May ABI Moves Higher while Inflation Rises
Business conditions remained robust at architecture firms in May, as the Architecture Billings Index score climbed even higher. The score of 58.5 for the month―any score over 50 indicates billings growth― is one of the highest ever reported, and indicates that even more firms reported an increase in their billings in May than in April. In addition, significant work remains in the pipeline, with inquiries into new projects remaining very high, and the value of new design contracts rising further to a new all-time high in the 11-year history of that index. Although comments from survey respondents indicate some concern about the impact of inflation on building costs, those fears have not yet impacted the frenetic post-pandemic pace of work at most firms.
Architecture firm billings continued to expand at firms across the country in May as well, with all regions seeing billings growth for the third consecutive month. Conditions remained strongest at firms located in the Midwest, but were also robust at firms located in the sunbelt regions of the South and West. By firm specialization, firms that concentrate on commercial/industrial projects reported the strongest business conditions for the third consecutive month. Billings are also growing rapidly at firms with a multifamily residential specialization once again, following a modest decline early last winter.
Inflation concerns continue
As mentioned above, inflation remains an ongoing concern. The latest data from the Bureau of Labor Statistics shows that the Producer Price Index for final demand, a measure of inflation, increased by 0.8 percent in May, and is up by 6.6 percent from one year ago. The construction industry continues to see an even larger impact, with the PPI for materials and components for construction increasing by 3.9 percent in May alone, and by 17.0 percent from May 2020. While lumber prices have finally started to stabilize, steel prices are continuing to rise. Employment continues to grow at a steady pace though, with total nonfarm payroll employment adding 559,000 new jobs in May; that’s more than were added in April, but fewer than were added in March. Architectural services employment continued its steady rebound in April (the most recent data available), adding 1,100 new jobs, for a total of 4,100 new jobs added through the first four months of the year. Employment in the sector is now back to 2019 levels and is just 4,800 jobs below its pre-pandemic peak.
Renovation opportunities expand
Throughout the pandemic-induced downturn and subsequent recovery, AIA analysts have heard that a large portion of design work has been for renovations, rehabilitations, retrofits, additions, and historic preservation to existing facilities, versus new construction, so this month they asked survey respondents about what they have seen. Responding firms indicated that since the beginning of the year, slightly more than half of their firm’s billings have been from work on existing buildings, with 28 percent of firms indicating that this work has accounted for at least three-quarters of their billings during that period.
Due to older building stock in those regions, firms located in the Northeast and Midwest reported a much larger share of their billings from projects on existing buildings in contrast to firms located in the Midwest and West. Firms with an institutional specialization also reported a higher share of their billings from existing buildings, with nearly four in 10 firms reporting at least 75 percent of their billings from those projects in the last six months, versus 53 percent of billings for firms with a commercial/industrial specialization, and 46 percent of billings for firms with a multifamily residential specialization.
Firms in the Midwest and Northeast were also most likely to report that the share of billings at their firm from projects dealing with renovations, rehabilitations, retrofits, additions, and historic preservation to existing facilities has increased in 2021 compared to pre-pandemic levels, with 35 percent of firms in the Midwest and 34 percent of firms in the Northeast reporting an increase, versus 31 percent of firms overall. Firms with a commercial/industrial specialization were also more likely to report that the share of their billings from work on existing buildings had increased post-pandemic, with 36 percent of those firms reporting an increase versus just 28 percent of firms with a multifamily residential specialization, and 31 percent of firms with an institutional specialization.
Firms were also asked about changes to work on existing facilities in 2021 by specific building types. Manufacturing and distribution facilities were the building type that the largest share of firms reported an increase, with 41 percent indicating that work on existing facilities has increased this year. In addition, 34 percent of firms reported that work on existing correctional facilities has increased, followed by existing healthcare facilities, existing multifamily residential, existing K-12 education, and existing food service buildings. However, firms also reported that they have seen a decrease in the amount of work they’re doing on other types of existing facilities this year, with 41 percent reporting a decrease on existing retail facilities, 31 percent on existing lodging facilities, 29 percent on existing office facilities, and 27 percent on existing travel and tourism facilities.