Searching for Signs of Recovery
While some areas of the economy are experiencing an upswing, architects likely won’t see a boost until next year.
For architects standing vigil for a sign that the Great Recession might be easing in 2010, macroeconomic conditions indicate it may be so, but that they must be patient. U.S. real GDP rose 5.7 percent in the fourth quarter of 2009, and the unemployment rate declined to 9.7 percent in January. But despite such positive signs, economists who follow patterns in construction predict that the architecture industry might not see a boost until 2011. Why? Tight credit, high unemployment, drastic decreases in tax revenue, and overbuilding are among the reasons. “The tough environment for construction that was present in 2009 will be with us in 2010 as well, even with the pickup in economic growth,” says Robert Murray, vice president of economic affairs at McGraw-Hill Construction [RECORD’s parent company]. While the forecasts are grim, economists and architects alike are seeing smart firms move into markets they might not have been so enthusiastic about before.
Just how bad is it? Evidence can be found in the AIA’s Architecture Billings Index, which reflects a nine- to 12-month lag between when an architect bills for a project and when construction spending begins. The ABI was up in December 2009, with a billings score of 43.4, compared to 34.1 in December 2008. But the index has fallen below 50 for 23 straight months; anything above 50 indicates an increase in billings, and below 50, a decrease.
|Construction volume in the U.S. will continue to slide this year because of overbuilding, tight credit, and revenues. Developer-driven commercial work is subject to wider boom-bust cycles dropping faster and recovers more quickly, but 2010 will not be a good year. Institutional work tends to be more stable. But, in this sector only the health-care is expected improve, up slightly at 3 percent.|
Many building sectors are still projected to see declines in 2010. McGraw-Hill Construction forecasts that total square footage for institutional buildings, including health-care and educational projects, will fall 2 percent in 2010, to 386 million square feet (msf). The commercial sector will drop 7 percent, to 297 msf. At first glance, the residential market seems to be a bright spot. McGraw-Hill estimates that the total residential market (single- and multifamily) will grow 24 percent in 2010, to 700,000 units. Any growth in any sector is welcome, but in 2009 the residential market was so far down, it almost had to rebound to keep up with the smallest demand.
WHAT’S TO BLAME
One factor possibly contributing to the recovery delay: strict lending policies by banks in the postrecession landscape. In a survey of senior loan officers at 55 domestic banks and 23 branches and agencies of foreign banks conducted by the Federal Reserve and released in February, none of the respondents said that lending conditions for commercial real estate, for example, have eased. Nearly 73 percent of those polled said their credit standards have remained unchanged, and 27.3 percent have actually tightened their requirements for loans in the commercial real estate sector. In addition, 140 U.S. banks closed in 2009, contracting the nation’s financing resources.
“We’re still talking about very different lending conditions” compared to prerecession times, says Murray. He points to large, high-profile projects that have been either scaled back drastically or held up due to tight credit. Examples he cites are the Atlantic Yards development in Brooklyn, whose Frank Gehry design was scrapped, and Santiago Calatrava’s Chicago Spire, now on hold.
Another problem hurting architects is that overall national unemployment remains high — 9.7 percent as of January — and this translates into less need for construction in the nonresidential sector. “Historically, the architecture industry does not pick up after a recession until jobs are created. [The rate of job creation] is reflective of businesses’ needs for new offices,” as well as retail, hotel, and restaurant facilities, says Kermit Baker, chief economist of the AIA.
Plus, the high unemployment rates mean less tax revenue, which funds the construction of schools, government buildings, and infrastructure. Already for the fiscal year 2010, 41 states have identified midyear budget gaps, reports the Center on Budget and Policy Priorities, a nonprofit, nonpartisan research organization. These gaps total $36 billion.
Of course, a major problem is that the massive amounts of commercial, single-, and multifamily space built on spec during the boom must be absorbed before demand for new design work reappears.
