The AIA/Deltek’s latest Architecture Billings Index (ABI) for the month of March has posted a decline to a score of 43.6. The new figures indicate a reversal of February’s “most modest easing.”
The AIA says: "This shows that clients are interested in starting new projects but remain hesitant to sign a contract and officially commit to those projects. However, most firms report that they still have strong project backlogs of 6.6 months, on average, so even with the ongoing soft patch, they still have work in the pipeline."
There were a number of revealing statistics included in the ABI report, which recorded responses from a special practice questions survey, including (among others) the ease at which design contracts are being negotiated when compared to the experiences of firm leaders within the industry just 4 to 5 years ago. 46% now report having a "more challenging" time negotiating their design fees versus the pre-pandemic time period, with another 14% saying that it was "much more" difficult and another 32% confirming it was at least "somewhat more challenging."
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12 Comments
Don't understand the rationale behind the headline - "declines significantly due to inflation and supply chain issues"? Inflation has decreased and slowed significantly over the past year while supply chain issues have been mostly overcome months ago. How is this causing such a dramatic one month drop in billings?
Sounds like a BS title to me. Not a single client I have heard talk about inflation or supply chain in the past 4ish months. Reality is all developers and clients are just being fiscally conservative or trying to engage designers in a fee war. Reports have shown inflation prices for input supply are back to normal but everyone is keeping their prices still well above but just taking more profit.
The headline of this article is directly referencing the findings from this latest ABI report from the AIA, "This marked the 14th consecutive month of declining billings at firms as inflation, supply chain issues, and other economic challenges continue to affect business."
"The outlook for the construction market in 2024 is decidedly mixed as contractors predict transitions in demand for projects, the challenges they will face and the types of technology they will embrace. Amid these changes, however, contractors are still struggling to cope with significant labor shortages, the impacts of higher interest rates and costs and a supply chain that, while better, is still far from normal." - AGC
It's interest rates. That AIA is still saying inflation and supply chain issues is pretty worrisome.
Better from the AGC
"Despite the flow of public funds, market uncertainty will likely influence various aspects of construction projects in the nonresidential segment. Project deliveries may be delayed due to financing challenges and disruptions in the supply chain. Margins could diminish as the cost of materials and labor fluctuates in response to economic uncertainty." - Deloitte
Interest rates and inflation are very much related.
They are, but at this point the Fed has managed to bring down inflation by a significant amount without causing massive unemployment and triggering a hard landing/recession. 3.5% inflation is more easily swallowed today than 5.33% base interest rate, when you compare it to previous years. I'll agree though that we probably got a little too used to extremely low interest rates in some of those previous years and are feeling the effects now when 5.33% feels like too much. If anything I think it's the expectation that interest should be lower that is still the reason the ABI is below 50 and not that people are worried about inflation and supply chain issues.
Because it is really all relative to previous rates. If I bought a house at at 1% rate,
*years ago, and sell it to buy another house I’d be at a much higher rate. Being that home sale prices haven’t come down, that’s a stupid thing to do right now. Why would anyone get out of a low rate to get into a much higher rate. It eats into any equity you may have.
Meant to write 3% not 1%. Anyway it doesn’t matter what rates were in the 60’s or 70’s. What matters is what the rates were when you bought your last house vs what they are now, and most people bought their homes during a period of low rates.
I see a lot of discussion about interest rates and supply chains. That is not the only thing that has changed in recent years. The whole landscape of society has changed, with pending wars, high political tensions and massively changing demographics, I think it's fair to say that there are other contributing factors that may actually be in the forefront. This along with significant, unpredictable and dramatic changes in the financial, social and legal arenas make it increasingly difficult for developers to convince themselves that this is a good time to be taking big swings at real estate development.
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