Maybe it’s the cold weather that has everyone down. A recent snowstorm seemed to take the final stuffing out of the hardy Chicagoans a couple of weeks ago, and the recent economic news tends to reflect that ennui. As of the third week of February, approximately 35 percent of the United States was covered in snow, and the rolling hits from major storms have taken their toll on construction, employment, earning and almost every other economic indicator.
It’s no surprise that architects would be less than confident about the near future of construction. The phone is ringing less, and they have less work on the books. However, the question is whether this is a true indicator of an economic trend or just a blip caused by an extraordinarily difficult winter that has struck the major population centers from Chicago to the Northeast. You can’t shut down Boston, New York, Philadelphia, Cleveland and Chicago for extended periods and not expect to see some economic impact. Especially in a segment such as construction, which is so influenced by the weather.
The Architectural Billing Index (ABI) is a report generated by a poll of architects done by the American Institute of Architects and weighted for various factors. It reflects the work on the books at architectural firms. An index number below 50 is a negative assessment, but above 50 shows promise for growth.
Beginning in September, architects began to become less optimistic about the future of their work as the index number moved downward. But it wasn’t until December that it actually dipped into negative territory, matching a figure reported in April 2013, but below the number reported a year ago in December.
Looking at the ABI over the last several months shows a bit of a roller coaster as it dips and rises, but still remains within contact of the midline of 50. Reading the tea leaves, this would indicate there is, collectively, a feeling of cautious optimism. Not elation, but not despair. A reasonable indicator of future work.
The lowering expectations circulating among architectural offices probably are not matched in commercial real estate offices, which are looking at a much stronger trend and rosier picture. Every quarter since the beginning of 2010, Real Capital Analytics has reported an increase in the price of both commercial property at office space through its RCA CPPI report. This is an objective measurement of property prices across all markets and by many different subgroups. Office space is just one of the many markets, which also include hotels, multifamily, retail, etc. It is an essential metric for real estate investors looking to match the market growth and receive a return on investment.
For people in the construction industry, rising prices can indicate investors are willing to take on more investment and develop real estate. That translates to buildings, which means more work for everyone. The work may come in the form of new construction, but it also may be retrofit projects.
Of course, one would expect a nearly four-year increase in property prices to have resulted in a steadier construction market, but much of these numbers are influenced by occupancy rates and demand. At some point, we will reach a tipping point when the demand will exceed the supply and construction will shoot off. The indicator from the architects is that we have not yet reached that tipping point.
