Business Conditions at Architecture Firms Remained Soft to Close Out 2023

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Business conditions at architecture firms remained soft to close out 2023, with an AIA/Deltek Architecture Billings Index (ABI) score of 45.4 for December (any score below 50 indicates declining billings).

Billings at firms declined for eight months of the year, with the only growth coming in some spring and summer months. However, clients largely remained interested in at least discussing potential new projects, since inquiries increased every month of the year except one, according to AIA.

The value of new design contracts increased for only six months of the year, indicating that while clients were interested in new projects, they were generally less likely to commit to them by signing a contract. In addition, backlogs at firms remained quite strong throughout 2023, despite declining from a record-high peak in 2022. Backlogs at firms stood at an average of 6.7 months in December, indicating that most firms still have a significant amount of work in the pipeline.

Firm billings declined at firms in all regions of the country except the Midwest in December, where billings were essentially flat. Billings declined for all or nearly all months of 2023 at firms located in the West and Northeast. Firms in the South saw growth in the second quarter but otherwise declined.

Only firms located in the Midwest reported increasing billings for most of the year, although conditions also softened there by late summer. Business conditions were also weak for most of the year at firms of all specializations, with firms with a multifamily residential specialization experiencing a particularly challenging year. Firms with an institutional specialization reported growth in the second quarter, but billings softened for them as well by the end of the year. Billings were flat throughout much of the year at firms with a commercial/industrial specialization and remained soft to end the year.

Architecture employment sees modest gains

In the broader economy, conditions generally ended the year on a positive note. Nonfarm payroll employment added 216,000 new jobs in December, for a total of 2.7 million new jobs added in 2023. Architectural services employment ticked up by a modest 100 positions in November, the most recent data available. While the current industry total of 201,000 positions remains below the most recent peak of 203,700 in July, there are still more employed in the industry now than there were one year ago.

And while the Consumer Price Index (CPI), a measure of inflation, increased slightly in December, the annual growth rate of 3.4% was well below the 6.5% rate it was at one year ago. The slight recent uptick in inflation can largely be traced to the continued rise in shelter pricing, which has offset the recent decline in energy prices. And while the Federal Reserve declined to raise interest rates at their December meeting, they have not ruled out further increases in the coming months.

Majority of firm leaders report delayed projects over last six months

For this month’s special practice questions, we asked firms about recent projects that have been delayed, stalled, and/or canceled. Overall, 86% of responding firm leaders reported that they have had significantly delayed projects at their firm over the past six months, 84% have had projects that are on hold/indefinitely stalled, and 64% have had projects that have been canceled or abandoned. Of firms with significantly delayed projects, nearly one third (31%) indicated that they have been increasing over the past six months, with just 12% reporting that they have been decreasing. More than one quarter (26%) of firms with projects on hold/indefinitely stalled reported that they have been increasing, with just 11% reporting them decreasing. And for firms with projects that have been canceled or abandoned, 19% reported that they have been increasing, while 17% reported that they have been decreasing.

Looking at their recent projects overall, firms reported that the majority, 72% on average, are proceeding as normal, while 14% are significantly delayed, 10% are on hold/indefinitely stalled, and just 4% have been canceled/abandoned. While these trends are generally consistent across firm size, there are some differences by firm specialization. Firms with a multifamily residential specialization reported that an average of 16% of their projects were significantly delayed, while firms with a commercial/industrial specialization reported that an average of 6% of their projects have been canceled or abandoned. Firms located in the South were also somewhat more likely to report projects that are on hold/indefinitely stalled, with an average of 12% of projects at firms in that region falling into that category.

Firm leaders pointed to a variety of factors contributing to recently stalled/delayed/canceled projects at their firm, with more than half (52%) indicating that construction budgets are insufficient for project as currently conceived, and 46% citing high interest rates. When asked to select the one most significant factor contributing to stalled/delayed/canceled projects at their firm, 21% of firm leaders selected insufficient construction budgets, 15% each selected financing problems and changing market conditions making clients nervous about proceeding, 14% selected contractor bids coming in too high or schedules too long, and 11% selected high interest rates. While rising material prices were selected as a contributing factor by 35% of respondents, just 3% selected as the most significant factor leading to projects being stalled/delayed/canceled.

Finally, when asked about their expectation of trends for stalled/delayed/canceled projects in 2024 as compared to 2023, responding firm leaders largely expect the trend to be about the same (59%) or be lower (31%). Just 10% of respondents expect the trend for 2024 to be higher. Firms located in the Northeast and West were somewhat more likely to expect the trend for 2024 to be fewer stalled/delayed/canceled projects, while firms located in the Midwest and South were slightly more likely to expect the trend to be higher.

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