Wednesday, October 16, 2013

With August Gains (in the AIA’s ABI Index), Nearly a Year of Steady Non-Residential Billings Growth

(But), "Progress is tempered by disappointing housing starts and a broader economy that is still underperforming"

A week or two after the AIA released the August ABI Index score (which the AIA did on September 18th), Kermit Baker, the Chief Economist of the AIA, weighed in with his commentary.  That’s what this blog-post brings you, his commentary.

August showed further improvement in billings at U.S. architecture firms. The Architecture Billings Index (ABI) score of 53.8 for the month reflected the strongest growth in activity in six months, and marked the twelfth time in the past 13 months that design activity has increased nationally. The strength in recent readings in the ABI, coupled with the extended period that architecture firms have been reporting generally favorable conditions, points to an impending healthy upturn in nonresidential activity. This view is shared by the recently released results from the AIA’s Consensus Construction Forecast Survey, which points to nonresidential construction spending picking up in the coming quarter and accelerating through 2014.
Regional design activity remained healthy in August, with preliminary ABI scores ranging from 51.9 at firms in the South to 54.8 in the West. The trend is particularly heartening for firms in the Midwest, which reported their second straight monthly increase after three consecutive months of decline. By sector, firms specializing in commercial/industrial facilities reported the strongest ABI scores for the second straight month, as residential firms have been reporting slower growth in design activity. Institutional firms have reported 13 straight months of billings gains, although the growth remains extremely modest.
The Fed holds steady
However, the broader economy continues to underperform compared to expectations. The GDP is averaging less than 2 percent growth on an annual basis through the first half of the year and is not expected to do significantly better for the year as a whole. National payroll gains totaled 169,000 on net in August, averaging a meager 180,000 net new payroll positions per month for the first eight months of 2013. As a result, overall payrolls are still almost two million below their level at the end of 2007, when the Great Recession began.
This may be the principal reason why the Federal Reserve Board decided not to cut back on its high-profile bond buying program. With economic growth below expectations, and inflation not yet an issue, they apparently felt that continued monetary stimulus at current levels was still warranted. Among other things, this action should slow some of the upward momentum in fixed-rate mortgages, which had climbed more than a full percentage point since the beginning of the year.
Whether due to rising mortgage rates or other factors, the national housing recovery seems to have stalled in recent months. After increasing 28 percent last year, and continuing to rise in the first quarter of this year, housing starts have flattened out in recent months. The number of starts in August (891,000) was 7 percent below the average starts level for the first quarter, and only 3 percent above the disappointing second-quarter levels. The slowdown has affected multifamily construction more than single-family homes. However, even though construction levels have stalled in recent months, average prices for new homes continue to trend up, suggesting that consumer demand remains at healthy levels.
Buildings designed, but not built
During the past economic downturn, architecture firms reported an increase in project delays and cancellations after design work had begun. Frequently, this was the result of difficulties in obtaining financing for a project, but often it just reflected general uncertainty with the economic viability of a project—uncertainty that was changing very rapidly as conditions were shifting.
Overall, architectural firms reported that almost 12 percent of their billings over the past few years were from projects that were cancelled after design activity began. For almost a quarter of all firms, billings from unbuilt projects totaled 15 percent or more of their design billings.
Smaller firms were more likely to have a higher share of billings from projects that were abandoned or are unlikely to ever be built. Almost 42 percent of firms with annual revenue under $250,000 reported that at least 15 percent of their billings have come from these projects. That share drops to under 15 percent for firms with annual billings in excess of $5 million. Residential firms reported high shares of billings from unbuilt projects, while institutional firms reported lower-than-average shares. Firms in the West reported higher shares, while firms in the Midwest reported relatively low shares.
Overall, almost half of firms indicated that the share of billings from unbuilt projects increased compared to pre-recession levels, while only 12 percent estimated that they had decreased. The rest reported that this share had reminded relatively constant.
This month, Work-On-The-Boards participants are saying:
   The correctional market is strong in California. Judicial projects will come back in 2014, with some projects possibly becoming active in the last quarter of 2013.
—180-person firm in the West, institutional specialization

• We are seeing more projects from not-for-profit groups. The stronger business climate is helping with fundraising for these needed cultural and humanitarian projects, which have not been built over the past four years.
—Nine-person firm in the Midwest, commercial/industrial specialization

• Healthcare projects—the only really healthy market in our region—have slowed dramatically over the last couple of months. Other markets are flush with minor studies, but not a lot of real design or construction.
—16-person firm in the Northeast, institutional specialization

• We are really busy designing projects in the proposal phase. Clients have come to expect so much more free work in proposals than before the recession. - 95-person firm in the South, mixed specialization

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