PRESS RELEASE
WASHINGTON – May 24, 2023 – Architecture firms reported a modest decrease in April billings. However, there was a slight increase in inquiries into future project activity according to a report released today from The American Institute of Architects (AIA).
Its monthly Architecture Billings Index (ABI) score for March decreased from 50.4 to 48.5 in April (any score below 50 indicates a decrease in firm billings). However, participating design firms reported that inquiries into new projects accelerated slightly to 53.9, while most firms continued to report a decline in the value of new design contracts, with a score of 49.8.
“The ongoing weakness in design activity at architecture firms reflects clients’ concerns regarding the economic outlook,” said AIA Chief Economist Kermit Baker, Hon. AIA, PhD. “High construction costs, extended project schedules, elevated interest rates, and growing difficulty in obtaining financing are all weighing on the construction market.”
Despite the recent softness in billings, many firms are cautiously optimistic about this year. As the construction market cools, construction costs and schedules are expected to ease, which may make some projects more feasible. In addition, firms will continue to be able to capitalize on opportunities related to green building and energy efficiency initiatives that have increased over the past few years, according to AIA.
Key ABI highlights for April include:
- Regional averages: Midwest (51.2); West (49.3); South (48.7); Northeast (47.2);
- Sector index breakdown: mixed practice (firms that do not have at least half of their billings in any one other category) (52.1); commercial/industrial (51.8); institutional (50.6); multi-family residential (41.5);
- Project inquiries index: 53.9;
- Design contracts index: 49.8.
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For the sixth consecutive month, only firms located in the Midwest saw billings growth in April. Business conditions remained sluggish at firms in other regions. By firm specialization, billings deteriorated further at firms focused on the multifamily residential market, reaching their lowest level since the height of the pandemic in 2020. On the other hand, firms with commercial/industrial and institutional specializations reported modest growth this month. However, some fluctuation in business conditions in all sectors is likely to continue over the coming months.
Interest rate hikes likely to pause
Recently there have been some encouraging signs in the broader economy as well. Although inflation remains elevated, the Consumer Price Index (CPI) rose by just 0.4% from March to April, and is currently up by 4.9% from one year ago – a still significant increase, but much lower than it was last summer. Notably, inflation in food prices has slowed recently, although gas prices have been increasing again. With the pace of inflation starting to slow, the Federal Reserve chose to raise interest rates by just 0.25 percentage points during their May meeting, to a current target range of 5.0-5.25%, and signaled that this may be their last increase for a while.
Strong job gains were cited as one of the reasons why the Federal Reserve may pause their recent increase in interest rates, and nonfarm payroll employment added an additional 253,000 new positions in April. In the architecture services sector, while payrolls have added a total of 3,500 new positions over the last year, employment levels in the industry have generally been flat for the last five months, hovering around 200,000 positions. While this is above the pre-pandemic level of positions, it remains well below the all time industry high prior to the Great Recession.
Firms reported strong profitability in 2022
This month we asked architecture firms about their firm’s profitability in 2022, and how they expect it to change this year. Responding firm leaders reported an average profitability of 10.7% in 2022, with more than half of firms (52%) reporting profitability of greater than 10%, and 12% reporting profitability of 25% or more. Large firms with annual billings of $5 million or more reported the highest profitability levels, averaging 14.8%, while firms located in the Northeast reported the lowest, at 7.6%. In addition, 14% of firms reported a loss for 2022, while an additional 2% reported profitability of 0%.
Overall, a majority of firms expect profitability in 2023 to be either about equal to 2022 levels (37%), or higher (36%). However, more than one quarter of firms (27%), expect their profitability this year to be below 2022 levels, with 8% expecting it to be significantly below 2022 levels. Likely because their profitability was lower in 2022, firms located in the Northeast are most likely to expect higher profitability this year, with nearly half (48%) projecting that it will be above 2022 levels.
When asked about the impact of various factors on their firm’s estimated profitability through the end of this year, firm leaders were most concerned about the potential negative impact of delayed, stalled, and cancelled projects, staff shortages, and supply chain issues and contractor labor shortages. Staff quality and firm morale and culture were most commonly selected as the factors likely to have a very positive impact on firm profitability.
Overall, when firms were asked to select the top three factors that they feel are likely to have a very or somewhat negative impact on their firm’s profitability this year, staff shortages affecting their firm’s ability to meet deadlines and take on new projects and the number of projects that are delayed, stalled, or cancelled were the top two factors selected (by 33% and 31% of firms, respectively), followed by staff compensation levels (28%), extended project schedules due to supply chain problems and/or contractor labor shortages (26%), and firm overhead costs (e.g., rent, healthcare, insurance) (24%). Of the factors that firms selected as one of their top three most likely to have a very or somewhat positive impact on their firm’s profitability this year, firm morale and firm culture (31%) and quality of staff (29%) were the top two factors, followed by level of fees negotiated (22%), and marketing and business development activities, and their impact on the number and/or quality of new projects that their firm was able to attract (20%).
This month, Work-on-the-Boards participants are saying:
- “We have a lot of healthcare projects on hold awaiting funding or cost reductions to align project scope to budget available.”— 150-person firm in the Midwest, institutional specialization
- “Due to labor and material costs, many projects are stopped or canceled. We foresee this trend continuing in our area, which is underserved in the number of available qualified contractors.”—8-person firm in the Northeast, commercial/industrial specialization
- “Pretty neutral. Growth is slowing substantially with the banking crisis.”—42-person firm in the West, mixed specialization
- “Definitely slowing due to funding and delays on owners’ side.”—23-person firm in the South, residential specialization.
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Visit AIA’s website for detailed information about this, and past billing index reports.
About AIA
Founded in 1857, AIA consistently works to create more valuable, healthy, secure, and sustainable buildings, neighborhoods, and communities. Through more than 200 international, state, and local chapters, AIA advocates for public policies that promote economic vitality and public wellbeing.
AIA provides members with tools and resources to assist them in their careers and business as well as engaging civic and government leaders and the public to find solutions to pressing issues facing our communities, institutions, nation, and world. Members adhere to a code of ethics and conduct to ensure the highest professional standards.
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Tim Trudell, [email protected]