ABI September 2024: Architecture firm billings remain soft

Architecture firm billings worsened in September. 

The AIA/Deltek Architecture Billings Index (ABI) score was 45.7 for the month, as the majority of firms continued to report declining billings.

Despite recently announced rate cuts by the Federal Reserve, clients are still cautious about future projects. Inquiries into potential new projects continued to increase, but the pace has slowed since the beginning of the year. And the value of newly signed design contracts at firms decreased for the sixth consecutive month in September, although the pace of that decline has moderated somewhat over the last few months. However, firms continue to report average backlogs of 6.4 months, which remains above pre-pandemic historical averages and is a good indicator of existing work in the pipeline, even if new work coming in has slowed.

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Conditions remained soft across the country as well in September. Billings were softest at firms located in the West for the third consecutive month, followed by firms located in the Midwest. Business conditions may be close to turning positive at firms located in the South, though, where they only declined slightly this month. By firm specialization, firms with a multifamily residential specialization saw billings soften further in September, while billings also remained fairly weak at firms with a commercial/industrial specialization. Although billings continued to decline at firms with an institutional specialization as well, the pace of that decline remained more modest than at firms of other specializations, which has been the case since the beginning of the summer.

Interest rates and inflation are down

Conditions generally continue to improve in the broader economy. Nonfarm payroll employment grew by 254,000 new positions in September, surpassing expectations. Growth was particularly strong in construction, where 25,000 new positions were added, including 17,000 nonresidential specialty trade contractors. However, architectural services employment continued to soften, declining by 1,300 positions from July to August (the most current data available). Employment in the sector is now down by 4,700 positions from its post-pandemic peak of 208,300 in July 2023.

The overall economic outlook continues to improve, though, with inflation continuing to decline and the Federal Reserve starting to lower interest rates. The Consumer Price Index (CPI) increased by just 0.2% from August to September and was up 2.4% from the previous year, nearly reaching the Federal Reserve’s target of 2%. The Federal Reserve lowered interest rates by 50 basis points at their September meeting and are predicting two additional reductions of 25 basis points each before the end of the year, which should begin to ramp up business that was on hold awaiting that decline.

Most firms report that reconstruction projects have increased or held steady in recent years

This month, we asked architecture firm leaders about recent work on reconstruction projects at their firm (e.g., renovations, retrofits, rehabilitations, alterations, additions, and historic preservation). Overall, 39% of responding firm leaders reported that total building design billings at their firm for reconstruction projects (as opposed to design work for new structures) has increased at their firm over the past few years, with 14% reporting that that share has increased significantly. Just 10% of firm leaders reported that the share has declined, while 49% said it has remained about the same (the remaining 2% of respondents indicated that they don’t do reconstruction work). Firms located in the Northeast and Midwest were most likely to report an increase in reconstruction projects (43% of firms in each region versus 36% of firms in both the Midwest and South regions), as were firms with institutional (41%) and multifamily residential (39%) specializations (in contrast to 34% of firms with a commercial/industrial specialization).

Firms that do reconstruction work reported a wide variety of principal goals for undertaking reconstruction projects in recent years. Two-thirds of firms cited basic updating and modernization of the building interior as a principal goal, followed by 64% that selected adaptive reuse or building conversion, 58% that selected tenant fit-outs, 56% that selected upgrades to basic building systems (e.g., HVAC, lighting), and 54% that selected upgrades to building shell (roof, facade, windows/doors, entrances). There were some variations in responses by region of the country, with the largest share of firms in the Northeast (70%) and South (61%) selecting adaptive reuse or building conversion as one of the principal goals of recent reconstruction projects. In comparison, the largest share of firms located in the Midwest (76%) and West (64%) selected basic updating and modernization of the building interior. However, there was even greater variation by firm specialization, given the unique needs of different building types. 85% of firms with a commercial/industrial specialization selected tenant fit-outs as a principal goal of recent reconstruction projects, while 74% of firms with an institutional specialization selected upgrades to basic building systems (e.g., HVAC, lighting), and 73% of firms with a multifamily residential specialization selected basic updating and modernization of the building interior.

Finally, firms were asked which building elements/systems were typically replaced and/or upgraded in the reconstruction projects they have undertaken over the past few years. Nearly all firms reported that interior replacements or upgrades (flooring/walls/ceilings) (89%), lighting (87%), and HVAC/mechanical (85%) systems were replaced/upgraded, while more than two-thirds reported that exterior replacements or upgrades (roofing/windows/glazing/facades/cladding) were involved. Finally, 44% of firms reported that insulation was replaced or upgraded, 41% that building automation/control systems were replaced/upgraded, and 27% that moisture control systems were replaced/upgraded.
 

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This month, Work-on-the-Boards participants are saying:

• “Just can’t seem to get the dam to break on getting new agreements signed for the larger projects. We are hopeful that the interest rate cuts will begin to allow more projects to be greenlighted.”—171-person firm in the West, commercial/industrial specialization
• “Our firm is busy with a large design-build project, but less volume of new work is seen moving forward.”—100-person firm in the Northeast, institutional specialization
• “A lot of developers seem to be gearing up for June/July 2025 construction starts.”—40-person firm in the Midwest, residential specialization
• “Our backlog is substantial enough to be impeding our ability to take on new work. We have been unsuccessful in expanding our staff and have been reluctant to outsource any work due to concerns about maintaining our design and quality control.”—6-person firm in the South, mixed specialization