeast is down 47.5 from 47.6, South is down 47.3 from 47.5, Midwest is down 44.6 from 45.9, and West is up 51.7 from 49.3.

By market sector: Institutional is up 45.9 from 44.9, Commercial/Industrial is up 50.0 from 46.5, Residential is down 49.6 from 53.6, and Mixed is up 51.5 from 49.1.


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

• “Lending is limited to multifamily construction, making financing for other project types very difficult.”
- Five-person firm in the South, commercial/industrial specialization

• “Architectural firms are willing to go out on a limb to provide services in advance of contracts, and are cutting fees to get on board--not good strategies for [the] long-term health of their firm or the profession.”
- 11-person firm in the Midwest, institutional specialization

• “Domestic work continues to drag along very slowly. Middle Eastern work has almost all disappeared or stalled. [The] only bright spot that keeps moving along is China.”
- 25-person firm in the West, residential specialization

• “There is more competition for small higher-education projects, and the length of time from start of discussion to contract and commencement of design is prolonged. Where there was a deluge of work two-and-a-half years ago, now there is barely a trickle.”
- 50-person firm in the Northeast, institutional specialization