Demand for Design Services Remains Healthy

WEDNESDAY, AUGUST 31, 2022


Last week, The American Institute of Architects released its Architectural Billings Index score for July, reporting an increase in demand for design services for the eighteenth consecutive month.

The ABI is a diffusion index derived from the AIA’s monthly Work-on-the-Boards survey, conducted by the AIA Economics and Market Research Group. The ABI serves as a leading economic indicator that leads nonresidential construction activity by approximately 9-12 months.

An index score of 50 represents no change in firm billings from the previous month, a score above 50 indicates an increase in firm billings from the previous month and a score below 50 indicates a decline in firm billings from the previous month.

July Report

Down a few points from June’s score of 53.2, the ABI score dropped just 2.2 points to 51.0 in July. Though a small reduction from the month prior, the July reading indicates stable business conditions for architecture firms.

The AIA went on to note in its report that the month moderated from June but remained strong with scores of 56.1 and 52.9, respectively. While both of these indicators remain below their mid-2021 peaks, they show that there remains interest in new projects going forward, according to the Institute.

However, the report also pointed out that the July ABI had the slowest rate of growth for new projects since January.

“Despite architecture services employment recently surpassing pre-pandemic levels, the ABI score this month reflects the slowest growth since January, and marks the fourth straight month with a lower score than the previous month, indicating a slowing trajectory in billings activity,” said AIA Chief Economist, Kermit Baker, Hon. AIA, PhD.

“With a variety of economic storm clouds continuing to gather, we are likely looking at a period of slower growth going forward.”

Additional highlights from the ABI July report included:

  • Regional averages: South (53.6); Midwest (52.2); West (51.7); Northeast (48.4); and
  • Sector index breakdown: multi-family residential (52.8); commercial/industrial (52.2); mixed practice (52.1); institutional (49.6).

The regional and sector categories are calculated as a three-month moving average, whereas the national index, design contracts and inquiries are monthly numbers.

Data representing the month of July can be viewed here.

Stalled Project Worries

In the full report for July, AIA mentioned that in its recent survey, 42% of firms consider stalled, delayed or canceled projects to be at least a somewhat serious issue. Overall, 58% of responding firms indicated in July that on a scale of 1 to 5, with 1 being not very serious and 5 being very serious, they rate the issue of stalled/delayed/canceled projects as a 1 or 2.

28% of firms, however, indicated that they consider it to be a somewhat serious issue and 14% rated it as a 4 or 5.

According to the data collected, for the nine months out of the calendar year, billings have declined in the Northeast region.

While billings are growing modestly in other regions, the AIA noted that in looking at firm specialization, business conditions remained positive at firms with multifamily residential and commercial/industrial specializations. However, firms with an institutional specialization saw a very small decline in billings and have been reported to generally see slower growth than firms of other specializations throughout the recovery period.

In looking back at the industry survey, those who rated the issue of stalled/delayed/canceled projects as at least a somewhat serious issue, reported that an average of 60% of their recent projects were proceeding as normal. However, 23% of their projects were reported as being significantly delayed, 12% as indefinitely stalled and 6% as being canceled outright.

These firms reported that a variety of factors have contributed to projects at their firms being stalled/delayed/canceled, among those included:

  • 66% cited rising material prices;
  • 64% cited contractor bids coming in too high or schedules too long;
  • 61% cited construction budgets insufficient for projects as currently conceived;
  • 55% cited changing market conditions making clients nervous about proceeding; and
  • 50% citied supply chain issues/materials availability.

“The short supply of professionals continues to be the issue, and many local firms have revised their business plans to not accept new clients at the moment. We are utilizing outsourcing resources available both within the US and outside the country to keep up,” said one eight-person firm in the West, mixed specialization.

Another unnamed six-person firm in the Northeast, residential specialization, added, “Conditions seem to have shifted for us. Before, we were doing about 70% residential work, since the Federal Reserve increased interest rates, our residential work has tailed off while commercial work remains strong, and we are now about a 50/50 split.”

Projected Spending Report

The day after AIA released June’s ABI numbers, the Institute reported that despite the economy’s deteriorating conditions, nonresidential construction spending is projected to increase.

According to the report’s findings, spending in the nonresidential construction sector is projected to increase by over 9% before the year is over and another 6% in 2023.

More optimistic than what had been reported in the AIA Consensus Construction Forecast Panel at the beginning of the year, the positive mid-year update is notably due to very strong gains in the manufacturing category, as well as surprising strength in retail facilities.

In addition, the AIA noted that the years-long supply chain problems have encouraged manufacturers to reshore and increase their storage capacity to better cope with potential future disruptions.

