Welcome to the first of Archinect's new monthly series, 'State of AEC.' At the end of each month, we will guide you through the latest analyses, indexes, and trends on how the architecture and construction industries are performing economically.
As we approach the midway point of 2024, data on the economic performance of the AEC sector suggests a subtle divergence between design and construction services. While the AIA's Architecture Billings Index shows a nine-month-long decline in billings within U.S. firms, construction starts are on the rise, albeit hampered by minor decreases in construction spending and increases in construction costs.
What unites all sides of the industry, however, are concerns over interest rates. While some held out hope that interest rates may fall from their 5.5% level at the beginning of May, no such fall materialized. As a result, analysts in the architecture and project planning sector note that clients have become hesitant to commit to new design projects, while analysts on the construction side worry that the continued increase in construction input prices, a symptom of inflation, is acting as a deterrent for interest rates falling.
Read our full roundup of the month's economic and business figures below. There is also one week left to share with us how work feels for you at the moment through our survey here. Keep a look out for the survey results in the coming weeks!
Design and Planning
The latest AIA Architecture Billings Index (ABI), covering April, found that billings are continuing to decline at a majority of firms, though not as significantly as the month before. The index score of 48.3 indicates that slightly more firms reported a decline in billings in the previous month than reported an increase. While billings declined, firms are continuing to see an increase in new inquiries, as they have done for the past year. The dollar value of new contracts signed has decreased, however, with marginally more architecture firms saying that contract values declined last month.
“Firms had hoped that the Federal Reserve would start lowering interest rates this spring and that would open new work, but with that decrease now likely on hold until late summer or early fall, firms may have some more slow months ahead of them,” the AIA said about their latest findings, noting that clients remain hesitant to commit to new work. Despite hopes that the Federal Reserve would lower interest rates at the beginning of the month, rates have remained at 5.5%.
As national conditions deteriorate, the ABI also found there to be a minor increase in the number of firms involved in international projects, with 9% of firms reporting international billings as opposed to 7-8% across 2023. At such firms, just over 9% of billings come from international projects, with 43% of firms reporting work from Canada, 27% from Central America and the Caribbean, 23% from the Middle East and North Africa, and 20% from Western Europe, excluding the UK.
Elsewhere, the latest Dodge Momentum Index, which measures the value of nonresidential building projects going into planning, saw a 6.1% increase on the previous month. While the value of such projects has been in a gentle decline since the beginning of the year, the overall trend has been an increase in nonresidential planning over the past year.
“Across these industries, it’s likely that owners and developers are grappling with uncertainty around interest rates and lending standards, thus delaying their decisions to push projects into the planning queue,” Dodge Construction Network’s Sarah Martin noted. “If interest rates begin to tick down in the latter half of 2024, more substantive growth in nonresidential planning activity should follow.”
Construction
Overall, total construction starts across the United States rose 6% last month, according to Dodge Construction Network. Since the beginning of the year, construction starts are up 13%, while over the past 12 months, construction starts are up 2%.
“The rebound in starts in April was certainly good news for the sector,” said Dodge’s Richard Branch about the trends. “While the uncertain timing of Fed interest rates cuts is causing concern, developers and owners are feeling reasonably confident that end-market demand will sustain project starts in some sectors. While risk remains in the sector for interest rates, labor, and material prices the value of projects in planning has been reasonably stable indicating future confidence.”
While more construction activity got underway last month, the cost of construction also marginally increased. Data from the U.S. Bureau of Labor Statistics showed that construction input prices increased 0.5%, with declines in iron, steel, and gypsum offset by substantial increases in oil (10.6%) and copper (5.6%).
“Rising input prices will put pressure on profits at a time when nearly 1 in 4 contractors expect their margins to contract over the next two quarters, according to ABC’s Construction Confidence Index,” the Associated Builders and Contractors Chief Economist Anirban Basu warned, before further cautioning that the demand is “yet another sign that inflation is accelerating and suggests that interest rates are set to stay higher for longer.”
Elsewhere, project abandonments are increasing across the United States with Delayed Bid, On Hold, and Abandoned activity increasing by 4%, 7%, and -6%, respectively over the past months. The number of abandoned projects in the public sector is now up 44% on this time last year.
Despite the increase in public sector projects being abandoned, there has also been a significant (17.9%) increase in public nonresidential construction spending over the past year. ABC’s Basu credits the rise for an overall 9.6% increase in total construction spending over the past twelve months, including a 13.7% increase in total nonresidential construction spending.
“Ongoing spending strength, driven by both the public sector and the ascendant manufacturing category, continues to support healthy backlog for contractors, according to ABC’s Construction Backlog Indicator,” Basu added.
While the uncertain timing of Fed interest rates cuts is causing concern, developers and owners are feeling reasonably confident that end-market demand will sustain project starts in some sectors. — Richard Branch, Dodge Construction Network
Northeast
Architecture firms in the Northeast told to the AIA ABI that business conditions are weakening, a trend that has existed for the past twelve months.
Total construction starts in the Northeast increased last month, according to Dodge Construction Network, while U.S. Census data shows that residential permits granted declined marginally by 2% on last month.
