Tuesday, June 19, 2012

Business Conditions at Architecture Firms Soften in April

The American Institute Architects’ Architecture Billings Index fell in April, the first time in six months. After a five month period of growth, it seems as though the architecture industry has finally caught up with the rest of the economic factors that have been sinking as of late.

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 of 48.4 in April; a modest drop from the 50.4 recorded in March. Indicators of future work, such as inquiries into new projects and the value of new design contracts, continued to expand in April, but the pace of growth has slowed in recent months, indicating that there may be less future work in the pipeline as well. 

Firms located in the South reported a decline in billings for the second month in a row, and firms in the West continue to struggle. Firms in the Northeast and Midwest, however, again reported modest growth. Revenue continued to grow at firms with commercial/industrial specialization, as this remains the strongest sector. Firms with a residential specialization reported minimal growth, but this is still the eighth consecutive month of improving conditions for them. Firms with an institutional specialization continue to experience weakness.
A Broader Economic Forecast

Many economic indicators in the general economy have moderated lately as well, with the U.S. GDP growing by an estimated annual rate of just 2.2% in the first quarter of 2012, compared to growth of 3.0% in the fourth quarter of 2011. While people are spending more, business investment in equipment and software has slowed. In addition, non-farm payrolls added just 115,000 jobs in April, the second month of weak growth following more substantial monthly additions from December to February. The architecture and engineering sector as a whole added 7,000 jobs last month, while the construction sector remained essentially flat. Consumer confidence also dipped slightly in April, with the Conference Board Consumer Confidence Index falling to a score of 69.2 (1985=100) on the heels of a more substantial decline in March. While consumers are guardedly optimistic about the present, their outlook for the future has dimmed in recent months.

After such a protracted period of downsizing for many architecture firms, three quarters of our survey panelists indicated that they hope their firm will be larger in five years. A fraction, just 2%, would like their firm to be smaller in the future, while the remaining 23% are content with their firm’s current size. Firms that are already large are more likely to want to expand. More than eight in 10 firms with annual gross billings of $1 million or more hope their firm is larger in five years, compared to just 67% of firms with annual gross billings of less than $250,000.

When asked why they hope their firm will be larger in five years, the most frequently selected response was that larger firms are better able to compete for desirable projects. This may be a direct response to the increased competition for projects that has cropped up during this economic downturn. Firms also hope to expand to become better able to make investments that will increase efficiency and become more diversified, which will enable them to better cope with future fluctuations in the economy.


By region, the ABI breaks down as follows from March to April: Midwest is down 50.1 from 54.1, South is down 49.0 from 50.1, Northeast is down 51.0 from 53.9, and West is up 48.0 from 46.6.

By market sector: Residential is down 50.5 from 51.9, Institutional is down 46.6 from 47.7 and Commercial/Industrial is up 53.8 from 56.0.

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

        We have had a more sustained couple of months with projects that appear to be moving forward. Despite a dip in April’s billings relative to March, there is considerably more backlog today than there was a month ago.
—Two-person firm in the West, commercial/industrial specialization

        There is a lot of pent-up demand for housing, as well as a lot of renovations. These projects are mostly higher-end, owner-occupied-related design and construction.
—One-person firm in the Northeast, residential specialization

        The economy is stagnant. Any projects that are being considered are very small, and there are many firms vying for every opportunity.
—55-person firm in the Midwest, institutional specialization

        Progress on projects continues to be excessively slow, and we’re having cash-flow and credit issues at a time when newly signed contracts are pushing us to grow our business.
—Four-person firm in the South, commercial/industrial specialization

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