Given this week’s market uncertainty, I want to share with members and partners the recent economic insights coming from AIA National. Last week at the Council of Architectural Component Executives (CACE) conference in Columbus, AIA Managing Director of Research and Practice, Michele Russo, gave a robust presentation to chapter / component staff about trends and indicators in the A/E/C sector. Here are the top takeaways (a link to the full presentation is at the end of the article):
Economic growth: The pace of economic growth nationally is moderate. The economy is still growing but it is slowing down.
Non-residential: Non-residential growth has not rebounded fully to where it was before the 2008 recession. However, work on existing buildings has remained strong even through the economic recovery, pushing out new construction in some sectors. This trend is good for sustainability and suggests a growing appreciation for older buildings.
Housing: Housing starts are viewed as a harbinger of where the sector is going. Russo says it appears nationally that we have been at a peak. Growth has been seen in single-family housing but this is starting to flatten in early 2019.
Housing price gains were slowing in many high-price areas in the first quarter of this year. However, there are fewer delinquencies and foreclosures. There is borrowing but not at problematic levels. Having consumer debt precede a downturn is the worst scenario and Russo does not see that happening.
Regional view: Recovery has not been universal across the U.S. and Russo thinks this is a pattern going forward, where markets will vary notably by region. West coast numbers are dropping, and the Northeast is soft. A lot of markets that bounced back well still have room for growth because they have not fully recovered: mid-Atlantic, mid-West, such as Baltimore, Chicago, Detroit, Philadelphia, and Washington DC.
Labor: Russo says we are not seeing labor shortages on the design side; the field is ‘right sized’ for the most part. Trades and construction, however, are seeing notable shortages – even with an increase in wages. There are a lack of strategies to deal with the issue, and this is being exacerbated by construction being the second hardest hit industry from the U.S. pullback on immigration (agriculture #1).
Trends and indicators: ABI trends and the 2019/2020 construction outlook show architectural billing dropped sharply in March, however new work coming into architecture firms continues to grow. It is slower growth but still growth; firms are just not billing at the pace they were. Backlogs in excess of six months at firms are still at post-recession highs, though there are regional differences.
In the previous two recessions, when the ABI headed into a high downturn, decline was steep and prolonged. Russo is not seeing this now.
There are three main reasons why the economy goes into recession:
1. Consumer borrowing
2. Government borrowing
3. Over borrowing by private sector (Russo thinks this will precipitate the next downturn)
If there is a slow down, says Russo, it will not feel like the previous recession. It will still be serious and firms will need to look at fundamentals, but it will require a different approach for the future than in 2008.
The work: From a national perspective, healthcare, education, and university work will remain strong. The most decline is expected in retail, hotel, and amusement/ entertainment. Affordable housing continues to be a huge issue, with multi-family being the growth area to address that.
Looking ahead: If you are wondering when and how to prepare for next recession, and what long-term opportunities for recovery might look like, here are Russo’s recommendations:
Most useful indicators to watch:
1. General business climate indicators: stock prices, interest rates, confidence scores.
2. Design and construction indicators: building rents and occupancy rates; design activity; construction activity and costs.
3. Business activity at firm: revenue, profits, staff chargeability.
2. Big data/ predictive modeling
3. Offsite construction processes
4. VR/ Augmented reality
5. Real-time renderings
6. Robotics automation – effects how architects deliver everything
7. 3D printing – materials disruption (potential opportunity for creativity and affordability)
8. Autonomous vehicles
9. Enhanced construction materials – area for architects to make sure new materials are not harmful to society
10. Internet of things
1. Get financials in order
2. Right-size staff
3. Ensure a strong base of services
4. Remain nimble
Michele Russo’s complete presentation on Economic Resiliency is available here, which includes more information, statistics and charts.
Here is the mid-2019 economic view from AIA economist, Kermit Baker.