It’s too early to celebrate, but the latest Architectural Billings Index from the American Institute of Architects indicates the architecture and construction industries may be on the slow road to recovery, with the Northeast leading the pack.
The index, a leading economic indicator of construction activity, was 54.5 in the Northeast in October, its highest index in many months and besting the rest of the country by several points. The Midwest was second-best at 51.8 percent.
“The Frost Belt regions are doing better, and that’s sort of reflective of broader trends,” said Kermit Baker, chief economist at AIA. “The residential problems nationally are centered in fast-growing regions over the past decade, where production got ahead of itself, and there have been big price declines.”
In the South and West, the institutional and commercial/industrial markets have been hit hard as a result of a tough housing market. “You don’t need to build offices or retail space or hospitals or schools if people are moving out,” he said.
Baker said in this region, most markets didn’t get ahead of themselves, and there haven’t been high vacancy and foreclosure rates over the past couple of years.
Nationally, the index saw in September its first positive reading since January 2008, but that number dropped slightly in October, indicating that potential recovery will likely be marked by stalls and starts.
The October index score fell to 48.7, from 50.4 in September, indicating a decrease in demand for design services from the hundreds of architecture firms surveyed across the country. Any score above 50 indicates design activity is increasing in the aggregate.
“October fell back below 50 so we think we’re kind of just at a turning point in the design business,” Baker said. “In some sense, it’s finally hit bottom, and we should start seeing more months of slow to moderate growth.”
Baker said after two and a half years of negative ABI numbers, one positive month isn’t a guarantee of recovery.
“If we start seeing numbers consistently above 50 in our index, we can expect to see construction activity in late 2011,’’ he said. “It’s growth, but it’s growth off a very weak base.”
The year started with a 42.5 ABI and the numbers generally trended up throughout the year.
“We had a little setback in May and June, about the time we had a setback in the broader economy,” Baker said. “The stock market took a hit then, and there was a bit of concern over, ‘Is this economy on solid footings? Do we really need to go ahead and build those office buildings, or should we see how this shakes out?’”
Among the building sectors, the national commercial/industrial sector is doing relatively well, with a 56.7 index in October.
One bright spot is the new projects inquiry index. At 61.7 in October, it was down slightly from its nearly three-year high mark of 62.3 in September, but with a continued positive trend, it spells good news for new construction.
“What our analysis has told us is that design activity is very highly correlated with construction activity,” Baker said. “Design activity leads construction activity by nine to 12 months.”
As indicators show a positive trend in the industry as a whole, they don’t spell recovery for all firms.
“Nationally, billings activity is moving up, but that doesn’t mean every firm is going to see better business conditions and every area of the country will see increased construction activity,” Baker said. “This is a fairly slow process. It’s kind of reflecting the very slow improvement we’ve seen in the broader economy, in which we’ve officially been in recovery for five or six quarters.”
