National: April 2013 - Architectural Billings Index Falters

Design Activity Hits the Brakes in April

Another extended spring swoon seems unlikely, but architecture firms continue to report problems in keeping projects moving along

By Kermit Baker, Hon. AIA
AIA Chief Economist

Source: AIA National
After eight straight monthly gains in design activity, revenue at architecture firms fell in April. The ABI’s seasonally adjusted reading for the month was 48.6, falling from 51.9 in March and 54.9 in February. Housing starts nationally—particularly for multifamily units—also dropped sharply in April, suggesting that the construction sector remains choppy. Spring slowdowns have been common during this uneven recovery, but the momentum of the fourth quarter of last year and the first quarter of this year pointed toward growing design activity moving through the entire year. Inquiries for new projects continued to grow at a healthy pace in April, as did the volume of new design contracts, so the expectation is for a resumption of revenue growth in the coming months.
The recent slowdown seems to have hit firms in the Northeast and Midwest harder, as firms in both regions experienced setbacks. Firms in the Northeast had reported growth for seven straight months prior to the April downturn, while Midwest firms broke a string of six straight months of gains. Firms in the South continue to see healthy gains, while firms in the West reported only modest growth.

Firms concentrating on the residential sector reported growth, as they have for 12 straight months now. However, the pace of growth for residential firms has slowed dramatically over the past two months. Commercial/industrial firms saw a modest decline in April, continuing their up-and-down pattern. Institutional firms have now reported nine straight months of growth, but the growth rate remains extremely modest.

Economy survives the sequester – so far

The U.S. economy remains on a pace of slow but steady growth. That’s bad news for those who thought that the economy was finally ready to accelerate as it has coming out of previous recessions, but good news for those who thought that the federal government’s budget sequestration would have a more dramatic negative impact on economic growth in early 2013.

The sequestration is slated to reduce federal spending by $1.2 trillion over the coming decade. Beginning on March 1, it reduced federal spending by about $12 billion a month over the remaining seven months of the 2013 federal fiscal year. Approximately 5 percent of the spending cuts, or about $4 billion for the final seven months of the fiscal year, is estimated to come from federal construction funding.

With post-March economic data beginning to come in, there are indications of a modest impact to date from sequestration. Public nonresidential construction spending fell by 7.5 percent in March compared to year-ago levels, but it has been falling almost every month over the past year. Construction employment grew very slowly over March and April, somewhat below its overall growth pace over the past year. Employment at U.S. architecture firms declined very modestly in March.

However, so far the broader economy doesn’t show much effect from sequestration. Employment increased an average of 150,000 a month nationally in March and April, close to the average of the past year. The national unemployment rate declined to 7.6 percent in March and 7.5 percent in April. GDP grew by 2.5 percent in the first quarter, up 0.3 percent from 2012’s average.

Even with sequestration as a factor, and the housing-starts setback in April, the general strength in the housing market points to a healthy nonresidential construction recovery. Housing starts increased by more than 25 percent nationally in 2012, and the consensus is that we’ll see comparable growth this year. The housing market has seen such strong growth over the past year that the greatest industry concerns at present are on the supply side: whether there is sufficient construction labor, construction materials availability and prices, and land shortages in rapidly growing markets.

Project downtime delays design schedules

While project delays – such as awaiting client reviews and municipal approvals -- are standard in the architecture profession, most firms feel that the situation has gotten worse recently with uncertain economic conditions and client difficulties in obtaining financing. Firms now report that projects are on hold an average of a quarter of the time during the design phase, either for anticipated or unanticipated re>asons. Almost seven in 10 architecture firms feel that project downtime has increased in recent years, with half of those indicating that it has increased a lot. Less than 6 percent of firms report that project downtime has decreased in recent years.
Even with the generally longer times that projects are on hold, architecture firms report that recent projects have been smaller on average, and have a shorter design phase than typical projects during the last construction boom. Almost half of participating architecture firms’ revenue in recent years comes from projects where the design phase (authorization to proceed on design activity through the construction contract award) lasts no more than six months. For almost 80 percent of projects, measured on a revenue basis, the design phase lasts less than a year. Less than 5 percent of design revenue comes from projects where the design phase is 24 months or longer.

This month, Word-On-The-Boards participants are saying:
  • Steady, but far from robust. Many large projects are still on hold, and one large sector of the business—K–12 education—has almost completely disappeared.
    —20-person firm in the Northeast, institutional specialization
  • We have used contract employees—laid off from other firms—to fill in additional workload. We will look to add more [full-time employees] by the end of the year.
    —Eight-person firm in the Midwest, commercial/industrial specialization
  • [The] federal government’s sequestration has created a huge gap in work for those of us that practice in that area.
    —110-person firm in the South, institutional specialization
  • I am now submitting proposals for new buildings instead of just [doing] remodeling and tenant improvements.
    —One-person firm in the West, commercial/industrial specialization

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