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Latest Architectural Billings Index Reflects Strongest Growth in 5 Years

November saw the fourth straight monthly increase in the American Institute of Architect’s Architecture Billings Index (ABI), with the pace of growth accelerating each month. At 53.2, the ABI is reflecting the strongest growth in billings at architecture firms since the end of 2007, just before the recession in design revenue began.

At present, firms in the Northeast and Midwest are reporting a reasonably sharp upturn in business conditions. Firms in the South are reporting a modest increase, and firms in the West a very modest decline. However, regional revenue trends at architecture firms have been quite variable in recent months, and are likely to continue to be so in the months ahead.

By construction sector, clearer patterns are beginning to emerge. The residential index was 55.9 for November. This index has been above 55 for four straight months. That level of growth has not been seen since late 2005 near the end of the housing boom. The commercial/industrial index moved back into growth territory, and the institutional index remained barely in growth territory, with an index reading just above the 50 threshold. Both of these sectors are currently fragile enough that they are more vulnerable to the fluctuations of the broader economy, particularly the federal budget and debt negotiations.

Housing strong, but rest of economy teetering

In a long-awaited turnaround, the housing market has turned into one of the strongest sectors in the economy. In the second and third quarters, housing starts have been up more than 25 percent above the same period in 2011. However, the rest of the economy has been relatively disappointing. Payrolls increased by a modest 146,000 in November, similar to the gains in September and October. Though the national unemployment rate has declined from 8.3 percent in July to 7.7 percent, much of this has to do with a decline in the labor force rather than an increase in employment.

Concern over the federal fiscal situation– the “fiscal cliff”–continues to make consumers and businesses nervous. The Consumer Sentiment index declined by eight points (approximately a 10 percent drop) with the preliminary December numbers from the University of Michigan, while their Consumer Expectations index declined thirteen points. Small business optimism declined even more sharply in November. The National Federation of Independent Business’ Small Business Optimism Index saw its largest one-month drop in the 25 years it has been conducting this survey.

One relatively positive development of a sluggish economy are low rates of inflation. Consumer prices have been increasing at a pace below 2 percent per year in recent months, with producer (wholesale) prices growing less that 1.5 percent recently. Some of this has to do with falling energy prices over the past several months and recent developments point to more stable energy costs for years to come. Domestic production levels of both natural gas and oil are slated to dramatically increase in the United States over the next several years due to the increase in production from hydraulic fracturing (or “fracking”). A recent report by the International Energy Agency predicts that the United States will be the largest international oil producer by 2020, surpassing Saudi Arabia. While this is welcome news for consumers and businesses, and should boost growth in the domestic economy, it has more serious consequences for strategies to deal with climate change issues.

Only modest growth projected for 2013

Like the last several years before it, 2012 turned out to be financially challenging for many architecture firms. Almost 30 percent estimate that gross revenue declined in 2012 while half estimate that revenue increased by at least 5 percent. Average revenue growth is estimated at 2.9 percent for the year. This coming year is expected to be only modestly better. Projected growth is just 3.0 percent, barely above 2012 levels; 20 percent of firms are expecting that revenues will decline. Larger firms (with revenues of $5 million or more) are the most pessimistic about their prospects for 2013, as this group is projecting just 2.8 percent growth in gross revenues for the year, with almost a quarter expecting a decline.

Residential firms are the most optimistic. On average they are expecting a 3.6 percent increase in revenue and fewer than 20 percent are anticipating declines. Institutional firms are projecting only 2.5 percent growth in revenue on average, with almost a quarter of them expecting that revenue will decline.

The ongoing uncertainly over the resolution of the federal budget and reducing the federal debt are critical reasons for the relative pessimism for 2013. Eleven percent of architecture firms report that concern over the “fiscal cliff” has caused the cancellation or significant delay of active projects at their firm. Another 27 percent report that it is a major concern for clients of active projects, and could cause cancellations or delays of projects in the future.

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

• People believe that the corner has been turned, and that 2013 will be a growth/recovery year.

—2-person firm in the Northeast, institutional specialization

• Businesses and individuals are reluctant to commit to significant spending due to the uncertainty surrounding the fiscal cliff.

— 15-person firm in the West, residential specialization

• There has been a dramatic slowdown in healthcare this year waiting for the election. We received several new potential projects once the election was over. We feel that 2013 will be a good year.

— 5-person firm in the South, institutional specialization

• Conditions are about the same despite many new apartment high rise starts that were shelved from previous years. No new market rate for-sale product coming online at the moment.

—16-person firm in the Midwest, mixed specialization.  Read More.


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