Wednesday, July 20, 2011

Declines in Design Activity Suggest a Bumpier Road to Recovery

The American Institute of Architects’ Architecture Billings Index indicated weak business conditions for the month of May. This marks the second month in a row of decline; a discouraging sign considering the 5-month recovery streak in the months prior. While these setbacks don’t necessarily spell the end of economic improvement throughout the industry, it does show just how rocky the road to recovery can be.

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 Architecture Billings Index registered a score of 47.2 in May; another substantial decrease in billings after the 47.6 registered in April. It isn’t just the decline in billings that is of concern; inquiries for new projects have slowed considerably to the lowest rate in almost two years. ABI results by region and market sector are once again are varied, however, inflation and increasing unemployment rates have been hurting business conditions across the board.

Regionally, firms in the Northeast and Midwest are seeing the steepest decline in the country. They have reported improving conditions since last fall, but that trend has ended with the recent downturn over the last two months. Declines in the South and West have been less severe. Firms that concentrate primarily on commercial/industrial and institutional sectors have seen a sharper drop in activity compared to those who specialize in residential work.

A weak economy and inflation

While government efforts are continually being made to increase jobs and improve economic conditions, GDP growth has slowed to just 1.8% and estimates for economic growth have been reduced to less than 3% for 2011, in turn lowering expectations for 2012. Nonfarm payrolls increased by only 54,000 in May after growing by over 180,000 per month on average during the first four months of the year. This raised the national unemployment rate to 9.1%, the highest we’ve seen this year. Inflation is also becoming a major concern in this economy. Producer prices have risen at about a 6% pace though the first five months of the year, although much of that reflects an increase in energy costs. Construction costs have also been quickly rising, largely due to increasing energy prices. According to the U.S Department of Labor, the cost of construction materials has increased by 7.5% between May of 2010 and May of 2011, and metal prices – steel, copper, and aluminum – have all increased at a double-digit pace.

Plans to expand

Despite all the economic turmoil and constantly fluctuating workload, firms remain optimistic about growth in the near future. At least half of firms expect to expand the geographic area that they serve, the architecture services they offer clients, or the facility types they design. One third of firms plan to begin offering or dramatically expanding their building information modeling (BIM) services, while fewer than 20% have similar plans for integrated project delivery (IPD) services. Around a quarter of firms plan to expand their nontraditional services (like consulting, expert testimony, or facilities management), expand the design disciplines they offer (interiors, landscape design), or begin offering or expanding their design/build or construction services. One in five firms plans to look for merger or acquisition partners.


By region, the ABI breaks down as follows from April to May: Northeast is down 47.6 from 51.2, South is down 47.5 from 48.3, Midwest is down 45.9 from 51.1, and West is up 49.3 from 47.7.

By market sector: Institutional is down 44.9 from 45.9, Commercial/Industrial is down 46.5 from 49.9, Residential is down 53.6 from 53.9, and Mixed is up 49.1 from 45.2.

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

• “Projects have come under contract, started, and then been stopped or cancelled for real estate and funding issues.”
- Eight-person firm in the West, mixed practice

• “Our firm is surviving due in large part to long-term contracts for non-building design services. We have added some staff. Solid growth seems far off and elusive.”
- 20-person firm in the Northeast, institutional specialization

• “Our area is leading the nation in job growth. However, the new Texas state budget cuts in education will cost jobs, and slow the state and local economy over the next year.”
- 250-person firm in the South, mixed practice

• “Banks say they are back in the game but they are not. Forty percent equity is not a loan.”
- 17-person firm in the Midwest, residential specialization

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