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Although the Architecture Billings Index (ABI) score for May remained above the 50-point threshold indicative of expanding billings, the score of 50.2 for the month means that billings at architecture firms were essentially flat. In fact, for the last four consecutive months, firm billings have either decreased or been flat, the longest period of that level of sustained softness since 2012. In addition, while both inquiries into new projects and the value of new design contracts remained positive, they both softened in May as well, another sign that there the amount of pending work in the pipeline at firms may be starting to shrink.
Economic differences in locations and disciplines
Regionally, conditions improved modestly in May, with firms located in the Midwest and South reporting billings growth, and firms located in the West reporting that conditions were flat. On the other hand, billings declined for the fourth consecutive month at firms located in the Northeast. And by firm type, firms with a commercial/industrial specialization reported fairly strong growth in May, while billings softened further at firms with multifamily residential and institutional specializations.
In the broader economy, the latest edition of the Federal Reserve’s Beige Book report indicated that the economy expanded modestly across the country in the period of April through mid-May, at a pace that was somewhat better than that during the prior six weeks. The report also indicated that there was strong growth in new commercial construction in the New York District, as well as a slight increase in construction and real estate activity in the Chicago district. And while home sales increased in the Kansas City and Dallas districts, residential construction and real estate softened in the Minneapolis district.
In addition, the likelihood of an upcoming rate cut from the Federal Reserve has increased recently, and there remain serious concerns about tariffs, although the worst fears about those with Mexico have been allayed in recent days. There was also considerable softness in the jobs report for May, with just 75,000 nonfarm payroll positions added for the month, well below the average monthly gains of 164,000 for the year so far, and 223,000 in 2018. In addition, the reports for March and April were revised downward by a total of 75,000 jobs, which essentially negates the entirety of this month’s gains. However, architectural services employment continues its growth streak, with an additional 1,000 positions added in April (the most recent data available). This brings total employment for the sector to 200,200, the first-time employment has been above 200,000 since November 2008.
What’s happening with renovations?
This month’s special practice questions asked responding firms about their work on additions to and/or renovations, rehabilitations, or retrofits to existing buildings. Firms reported that on average, 48 percent of their firm’s gross billings over the past year were from these types of projects, which is a slightly higher share than what was reported in the AIA’s 2018 Firm Survey report, which indicated that 43 percent of firm billings were from these projects. Firms located in the Northeast reported a much higher share of billings from additions and renovations (58 percent), while firms located in the West reported that just 41 percent of their billings were from these projects. In addition, firms with a residential specialization reported that just 36 percent of their billings were from these projects.
As such, firms were much more likely to report that the share of their firm’s billings from additions to and/or renovations, rehabilitations, or retrofits to existing buildings has increased over the past five years for healthcare and education projects, than for multifamily residential and retail projects. And of firms that reported an increase in this type of work for at least one project type over the past five years, by far the largest share (58 percent) indicated that the most important reason for the increase was because work on existing buildings is a more cost-effective strategy for their clients. Just 4 percent said that it was because zoning regulations in areas they work favor improvements to existing buildings, and just 2 percent because work on existing buildings is a greener or more sustainable strategy.
This month, Work-on-the-Boards participants are saying:
- “Construction costs are high enough to temper growth, but boom continues nonetheless.” — 15-person firm in the West, commercial/industrial specialization
- “Developing skills in renovating older, outdated buildings has been critical to our firm’s growth strategy.” — 24-person firm in the Northeast, institutional specialization
- “Second half of year is much stronger than first half, mainly because our firm had a number of projects that got held up by the HUD closure. Now these are back and we have added a lot of other new work.” —26-person firm in the South, residential specialization
- “Robust business climate in general, but with volatile undercurrents. Government sector continues to fuel growth while commercial sector struggles with changes to the retail real estate sector.” —42-person firm in the Midwest, institutional specialization