ABI: Architecture firm billings recover modestly in February

While most firms work exclusively domestically, international projects more common at larger firms

U.S. architecture firms reported a modest recovery in billings in February following a small dip in January. The AIA’s Architecture Billings Index (ABI) was 50.3 for the month, on the heels of a 49.6 reading in January. New project inquiries recorded more significant growth, increasing to 59.5 in February from 55.3 in January. New design contracts also pointed to solid growth ahead in design activity, increasing almost a full point to 51.7 for the month.

Regional trends in architecture firm revenue were disappointing, and reflected the widespread lack of momentum moving into 2016. Billings index scores for firms in the Northeast, Midwest, and West all reflected a slight decline in February. Even in the South, the only region showing an increase, billings have reflected slowing growth for several months now. By sector, residential and commercial/industrial firms both reported healthy gains, while institutional firms suffered their second consecutive setback after enjoying a year and a half of steady growth.

Nervousness on the Increase, But U.S. Economy Holding Up

Despite growing just 2.0 percent in the third quarter of last year and 1.0 percent in the fourth, the U.S. economy is really quite healthy. However, the gyrations that we’ve seen in the stock market – with the drop in the third quarter of last year and then again with a weak start to 2016 – has brought up concerns over an impending economic recession. And a volatile stock market is not the only issue; overall manufacturing activity has seen no growth over the past 18 months, while energy and most other commodities such as agricultural products and most building materials have seen weak demand recently. As a result, the Federal Reserve Board held off implementing another increase in short-term interest rates at its recent meeting.

While these are certainly cautionary signs, there are other signals that we would expect to see if overall economic growth were in jeopardy. At the top of the list would be a weakening employment market. In fact, we are seeing just the opposite: our economy created a very healthy 2.75 million net new payroll positions last year, and we’re close to that pace through the first two months of this year. Within our sector of the economy, construction jobs are growing at a healthy pace, and architecture firm employment is the best it’s been since early 2009. Inflation is too low, if anything, interest rates remain very favorable, and consumer sentiment is at healthy levels, all of which point to the economy continuing to expand for the time being. However, more attention to economic indicators is no doubt warranted for the next several months.

International Work Still a Relatively Small Share of Architecture Firm Revenues

Overall, one in six architecture firms (17 percent) reported revenues from international design/construction projects over the past five years. Firms with international project activity are about evenly split between offshore projects for a foreign client as compared to a U.S. client. Additionally, a small share of firms (under 3 percent) reported projects outside the U.S. for the U.S. Government. Larger firms are much more likely to have international work. Almost half (45 percent) of firms with $5 million or more in annual revenue reported international project activity over the past five years, as compared to fewer than 5 percent of firms with less than $1 million in gross revenues.

Of firms with international billings, the international share is often quite low. Almost a third of firms with international projects report that that revenue accounted for less than 1 percent of their gross revenue of the past five years, and close to 60 percent indicate that it was less than 5 percent of revenue. On average, firms with international activity indicate that it averaged about 10 percent of gross revenue.

Firms report clear positives and negatives associated with international project activity. On the positive side is that these projects tend to be more creative to design (49 percent of firms felt this way, only 18 percent disagreed, while the rest were neutral), and they tend to require less marketing effort (42 percent agreed while 34 percent disagreed). On the negative side, almost two-thirds felt that international projects tend to have more delays and problems, while only 6 percent felt that they had fewer problems. Almost 60 percent of firms feel that international clients are more difficult to manage, while only 7 percent feel that they are easier.

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

    • Robust, but cautious. The multifamily housing bubble is about to burst.

    —35-person firm in the West, mixed specialization

    • What the profession lost from the recession will be eclipsed by the up and coming generation of emerging professionals. We love their enthusiasm, passion, and verve.

    —126-person firm in the West, institutional specialization

    • Getting busier, but interns asking for a lot of money. Staff also wants raises in excess of clients’ willingness to pay.

    —8-person firm in the South, commercial/industrial specialization

    • Workload and backlog are, at times, outpacing our ability to add and absorb new staff onto our team in the way we feel best supports our firm culture.

    —29-person firm in the Midwest, commercial/industrial specialization

Source: AIA