EFFECT ON FIRMS
The lending dilemma has affected the architecture industry directly, too. The lack of work and tight credit have made it difficult for even venerable firms to hold open their doors. Boston-based Cubellis, for example, closed at the end of 2009, after Sovereign Bank denied a line of credit necessary to pay the salaries of the company’s 170 employees. Yamasaki Associates, based in Troy, Michigan, closed in early January, after it was unable to pay employees and suppliers in recent months.
According to the U.S. Labor Department, the number of technical and nontechnical staff employed in the architecture and engineering services industry in 2009 was 1.346 million, down from 1.445 million in 2008 — a 9.3 percent drop. In January, this sector shed an additional 7,700 jobs.
Some architecture firms are still planning layoffs in the year ahead. The Massachusetts-based consultancy ZweigWhite conducted an online survey of firm leaders in which 35 percent of respondents said they are considering staff cuts in 2010, on top of layoffs conducted in 2009.
Some firms have managed to weather the storm. Jeanne Gang, principal of Studio Gang Architects in Chicago, says her firm has stayed resilient by building a varied portfolio and adding smaller projects that she might not have accepted in the past. ”We have avoided layoffs mainly due to being diversified typologically and geographically,” says Gang. “During this time, the project types have shifted. We are seeing fewer domestic condominium projects and more institutional and public projects get started.”
AREAS OF PROMISE
Overall, economists see areas of hope. Surprisingly, high-end single-family housing could be a promising sector. Some clients who have the money are still spending it, according to Kurt Lavenson, principal of Lavenson Design in Oakland, California, which focuses on this market. He says clients are starting to revive projects that were put on hold when the recession began, because bidding is competitive. “In residential construction, labor costs have dropped,” he explains. “Contractors are interested in anything they could be building or working on, making it enticing to build.”
McGraw-Hill Construction estimates that in 2010, single-family housing starts could rise 28 percent, to approximately 555,000 units, from 2009. But that is still 18 percent lower than the number of units built in 2008, and 66 percent below the all-time high of 2006. Mortgage rates are currently very low, points out Murray. Also, the tax credit for first-time home buyers was set to expire last November, and that may be responsible for a bounce in the number of homes sold that month. The credit has been extended to April 30, 2010.
Perhaps more notably, multifamily housing is projected to rise 12 percent, to 145,000 units, the first increase in this market since 2005. But architects in this market must not expect to do large projects. “Forget about high-rise condos,” cautions Murray. “Overall, smaller-scale, ‘garden-style’ buildings — in other words, the lower end — hold some promise.” He adds that secondary markets might fare better this year than metropolitan areas.
Another area of hope for 2010 is the public sector, partly due to the funds provided by the American Recovery and Reinvestment Act (ARRA) of 2009. Baker estimates that the ARRA has about $30 billion to $35 billion earmarked for residential and nonresidential construction for 2009 to 2011. “That’s an optimistic estimate,” he says. “It’s not enough to do much, but enough for some firms to feel the difference.”
Rob Tibbetts, vice president and marketing director in HOK’s San Francisco office, says it has focused on government work since the downturn began, precisely because of the possibility of receiving stimulus funding. “Probably half of what we’re submitting now are federal projects,” he says. “Before, we’d submit for federal projects about once every five years.”
Tibbetts adds that HOK is currently competing for some public-sector work on the state level, too — including three California court projects. It’s a wise new direction, says McGraw-Hill Construction’s Murray, who points out that courthouse building, at both the state and federal level, saw a 26 percent increase in millions of square feet, to 10.3 msf, in 2009. “Courthouse projects have seen a 77 percent increase in dollar terms, to $4.2 billion last year,” says Murray.
What seems as consistent as the economists’ discouraging data is the trend of firms pursuing less glamorous, more practical, or simply smaller projects from those in prerecession years. “Architects seem to be going in counterintuitive marketing directions. We’re saying, ‘Buy much less of our services,’ ” says Carl Stein, principal of Elemental Architecture in New York. “But that’s a reflection of our reality.”