Midwest
According to the ABI, business conditions in architecture firms in the Midwest are in decline, with the rate of decline continuing to accelerate every month since the beginning of 2024. Of the four U.S. regions, the Midwest reported the fastest rate of decline in business conditions in the past month.
Total construction starts in the Midwest increased last month, according to Dodge Construction Network, while U.S. Census data shows that residential permits granted rose marginally by 1.8% on last month.
West
Firms in the West region have seen a continuing decline in business conditions in the ABI, though at not as fast a rate as was seen in the middle of 2023. At the moment, the West is displaying the healthiest trend in architecture business conditions of all four U.S. regions despite the continuing weakening and despite the fact that the West has now seen the longest duration of decline of any region, at 19 consecutive months.
Total construction starts in the West increased last month, according to Dodge Construction Network, while U.S. Census data shows that residential permits granted declined significantly by 8.6% on last month.
South
Firms in the South region have continued a 12-month trend of reporting that business conditions have worsened on the previous month according to the ABI, with business conditions in the South now only marginally healthier than in the Midwest.
Total construction starts in the South increased last month, according to Dodge Construction Network, while U.S. Census data shows that residential permits granted rose significantly by 15% on last month.
While billings declined, firms are continuing to see an increase in new inquiries, as they have done for the past year. The dollar value of new contracts signed has decreased, however, with marginally more architecture firms saying that contract values declined last month.
Residential
According to the ABI, firms specializing in multifamily residential projects have continued to see a decline in billings. In fact, such firms have not reported an increase in billings from the previous month since August 2022.
On the construction side, the number of residential starts fell by 1% according to Dodge Construction Network. On a year-to-year basis, however, residential starts are up 22% from the first four months of 2023. Total residential spending is also 4.5% higher than it was one year ago, though falling by a marginal 0.7% over the last month.
Digging deeper into the residential sector, single-family starts fell 7% according to Dodge, while multifamily starts increased by 13%. Over the past twelve months, single-family starts have risen 10% versus the previous twelve-month period, although multifamily starts were 7% lower.
Commercial/Industrial
Firms specializing in major non-residential sectors have reported a decline in billings on the previous month. According to the ABI, firms specializing in commercial/industrial projects continue to see a deterioration in billings despite the rate of such decline slowing over the past two months. The last time such firms reported an increase in billings on the previous month was July 2023.
Despite a decline in billings for commercial projects, the value of commercial projects currently in planning has risen by 12.6% on last month, according to the Dodge Momentum Index, with the value of such projects up 6% on this time last year. “Outsized demand to build Cloud and AI infrastructure is supporting above-average activity in the sector,” Dodge Construction Network’s Sarah Martin noted, explaining that an increase in demand for new data center projects is propelling the commercial planning statistics.
In construction, commercial starts are down 1% on last month, attributed by Dodge Construction Network to a decline in parking and warehouse projects. Meanwhile, industrial projects have more than doubled in the last month. However, for the 12 months ending in April 2024, commercial starts are down 13% than the previous 12 months, with industrial starts being down 31%.
Institutional
Firms specializing in institutional projects continue to report a decline in billings, according to the ABI, with the rate of decline accelerating for the last three months in a row. Such firms have reported a decline in billings almost every month since July 2023, with the sole exception of January 2024, where billings were stagnant on the previous month.
In addition to a decline in billings, there has been a decline in the value of institutional projects currently being planned. the Dodge Momentum Index reports that the value of planned institutional projects has dropped 6.3%, while the value of such projects is down 15% on this time last year.
In construction, institutional starts rose 16% in April, according to Dodge Construction Network, attributed to increases in healthcare and transportation projects. For the 12 months ending in April 2024, institutional starts are up 9% from the previous 12 months.
“RFPs have been slow,” a 120-person firm in the Northeast specializing in institutional projects told the AIA via their Work on the Boards survey. “Escalation and interest rates are the big factor. We’ve been fortunate to have won some big projects in the fall of 2023 that will carry our year.” Meanwhile, a 29-person firm in the South specializing in residential projects told the AIA that conditions were “not good at all. For the first time since 2008 we are considering layoffs.”
“We continue to be flat in terms of billings and new project development,” a 17-person firm in the Midwest with mixed specialization told the AIA. “We are also seeing a slowdown on the general contractor and subcontractor side and are fielding numerous calls for work from those groups.” Elsewhere, a 45-person firm in the West specializing in commercial and industrial projects told the AIA that the “market appears to be a little more active in the last three months.”
Share your own experiences of the AEC sector in the comments section below. When doing so, please tell us which U.S. Census region you are based in (Northeast/Midwest/West/South) and the size of your firm.
Finally, our survey of how architects are finding work and business at the moment is closing this week. Share your experiences with us here, and keep a look out for the results in the coming weeks.
Niall Patrick Walsh is an architect and journalist, living in Belfast, Ireland. He writes feature articles for Archinect and leads the Archinect In-Depth series. He is also a licensed architect in the UK and Ireland, having previously worked at BDP, one of the largest design + ...
No Comments
Block this user
Are you sure you want to block this user and hide all related comments throughout the site?
Archinect
This is your first comment on Archinect. Your comment will be visible once approved.