Architecture Billings Index: Severe Winter Weather Continues to Depress Design Revenue

Business conditions at U.S. architecture firms improved modestly in February, but growth rates remain well below typical 2014 levels. With a national index score of 50.4 for February, billings increased somewhat from the 49.9 reading in January. New design contracts were also weak in February, posting a 50.0 score, which signifies no improvement over January levels. Even new project inquiries, though indicating growth, were at their slowest pace of increase in two and one-half years.

Regional billings scores reflect the slowdown in design activity, but also are beginning to point to regional diversity. Firms in the Northeast and West have reported softness in billings. Firms in the Northeast have reported six straight monthly declines, while those in the West have reported lower billings both months in 2015. Firms in the South continue to report solid numbers, although also reflecting growth rates well below 2014 levels.

In the face of overall disappointing trends in the first two months of the year, the performance of institutional firms has been very encouraging. Institutional firms have now reported nine straight months of gains in billings, reflecting healthy growth levels over this period. However, offsetting the improving situation at institutional forms is the weakness at residential firms. The residential ABI fell below 50 in February for the first time since the third quarter of 2011. Hopefully, this is merely weather-induced lull, in which case scores should rebound fairly quickly. The commercial/industrial index has remained in a slow growth mode for over a year now, but has not seen any negative months over this period.

Falling Oil Prices Change Economic Picture

Falling oil prices over the past nine months have dramatically changed the domestic economic landscape. Crude oil prices have fallen by more than 50% since mid-June, 2014. As a result, retail gas prices have fallen by a third over this same period, even with the 20% increase since the end of January.

Lower oil costs have a broad range of domestic implications. On the negative side, economies that rely on oil revenue, notably many Texas and surrounding markets, Denver, and North Dakota, will likely see a decline in employment and economic growth as production in these areas is slowed in response to lower prices. Even beyond these immediate oil producing areas, companies producing equipment or supplies for this industry will feel the impact. For example, as of mid-year 2014 when oil prices were at their recent high, the power construction category – which includes buildings and structures for the distribution, transmission, gathering, and storage of crude oil among other activities – was the largest single construction category within the nonresidential sector, accounting for almost 18% of total nonresidential spending. At that point, spending in this category was increasing at an almost 20% per year pace. Currently, expenditures in this category are falling at an almost 15% per year pace.

However, since the U.S. is a net oil importer, in the long run the benefits of lower oil costs will almost certainly outweigh the costs by way of increased growth for industries that are major oil users, as well as for consumers who will be paying less for gasoline and oil costs. One immediate positive is that low oil prices are keeping inflation in check. Consumer prices increased only 1.2% in the fourth quarter of 2014 when compared to the prior year, while producer prices increased only 0.7%.

Construction Financing Remains an Issue, But Seems to be Easing

During the downturn, architecture firms were frequently reporting that access to financing was a common reason that projects were stalled or abandoned. While there have been reports that credit is generally more available to the construction industry, we wanted to see how much easing was evident to architecture firms in terms of their project workloads over the past year.

On a 5-point scale, with 1 indicating that financing was not a serious problem and 5 indicating that it was extremely serious, over 46% of respondents rated it a 1 or 2, suggesting that it wasn’t that serious of an issue, while 19% rated it a 4 or 5, indicating that it was still a very serious problem. The remaining 35% rated it as a 3, or a somewhat serious issue.

While 15% or respondents felt that the availability of credit for construction had gotten more restrictive over the past year, 37% felt that the problem had eased over this period, including almost 7% who felt that it has eased considerably. The remaining 48% felt that the availability of credit had remained about the same over the past year. There was no discernable regional, firm size, or firm specialization patterns to the responses on credit availability.

Finally, firms were asked to whether credit restrictions with projects at their firms were generally because projects were not economically viable, or because there was a general hesitance on the part of lenders to finance construction projects. Almost 32% of respondents felt that it was a general hesitance to lend for construction projects, 9% felt that projects were generally not economically viable, while 41% felt that both were factors, and the cause varied from project to project. The remaining 19% hadn’t run into project financing problems at their firms over the past year.

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

• Still good although everyone is on pins and needles waiting to see how the lower oil prices will fully affect us.
—45-person firm in the South, commercial/industrial specialization

• We have a number of studies going that will turn into projects, but the studies don’t pay the bills right now. We are seeing problems with higher material prices.
— 11-person firm in the Midwest, institutional specialization

• The rise in construction costs has slowed growth, and has caused delays in getting in the ground while money is cut out of the projects.
—10-person firm in the West, mixed specialization

• Business is still booming though we did have a project go on hold today due to the declining price of natural gas.
—30-person firm in the Northeast, commercial/industrial specialization

Kermit Baker, Hon. AIA, is the Institute’s chief economist and a senior research fellow at the Joint Center for Housing Studies at Harvard University. 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