ABI: Business Conditions at Architecture Firms Soften in January

Billings at architecture firms declined modestly in January, as the Architecture Billings Index (ABI) score fell to 49.9 (a score below 50 indicates a decrease in billings). While this was the first decline in firm billings in nearly a year, it is minute enough that it is likely to be more of a blip than a trend. And while business conditions at architecture firms frequently soften during the holiday period at the end of the year, ABI data is seasonally adjusted to minimize those effects (note that this month all historical seasonal-adjustment factors were updated, leading to some revision of historical data). Inquiries into new work remained strong, and more firms reported an increase in the value of signed design contracts in January, after a brief slowdown in December.

For architecture firms located in the Northeast region of the country, the recent trend of declining billings continued in January. These firms were joined by those located in the West, which also experienced a moderate downturn this month, their first since last spring. The picture is rosier at firms located in the Midwest and South regions, both of which saw billings continue to increase.

Business conditions also continued to improve at firms of all specializations, although billings growth slowed in January at firms with a residential specialization, after increasing at a more torrid pace for much of 2014. Billings growth also slowed modestly at firms with a commercial/industrial specialization, while a larger share of firms with an institutional specialization reported improving business conditions this month than in the previous three months.

Conditions continue to be generally positive in the broader economy, with nonfarm payrolls adding 257,000 new positions in January, for an average monthly increase of 336,000 positions over the last three months. Hiring continued in the construction, residential, and non-residential building sectors, and the architectural services sector reported an annual average of 165,000 positions for 2014, the highest annual average in five years. In addition, gross domestic product (GDP) grew at an annual rate of 2.6 percent in the fourth quarter of 2014. While this is a sizable drop from the 5.0 percent annual growth reported in the third quarter, total GDP growth for 2014 was 2.4 percent, an increase from 2.2 percent growth in 2013. And consumers are enjoying the improving economy as well, as the University of Michigan’s Index of Consumer Sentiment increased by 5 percent from December to January, reaching its highest score in 11 years. Most notably, consumer sentiment increased equally in households with annual incomes both above and below $75,000.

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Marketing is always important for architecture firms, and has become more important as firms emerge from the economic downturn. When asked how their marketing expenditures have changed over the last year, just over half of responding firms (52 percent) indicated that it has increased, with most reporting that it had increased just a little. Five percent of firms reported that marketing spending had decreased, while the remaining firms indicated that spending was unchanged from the last year. In addition, larger firms were more likely to report an increase in marketing spending than smaller firms.

When asked to select the most important elements of their firm’s marketing strategy, nearly two-thirds of respondents (72 percent) selected previous projects/firm reputation as one of the top three most important elements. Following that theme were the 58 percent that selected community contacts/word of mouth, and the 53 percent that selected networking—business/professional contacts. Smaller firms were more likely than larger firms to consider community contacts, firm websites, and social media to be most important, while larger firms were more likely to select superior proposals and superior client presentations as important parts of their marketing strategy.

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

• As architects with private business clients, the difficulties have remained unchanged for the past six years. Our clients have difficulty obtaining loans that are acceptable to them, and regulations have slowed the approval process dramatically.
— Six-person firm in the Northeast, commercial/industrial specialization

• Heated. Demand is ahead of labor supply in architecture and construction.
—13-person firm in the Midwest, residential specialization

• Holding steady; California recovery is being led by the Bay Area, Los Angeles, and San Diego, while the Central Valley is lagging behind major metropolitan areas.
—120-person firm in the West, institutional specialization

• Generally on an upward swing, with some potentially negative effects for our region in the year ahead because of falling oil prices. We are also seeing significant spikes in construction costs.
—48-person firm in the South, mixed specialization

Jennifer Riskus is Manager of Economic Research for the AIA. The Architecture Billings Index (ABI), produced by the AIA Economics & Market Research group, is a leading economic indicator that provides an approximately nine- to 12-month glimpse into the future of nonresidential construction spending activity.

Reference:

The ABI Work-on-the-Boards Survey Panel is open to any AIA member who is principal/partner of their firm. Apply to join the ABI panel by completing a brief background information form on your firm here.

Source: AIA