The Big Idea

Drawing up a recovery in commercial construction

Stephen Stanley | May 21, 2021

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors. This material does not constitute research.

As the economy rapidly climbs out of the hole created by pandemic-related lockdowns, one sector that has clearly lagged is nonresidential construction. With the future of brick-and-mortar retail and offices, among others, somewhat uncertain, it is no surprise that nonresidential construction has lagged the broader economy and particularly torrid housing activity. An indicator of architectural billings suggests that nonresidential construction may be beginning to wake from its slumber.

AIA architecture billings index

The American Institute of Architects, an industry trade group, has collected monthly data on billings from its members for more than 20 years. The AIA surveys members that do most of their work for nonresidential projects and reports the results. The main index measures billings, which tend to lead nonresidential construction activity by around nine to 12 months. Hiring an architect to draw up plans for a new building does not guarantee the building will commence, but it is a pretty good leading indicator. Blueprints are not cheap and unlikely to be commissioned unless there is serious interest in the project.

More recently, the AIA has branched out and begun collecting even more information from its members. It now reports not only billings but also the value of signed contracts, which would tend to lead the billings index, and on

inquiries, which would be even more of a leading indicator.

The indices are reported as diffusion indices. An index reading of 50 represents an equal number of respondents reporting increases and decreases. The gauges measure the breadth of growth rather than the change in the dollar value of billings and contracts.

April billings

The AIA Billings Index jumped in April by more than two points to 57.9. This is the highest reading since before the 2008 recession. The other indicators were even stronger. The index of signed contracts jumped by six points to 61.7, the highest level since the AIA began collecting these data in 2010. Moreover, the inquiries score surged to 70.8.

Just to emphasize, these readings do not tell us the magnitude of any rebound in architectural activity, but they do indicate that the breadth of the snapback is impressive. Given that the survey is focused on architects who do the majority of their work on nonresidential projects, this suggests that even this sluggish sector of the economy is reviving.

Delving further into the details of the April survey, architects in all four regions of the country reported billings gains. The diffusion index was highest in the Midwest, at 60.6, and lowest in the West, at 52.4.

Moreover, the AIA reports on billings also include indices broken down by the type of building that the architectural firms specialize in including commercial/industrial, institutional or multifamily residential. The experience of the last year or so has been quite varied across the three sectors. Commercial/industrial was below 30 at the lows in April 2020, and steadily improved last year before leveling off around 45 at the end of 2020. Institutional was basically flat at around 40 from April 2020 through the end of last year. In contrast, multifamily residential recovered rapidly last year, consistent with the housing sector more generally, moving above 50 last fall and holding near 50 through the end of the year.

So far in 2021, all three sectors have strengthened roughly in line with each other. All three moved slightly above 50 in February and have exploded higher from there. In April, the commerical/industrial sector jumped to 59.1, institutional to 56.7, and multifamily residential to 56.9.

Special questions

In April, the AIA asked its members special questions about the biggest issues they have encountered over the past six months. Increases in costs for basic construction materials were cited as a serious problem by 37% of firms and a moderate problem by another 35%. For finished construction products, 21% cited increased costs as a serious problem while 25% said lack of availability or long lead times was a serious problem.

Local color

As with ISM survey reports, the AIA release includes a few quotes from individual respondents, which corroborate the broad strengthening for the industry:

“Challenges remain to get financing for projects, but activity is definitely picking up.”—62-person firm in the Midwest, institutional specialization

“Business remains robust, but that has made it difficult to find available consulting engineers and qualified architectural staff to keep up with the firm’s growth.”— 17-person firm in the West, commercial/industrial specialization

“The market is heated up, projects of all types are firing up, and the request for proposals is at pre-pandemic levels.”—5-person firm in the South, commercial/industrial specialization

“We have plenty of work ahead now but it has been a slow start to the year. The second half looks very promising.”—24-person firm in the Northeast, commercial/industrial specialization

Conclusion

One of the few sectors of the economy that has not rebounded much after last year’s drop is nonresidential construction. The AIA architectural billings index for April sends a strong signal that improvement is on the way. It looks like nonresidential building activity is poised to rebound substantially by late 2021 or 2022.

Stephen Stanley
stephen.stanley@santander.us
1 (203) 428-2556

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