2011 is going to be a great year for some architects. And not such a good year for others. It all depends on where you are and what you do.
It's mostly good news for architects in the Northeast and the Midwest. Here, business conditions will continue to improve over the next 12 to 18 months, where signs of improvement have already been showing in architectural billings. The South and the West, meanwhile, will continue to suffer from a lack of project starts. And it looks like these regions still have a way to go before clients return with cash in hand.
Making market projections
Architects operate in an environment that is dictated – like every market – by supply and demand. The demand for architecture is inextricably tied to myriad macro- and micro-economic forces. So, while architects can regulate architecture's supply, they have little control over its demand.
This condition was made acutely obvious during the downturns of 1990/91 and 2001 when architects learnt that they necessarily suffer during recessionary economies. Of course, certain sub-markets are more affected than others, says Scott Simpson, Managing Director at KlingStubbins. To counter the inevitable effects, architects made an effort to stem supply and stimulate demand by purging their payrolls, reducing their overheads and cutting their fees. 'When the market is down,' says Simpson, 'the most effective and immediate response is to trim staff, since that's far and away our biggest operating expense.'
So while it was entirely predictable that the Great Recession would eventually devastate the architectural industry, it was hard to say exactly when and by how much. To be able to confidently face future challenges, architects need to be able to accurately forecast future market conditions. To achieve this, they need the answers to two critical questions: what are the leading indicators of economic activity in the architectural market; and how long does the industry lag behind these indicators?
The AIA's Architectural Billings Index (ABI) is the most revealing indicator of current economic activity for the industry. While it is published as a diffusion index that tracks monthly variation in billings around a benchmark of 50, it can also be adjusted to reflect absolute monthly movement in billings (by calculating accumulative dispersion). In this form, it can be directly compared to broad economic indicators. The aim here is not to identify causal relationships, but to identify the strongest casual correlations.
Analyzed against economic factors ranging from the ordinary (employment data from the U.S. Bureau of Labor Statistics) to the unusual (the Equipment Leasing and Finance Association's Monthly Leasing and Finance Index) to the proprietary (various consumer confidence and property price indices), the ABI most strongly correlates with the volume of existing home sales (published by the National Association of Realtors). This is equally true whether country-wide ABI data is analyzed against national figures for home sales, or whether regional ABI data is compared with the corresponding regional home sales volume.
'This correlation makes perfect sense,' says Simpson. 'When the residential real estate market is strong, it indicates a high level of consumer confidence, a relatively low level of unemployment, flowing capital markets and freely-available financing, which is an ideal economic climate for architects.' It also makes sense that architectural commissions escalate commensurate with an increase in the number of people buying, selling and occupying real estate. 'Basically, there's a greater likelihood of someone wanting an architect to customize their newly-acquired asset than someone who's been sitting on the same property for 20 years,' says Simpson.
So while the industry responds to regional, national and global economic market variations, future volatility can be most accurately anticipated by looking at the sale of existing homes. But there's a considerable lag: an increase in home sales doesn't immediately correspond with an increase in architectural billings.
Why is this? Because the trickledown effect takes some time to percolate to the architecture industry. During the recent global downturn, architects waited patiently for lending and spending to dry up; budget deficits to increase; unemployment to rise; consumer confidence to decline; and global cash flows to stem. Conversely, they are now waiting for these conditions to reverse so that commercial and personal consumers once again invest in architecture.
The following diagram shows an example of the trickledown effect of broad economic gains on billings for the institutional, workplace and lifestyle sectors.
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The comparative analysis of ABI data shows that variations in architectural billings lag 12 – 18 months behind fluctuations in the volume of home sales. So even while home sales declined sharply in mid-2007, architectural billings continued to skyrocket until mid-2008. From then, architectural billings quickly tapered and started to plummet. This timeline is backed by the myriad reports of layoffs and fee reductions that started to dominate the architectural press toward the end of 2008.
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The AIA Architectural Billings Index lags 12 – 18 months behind existing home sales
It is also particularly marked that architectural billings respond more quickly to a decline in home sales (eliciting a 12 month response time) than to an uptick (around 18 months).
The correlation between existing home sales and the ABI data is statistically strong, including the correlations between regional ABI data and regional home sales reports. The following forecasts are based on the assumption that architectural billings will continue to track home sales, with a 12 – 18 month lead time.
Despite reports of recent modest gains, architectural billings on a national scale will continue to slip through most of 2011. However, the rate of decline will be slower than was experienced during 2009 and most of 2010. The continued weakening of the ABI will be catalyzed largely by high unemployment and the limited availability of financing. The institutional sector will be particularly affected, with little of the American Recovery and Reinvestment Act of 2009 remaining for disbursement to architects (92% of funds have already been made available).
The good news is that billings are scheduled to pick up sharply in the third quarter of 2011, when new projects are commissioned and deferred and de-prioritized projects put back on the drawing board. This strong increase in billings could even offset the net negative losses made during the first three quarters of 2011. Kermit Baker, Chief Economist of the AIA, predicts that non-residential construction (down 20% in 2010 from 2009) will pick up slightly by 5% in the coming year. And while residential construction was down 5% in 2010 from 2009, Baker forecasts an uptick of 10% in 2011.
Public spending will be particularly focused on the reinstatement of old projects instead of investment in new ones. An even stronger rebound in country-wide architectural billings is likely to occur if international currencies continue to strengthen against the U.S. dollar, which will incentivize investment in stateside real estate and construction.
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The AIA Architectural Billings Index will slip slightly in 1Q 2011 before rising sharply in 3Q 2011.
Northeast and Midwest
Architecture firms operating in the Northeast and Midwest have experienced an increase in month-over-month billings since August 2010. Steady and sustained growth will continue throughout 2011, helped by personal and commercial consumers who are expected to take advantage of eased credit markets, moderately priced property and a competitive construction market.
The large manufacturing belts and high concentration of Federal facilities in these regions are forecasted to stimulate demand for architects, and the strengthening of offshore currencies against the U.S. dollar is generally making investment in stateside construction comparatively more attractive. The Northeast will be particularly buoyed by retail investment – New York City has already seen big box retailers such as Costco and Nordstrom taking advantage of 100,000+ sq ft stores that had been vacated during the downturn.
South and West
Although transaction volume has picked up slightly since 2009, sales of existing homes remained weak throughout 2010 in the South and West. This bodes badly for architects. Business conditions will continue to deteriorate throughout the first quarter of 2011 in the West. Meanwhile, architects operating in the South can expect billings to decline month-over-month almost until 2012. The continued uncertainty over President Obama's health care overhaul has stemmed demand for institutional architecture and the regional demand for retail projects is much weaker than the Northeast.
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Industry Outlook 2011
The AIA's ABI provides an accurate snapshot of current business conditions. While typically used for evaluation and benchmarking, architects can also forecast future movement in the ABI by looking at the transactional volume of home sales as a leading indicator. This intelligence can be used constructively by architects to prepare more effectively for future changes in demand. Architects can use existing home sales as a leading indicator to ensure that precautionary and proactive measures are taken instead of reacting to fluctuations in billings.
Matthew Lynch is a Senior Consultant at Woods Bagot , a global design studio that allocates 2% of annual revenue to its research arm Public . Lynch has taught at Columbia University's GSAPP and contributes to Architectural Record, Urban Land, AIArchitect, Conditions Magazine and Archinect .