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Architects' Billings Plummet to All-Time Low

May 12, 2008

By Ted Smalley Bowen

The first quarter of 2008 was a bleak one for architects—and conditions are not likely to improve anytime soon.

The Architectural Billings Index (ABI), a key measure of the market for architectural services compiled by the American Institute of Architects (AIA), opened the year with a three-month skid, ending the first quarter at the lowest point in its 12-year history. March’s anemic ABI score of 39.7—a number over 50 indicates an increase in billing activity and below 50, a decrease—marks a 15-point drop from December’s 55.

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While some firms are still reporting high volumes of work, even the most optimistic are girding for hard times. The ABI is a reliable predictor of construction activity nine months to one year out, suggesting that the remainder of 2008 and early 2009 will see comparatively little building, according to AIA analysts.  

The latest figures show a drop-off in all regions. Among sectors, only the institutional market, which tends to be less susceptible to short-term swings in the economy, managed a slight up-tick. 

Projects are beginning to run aground as credit tightens and demand dips for housing, office space, hotels, and other building types, particularly in the U.S. Some firms are having better luck overseas, although the prospect of a global slowdown makes a geographic hedge less than a sure thing.

Lenders, many hampered by bad investments and a systemic lack of trust, have tightened the taps. Loan-to-value ratios are high, with 25-percent equity a common requirement, according to industry analysts. In some cases, where the risk is great enough, banks are demanding to own projects outright. “Folks are nervous about lending,” says Kermit Baker, AIA chief economist. “The calculations changed fairly dramatically.”

Compared to 2007, the non-residential category in 2008 is expected to be off 11 percent, in terms of square feet of new construction starts, explains Robert Murray, vice president of economic affairs for McGraw-Hill Construction. Stores and shopping centers will be down 18 percent, office buildings down 11 percent, and hotels down 10 percent. “We really haven't seen the (full) impact of write-downs on the commercial side,” Murray notes. “That will be a negative factor later this year and into 2009.”

The institutional sector will fare slightly better this year, but it too will feel the pinch. Academic construction will be down 1 percent, healthcare facilities down 4 percent, and other institutional buildings down 4 percent, according to McGraw-Hill projections.  Multifamily housing is expected to plummet 23 percent.

Economists liken the current situation to the savings and loan debacle of the late 1980s and early 1990s, although they say there hasn’t been the same degree of overbuilding in the commercial sector. This recession could be deeper and longer, though. Bob Packard, managing partner at Zimmer Gunsul Frasca, a 500-person firm in Portland, Oregon, is warily optimistic. “We’re still busy," he says. “We’re hoping this whole thing hasn't been built on a house of cards.”

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