Although prospects for construction spending have surprisingly improved, the deteriorating outlook for the broader economy has not gone unnoticed. Among the more worrisome indicators are:

  • Stock market declines – a bear market is defined as a 20% decline in stock prices from their most recent peak;
  • Inflation – consumer prices have seen steady gains so far this year, with the June figure showing a 9.1% increase over the past year. Producer prices have been just as volatile, with the price of inputs to construction increasing in the 15% range in recent months;
  • Interest rates – the Federal Reserve Board has been aggressively raising short-term interest rates since the beginning of the year to help combat inflation;
  • Consumer sentiment – consumer sentiment scores fell with the onset of the pandemic in early 2020, but then began to recover. However, as supply chain disruptions caused inflation to accelerate beginning in early 2021, consumer sentiment began to plummet. Currently, consumer sentiment scores are about as low as they have ever been since the University of Michigan began collecting them in the early 1950s;
  • Business confidence – While business confidence scores, as measured by the Conference Board’s CEO Business Confidence Index, have only turned negative in recent months, they are coming off their highest recorded levels of several decades; and
  • Housing starts – the housing and home improvement industries have been one of the few bright lights in the economy during the pandemic. Housing starts nationally increased 7% in 2020 as the pandemic set in, and another 16% in 2021. This year, homebuilding has been on pace to produce another healthy gain. However, sharp gains in house prices – they have been growing at a 20% annual pace in recent months – as well as increased mortgage rates – have dampened households’ willingness as well as their ability to purchase a home.

The full report can be viewed here.

Previous ABI Results

In July, AIA released its Architectural Billings Index score for June, revealing an increase in demand for design services.

Slightly down from May’s score of 53.5, the ABI score dropped just 0.3 points to 53.2 in June. Though differing ever so slightly, the June reading indicates moderately strong business conditions overall.

The AIA went on to note in its report that for the month that both new project inquiries and design contracts indexes continued to show growth, posting scores of 58.2 and 52.2, respectively. However, the Institute added that it was the slowest rate of growth for new projects since the recovery began in early 2021.

In addition, the value of recently signed design contracts also fell to the slowest pace of growth since January 2021.

“Ongoing project activity at architecture firms as well as new work coming online remains strong, pushing project backlogs up to seven months on average nationally,” said Baker at the time. “In spite of heavy workloads, employment at architecture firms has stabilized, suggesting that adding new employees is becoming even more challenging as the building construction sector continues to recover.”

In backing Baker’s statement, several recent reports have outlined the industry’s ongoing labor shortages and recruitment challenges. According to the specialized division of staffing giant PeopleReady, PeopleReady Skilled Trades, the industry is one of the hardest hit by worker scarcity.

Looking back at when the pandemic started in March 2020 to as far as December 2021, the division reports that four million jobs were open in key skilled trades industries—more than double the number of vacancies pre-pandemic. Today, thousands of those open positions still remain.

Additional highlights from the ABI June report included:

  • Regional averages: West (57.8); Midwest (54.8); South (51.5); Northeast (48.7); and
  • Sector index breakdown: institutional (53.5); mixed practice (52.8); multi-family residential (52.6); commercial/industrial (52.5).

The report notes that the regional and sector categories were calculated as a three-month moving average, whereas the national index, design contracts and inquiries are monthly numbers.

Data representing the month of June can be viewed here.

In June, AIA released its Architectural Billings Index score for May, revealing strong business conditions despite increasing headwinds in the economy.

While the score remained above 50, the May ABI fell three points from the 56.5 reported in April to 53.5. The May report marked the 16th consecutive month that the majority of firms reported billings growth.

In addition, both inquiries into new projects and the value of new design contracts also rose slightly, indicating that there was still a strong interest in new projects and a substantial number of projects in the pipeline for which contracts have already been signed.

Additional highlights from the May report included:

  • Regional averages: South (52.3); Midwest (56.8); West (59.3); Northeast (51.4); and
  • Sector index breakdown: multi-family residential (54.5); commercial/industrial (57.7); institutional (51.7).

The report notes that the regional and sector categories were calculated as a three-month moving average, whereas the national index, design contracts and inquiries are monthly numbers.

Data representing the month of May can be viewed here.

While the ABI continues to stabilize through 2022, all throughout the spring and summer of 2021 it climbed. According to reports issued by the AIA, it wasn’t until February that the report would indicate its first positive mark since before the COVID-19 pandemic.

Reportedly a boost from January’s score of 44.9, the report revealed a score of 53.3.

One of the ABI’s lowest points was at the end of March 2020, when it plummeted from the pandemic. That index revealed a 20.1 drop in points to a score of 33.3. The score nearly doubled the decrease of 9.4 points experienced at the beginning of the 2001 recession and the loss of 8.3 points recorded during the Great Recession, making it the index’s largest single-month decline in its nearly 25-year history.

   

Tagged categories: American Institute of Architects (AIA); Billings; Business conditions; Color + Design; Color + Design; Commercial / Architectural; Design build; Economy; Good Technical Practice; Market; Market data; Market forecasts; Market trends; NA; North America; Project Management; Projects - Commercial; Upcoming projects

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