ABI September 2023: Architecture Firm Billings Decline Sharply

Business conditions at architecture firms deteriorated in September. The AIA/Deltek Architecture Billings Index (ABI) score of 44.8 for the month is the lowest score reported since December 2020 during the height of the pandemic and indicates that the share of firms reporting declining billings has significantly increased. In addition, the value of newly-signed design contracts also slumped in September, indicating that there is increasing reluctance among clients to sign contracts committing to new projects. Although firms continued to report relatively robust backlogs of 6.5 months on average, they have shrunk by nearly a month since their peak of an average of 7.2 months in March 2022.

Declining billings were reported by firms in all regions of the country in September, with firms in the West continuing to report the softest business conditions, as has been the case for the last four months. Conditions also softened further at firms located in the South and Northeast, while billings declined at a slower pace at firms located in the Midwest. By firm specialization, billings were essentially flat at firms with an institutional specialization, while they declined further from August at firms with a commercial/industrial specialization and remained very soft at firms with a multifamily residential specialization, where billings have declined every month since August 2022.

Loss of architecture positions from July-August offsets gains seen so far this year

While overall national nonfarm payroll employment increased by a surprisingly strong 336,000 new positions in September, architectural services employment softened notably in August, the most recent data available. The industry shed 1,900 positions from July to August, offsetting most of the employment gains seen so far this year. In addition, small businesses are increasingly pessimistic about the economic outlook for the next six months, according to the National Federation of Small Business (NFIB) Small Business Optimism Index for September. That index declined in September to some of the lowest levels it has seen since 2012, following the Great Recession. Despite recent moderation in inflation, small businesses remain generally pessimistic about inflation, as well as labor shortages, higher financing costs, and reduced credit access. While the Federal Reserve held interest rates steady at their September meeting, they have indicated that there may still be more increases in the coming months, which has contributed to the ongoing uncertainty.

Technology use varies greatly by firm size

This month we asked firms about the adoption and implementation timetable of various architecture firm-related technologies with design and/or business applications at their firm. We also asked about their expectation of the potential for emerging construction-related technologies to be incorporated into construction processes over the next five years. Overall, more than three quarters of responding firm leaders (76%) reported that they’re already using BIM (building information modeling and technology) for ongoing projects, while nearly half (42%) are already using enterprise collaboration (a system of communication that makes it easier for employees to work together on key projects), and one third are using virtual/augmented reality/real-time rendering. Firms are generally interested in implementing additional types of technology over the next ten years, however, 58% of responding firm leaders indicated that they have no plans to implement additive manufacturing (3D printing) or big data/data science technology, while half have no plans to implement parametric design (an algorithm-based method merging the design intent with the design outcome) and 44% have no plans to implement artificial intelligence for firm operations applications (e.g., marketing, HR, strategic planning, finance/administration).

There are some significant differences in technology use by firm size, with large firms generally being more likely to report already using certain types of technology or planning to implement them in the near future. Notably, 94% of large firms with annual billings of $5 million or more are already using BIM, in contrast to 39% of small firms with annual billings of less than $250,000, while 62% of large firms are already using enterprise collaboration versus 15% of small firms, and half of large firms are using virtual/augmented reality/real-time rendering versus 18% of small firms. In addition, 29% of large firms are already using additive manufacturing (3D printing) and 26% are using parametric design, in comparison to hardly any small firms using those technologies, while one quarter of large firms are using mass timber designed projects versus 7% of small firms. And while few firms of any size are currently using AI technology, more than two thirds of large firms plan to implement AI for design-related applications in the next decade (with 45% planning to do so in the next two years), and 60% of large firms plan to implement AI for firm operations applications in the next decade (with 34% planning to do so in the next two years).

In terms of construction-related technologies, most responding firm leaders indicated that they believe that all are at least somewhat likely to be incorporated into construction processes over the next five years. More than three quarters (76%) believe that it is very likely that there will be increased use of offsite construction processes (e.g., prefabrication; modularization; preassembly; offsite multi-trade fabrication), while 61% think that it is very likely that drones/industrialized design (to improve productivity in the construction process) will be incorporated, and 57% think that it is very likely that enhanced construction materials will be incorporated. However, more than one third of responding firm leaders (34%) think that it is not very likely that autonomous vehicles will be incorporated into construction processes over the next five years, while 26% think that it is not very likely that wearable technologies will be incorporated, and 22% think that it is not very likely that robotics/automation will be incorporated.

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

“Nationally, business conditions remain about the as 2022. Locally, and in traditional larger metro areas, business conditions are spotty.”—63-person firm in the Midwest, institutional specialization
“We are okay because of one project that we won in 2019 that is finally getting started. If it were not for that project, we would have no work.”—5-person firm in the South, residential specialization
“Owners want to build, but inflation is wreaking havoc with financial proformas and forcing cost cutting measure on many commercial projects so that they can proceed.”—12-person firm in the Northeast, commercial/industrial specialization
“Good through the end of the year and the first quarter of next year with current backlog. We are expecting a slowdown in the first or second quarter of 2024.”—30-person firm in the West, institutional specialization

Save the date! Join Kermit Baker, AIA’s Chief Economist, on Thursday, October 19 at 2 PM ET to hear the next quarterly update of the industry’s latest economic data and what firms are reporting. Register for free at https://aiau.aia.org/courses/2023-economic-update-4