ABI May 2022: Business conditions at architecture firms remain strong despite economic headwinds
Architecture firms continued to report strong business conditions in May, despite increasing headwinds in the economy. While the Architecture Billings Index (ABI) score of 53.5 for the month means that fewer firms reported an increase in billings in May than in April (when the score was 56.5), the majority of firms reported billings growth for the 16th consecutive month. In addition, both inquiries into new projects and the value of new design contracts ticked up this month, indicating that there is still both strong interest in new projects and a substantial number of projects in the pipeline for which contracts have already been signed.
Business conditions also improved at firms in all regions of the country for the second consecutive month in May, with firms in the Northeast continuing to report modest growth after seven straight months of declining billings. Business conditions remained strongest at firms located in the West, followed by firms located in the Midwest. By firm specialization, while billings continued to increase at a steady clip at firms with a multifamily residential specialization, the pace of growth has slowed somewhat in recent months. Firms with a commercial/industrial specialization are still seeing the strongest conditions overall, as has been the case for much of the last year, while billings growth remained more modest at firms with an institutional specialization.
Architecture employment remains flat as inflation soars
In the larger economy, inflation remains a critical issue. The Consumer Price Index (CPI), a measure of inflation, increase by 1% in May, and has now increased by 8.6% from one year ago. Gas prices alone increased by 4.1% this month, while grocery prices increased by 1.4%. In addition, core services inflation increased as well in May, most notably in airfares, which have now increased by 36.8% from one year ago, with the majority of those increases coming in the last few months. In an attempt to manage this rising inflation, the Federal Reserve raised interest rates by a whopping 0.75% on June 15, the largest increase in nearly 30 years. This comes on the heels of an increase of 0.5% in May, and all signs point to more increases later this year.
Nonfarm payroll employment continued to rise at a steady pace in May, as 390,000 new jobs were added. Total nonfarm payroll employment is now just 0.5% below its pre-pandemic peak, and the ongoing tightness in the labor market means that it should surpass that level soon. Architecture services employment data lags national employment data by a month, and in April, the industry actually declined by 400 employees. In fact, employment in the sector has generally been flat since January, when 2,000 new jobs were added.
Institutional projects most likely to see an increase in those designed to meet a rating system in the coming years
For this month’s special practice questions, we asked firm leaders about projects at their firm that are designed to meet a rating system, like LEED v4, WELL, and/or Energy Star. Overall, responding firms indicated that approximately 17% of their firm’s projects over the past year were designed to meet a rating system. This share was higher at firms located in the West, as well as at large firms with annual billings of $5 million or more, which reported that 20% and 25% of their projects, respectively, were designed to meet a rating system. On the other hand, firms with a commercial/industrial specialization reported that just 8% of their projects met these criteria, in contrast to 20% of firms with a multifamily residential specialization and 21% of firms with an institutional specialization.
Looking to the future, just over half of responding firms (51%) indicated that they expect the share of projects at their firm designed to meet a rating system, like LEED v4, WELL, and/or Energy Star, will remain about the same as it is today over the next few years. However, more than one third of firms (36%) expect that that share will increase, in contrast to just 13% that expect that share will decrease. Of the firms that expect an increase, 6% expect that the share will increase a lot, and 30% expect that it will increase a little. Large firms with annual billings of $5 million or more and firms located in the Northeast were most likely to foresee an increase in the coming years, with 43% and 46%, respectively, expecting those conditions.
Firms were also asked about how they expect the share of projects at their firm that are designed to meet a rating system, like LEED v4, WELL, and/or Energy Star, to change over the next few years. The largest share of respondents, 52%, indicated that they expect the share of education projects designed to meet a rating system to increase over the next few years, followed by 50% that expect the share of healthcare projects designed to meet a rating system to increase. In addition, 42% expect the share of multifamily residential projects designed to meet a rating system to increase, while 39% expect the share of office projects to increase. The least likely project types for which respondents expect the share designed to meet a rating system to increase over the next few years were religious, industrial, amusement/recreation, and retail projects.
This month, Work-on-the-Boards participants are saying:
“Conditions are busy; being careful about what we can take on. Looking for more staff or other workshare opportunities.”— 39-person firm in the West, institutional specialization
“Solid backlog for several months, but construction market and supply chain conditions may cause some reduction.”—60-person firm in the Northeast, mixed specialization
“Even though we have reduced the number of RFPs that we respond to, our new project opportunities have not reduced, because we are getting direct invitations from clients. It is putting a great deal of pressure on our staff.”—180-person firm in the Midwest, mixed specialization
“Best ever business conditions for new projects, but all new projects are going into a long-term backlog.”—3-person firm in the South, commercial/industrial specialization