After architecture firms experienced their first decline in billings in nearly two years in October, business conditions softened further in November, as the AIA’s Architecture Billings Index score fell to 46.6 (any score below 50 indicates a decline in firm billings). While inquiries into new projects continued to rise modestly, the value of new design contracts also declined further in November. This indicates that not only are firms seeing a decline in current work, but that less new work is entering the pipeline as well.
Business conditions also softened in nearly all regions of the country in November. Only firms located in the South, where firms have seen some of the strongest growth throughout the post-pandemic period, reported a small increase in billings. Firms in the Northeast have seen the largest decline in billings so far, and only experienced a few months of growth earlier this year before returning to negative territory. Firms of all specializations also saw weaker business conditions this month, including those with an institutional specialization, where conditions had been fairly robust recently.
In the broader economy, there are signs of concern as well. In the Nov. 30 edition of the Federal Reserve’s Beige Book report, which covered conditions in the previous six weeks, economic activity was reported as being largely flat across much of the country, or expanding with a slower pace of growth than in recent months. In addition, there was more pessimism about the overall economic outlook, given the ongoing impact of inflation and higher interest rates. In particular, interest rates had a large impact on home sales in areas like the Atlanta, St. Louis, Dallas and San Francisco Districts. Both residential and nonresidential construction declined in most areas, although nonresidential construction declined at a slower pace. In addition, tightening credit standards have led to declines in bank lending, which may also have an impact on construction in the coming months.
But companies are largely still hiring. Nonfarm payroll employment added an additional 263,000 new jobs in November, and construction employment grew by 20,000 employees, 8,000 of which were hired for nonresidential building construction. However, architecture services sector employment declined for the second month in a row in October (the most recent data available), shedding an additional 300 positions, for a total decline of 800 positions over the last two months.
When asked about their expectations and concerns for the coming year, despite the downturn in billings, firm leaders remained largely optimistic about 2023, with 63% expecting it to be a good to great year for their firm. Just 16% expect it to be a challenging or disastrous year, while 21% think that it will be a more mixed, or so-so year. However, some firms were more concerned. One quarter of firms located in the Northeast, and 25% of firms with annual billings of less than $1 million, expect 2023 to be challenging or disastrous. On the other hand, 68% of firms located in the Midwest, and 70% of firms with annual billings of $1 million or more, expect a good or great 2023.
The overall list of the top business concerns for the coming year for architecture firms is largely the same for 2023 as it was for 2022. Coping with volatile construction/building materials costs and availability and increasing firm profitability remained the top two issues, selected by 26% and 25% of responding firms, respectively. Increasing profitability is almost always one of the top concerns for firm leaders, regardless of what else is occurring in the economy at that time. Following those two concerns are ones about staffing: 20% indicated that finding candidates to fill key positions at their firm is one of their biggest concerns for 2023, while 17% selected filling open staff positions, and 10% selected retaining current staff. Issues related to running their firm were also high on the list, notably dealing with ownership transition issues, and managing the cost of running the firm/maintaining competitive salaries. And while 48% of responding firm leaders indicated that increasing the long-term commitment of younger staff to the profession is a major issue, just 6% selected it as one of their top concerns for 2023.
While there were some firms that indicated that issues like increasing firm work on existing buildings and implementing new project delivery methods are a major concern at their firm for the coming year, fewer than 1% of respondents selected those issues as one of their top concerns for the coming year. In addition, more than 60% of respondents indicated that issues like managing possible merger and acquisition activity and managing a portion of the workforce that stays remote permanently are not a concern at all at their firms.
