By Kermit Baker, Hon. AIA

AIA Chief Economist

Business conditions at U.S. architecture firms slipped again in May, with a national Architecture Billings Index (ABI) score of 47.2. This second straight significant decline came on the heels of five months of recovery. While it’s unlikely that this signals the reversal of an expected recovery in nonresidential construction activity in late 2011 or early 2012, it does suggest that the path to recovery will continue to be very bumpy and uneven. A separate reading of inquiries for new project activity also is of concern. At 52.6, this index points to modest increases in inquiries, but the pace of growth is the slowest that it has been in almost two years.

Regionally, the steepest decline in design activity has been at firms in the Northeast and Midwest. Firms in both regions had been reporting generally favorable business conditions since last fall, but the past two months have shown a reversal of this trend. Recent declines in the South and West have been more modest. By construction sector, the recent falloff has been felt more intensely by firms working in the commercial/industrial and institutional sectors. Firms concentrating in commercial/industrial facilities had reported improving conditions since last summer before the downturn of the past two months. Residential firms, on the other hand, have benefitted from a resurgence in multifamily activity, and continue to report improvement in design activity.

A weak economy and inflation

Similarly, the broader economy appears to have hit another soft patch. Growth in GDP slowed to 1.8 percent at a seasonally adjusted and annualized rate during the first quarter of the year, and is not expected to show substantial improvement by the time second quarter results are released in late July. The Federal Reserve Board recently reduced its growth forecasts for the U.S. economy to less than 3 percent for 2011, while also lowering its expectations for 2012.

Weak employment numbers seem to be the principal source of disappointing growth. Nonfarm payrolls increased by only 54,000 in May after growing by over 180,000 per month on average during the first four months of the year. That slow growth pushed the national unemployment rate up to 9.1 percent, its highest level of the year. Reflecting the continued weakness in the construction sector, construction payrolls have hardly grown at all in 2011.

In spite of a weak economy, inflation has become a more significant concern. Producer prices have risen at about a 6 percent pace though the first five months of the year, although much of that reflects an increase in energy costs. Construction costs, largely because energy is such an important component, have also been rising very rapidly. Additionally, growth in construction activity in emerging international markets has driven up prices for key building materials. The cost of material inputs to the construction industries increased 7.5 percent between May of 2010 and May of 2011, according to the U.S. Department of Labor. Energy costs are not the only culprit. Metal prices – steel, copper, and aluminum – have all increased at a double-digit pace over the past 12 months.

Plans to expand

Most architecture firms anticipate fairly dramatic changes in strategic direction as the profession emerges from this downturn. At least half of firms expect to expand the geographic area that they serve, the architecture services they offer clients, or the facility types (e.g. education, retail) they design.

One third of firms plan to begin offering or dramatically expanding their building information modeling (BIM) services, while fewer than 20 percent have similar plans for integrated project delivery (IPD) services. Around a quarter of firms plan to expand their nontraditional services (like consulting, expert testimony, or facilities management), expand the design disciplines they offer (interiors, landscape design), or begin offering or expanding their design/build or construction services. One in five firms plans to look for merger or acquisition partners.

Most firms plan to diversify their practices, although their strategies for doing this vary. Larger firms were more likely than smaller firms to plan to expand domestically or internationally, or seek merger or acquisition partners. Smaller firms reported that they were more likely to begin offering or dramatically expanding design/build or construction services.

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

“Projects have come under contract, started, and then been stopped or cancelled for real estate and funding issues.”

–Eight-person firm in the West, mixed practice

“Our firm is surviving due in large part to long-term contracts for non-building design services. We have added some staff. Solid growth seems far off and elusive.”

–20-person firm in the Northeast, institutional specialization

“Our area is leading the nation in job growth. However, the new Texas state budget cuts in education will cost jobs, and slow the state and local economy over the next year.”

–250-person firm in the South, mixed practice

“Banks say they are back in the game but they are not. Forty percent equity is not a loan.”

–17-person firm in the Midwest, residential specialization