Pulse Check: Construction and the Economy

  • Categories:

    Industry Trends

  • Date:

    June 25, 2019

Pulse Check: Construction and the Economy

Industry Trends

Several Wray Ward leaders attended the 2019 AIA Conference on Architecture, where we heard Kermit Baker, senior research fellow at Harvard University’s Joint Center for Housing Studies (JCHS) and project director of the Remodeling Futures Program. Baker also serves as chief economist for the American Institute of Architects (AIA).

A highly sought expert on business and construction trends for the U.S. economy, Baker is a frequent contributor to trade publications and this blog. We caught up with him after the AIA conference to delve into his presentation on critical issues facing the industry, design professionals and businesses today.

Renovations and retrofits are overtaking new construction in many sectors. Why?

KB: I think there are several issues at play here.

One: The U.S. population is growing more slowly, so we don’t need as many new facilities.

Two: There is an increased emphasis on making facilities more sustainable — in other words, upgrading our current building stock rather than tearing facilities down and replacing them. This is consistent with some emerging values, namely that we should guard our natural resources more carefully. It also tends to be a more cost-effective route.

We survey architecture firms for a major census every other year. We ask these firms about the share of their billings for new construction versus additions, renovations, retrofits and rehabilitations. Prior to the 2008 recession, work on existing facilities accounted for about one-third of billings. Immediately after the recession, this share jumped up to about 45% — a significant increase. This wasn’t a surprise, since we tend to focus on what we have during downturns. What surprised us was that the share of activity in existing facilities has remained high post-recession. In fact, it’s holding steady at 45%.

Is this just the way we do things now? Or is it a temporary trend?

KB: If anything, I think this trend is likely to accelerate moving forward. There’s so much attention on trying to conserve our existing facilities. It’s part of the fabric of life. Think about what we went through with urban renewal in the 1960s, when we fixed up cities by tearing them down and starting all over. We discovered that approach has significant negative effects on our communities and social structure. Now, we understand we’re better off repurposing and utilizing existing facilities.

To that end, we’ll see a growing emphasis on systems — electrical, HVAC, etc. Specifically, making them more efficient.

Are you worried about another recession?

KB: We’ve been publishing the Architecture Billings Index, a leading indicator for construction, for nearly 25 years. It’s based on a monthly survey of architects, and we do a fair amount of statistical analysis to determine what responses tell us about the industry.

We’ve seen some volatility in our index this year. In fact, March 2019 showed the biggest decline in six or seven years. It’s generating a lot of concern. So, is this suggestive of a slowdown in construction activity? To answer that question, we looked at the current landscape as well as the two most recent recessions in 2008–09 and 2001.

Ultimately, it doesn’t look like the next 18 to 24 months will compare to what we went through in 2008–09. That was the most significant downturn most people will see in their professional lives.

On the other hand, the 2001 downturn, mostly due to the dotcom bubble burst, was not too dramatic for design and construction, so it may be a better model of what to expect next for our industry.

The good news is that, at least based on what we’ve seen thus far, the immediate future shouldn’t mirror even a modest recession.

On the construction side, we just don’t see the same market conditions that we saw with prior recessions. We aren’t seeing overbuilding — the level of construction hasn’t ramped up like before. Rents aren’t getting out of line, and vacancy rates aren’t beyond normal levels. The market conditions are much more measured. There isn’t a fundamental imbalance between what we need and what we have out there.

This all may be partly due to the fact that we just aren’t building as much. Overall, there’s less speculative construction with the hope for future growth. But I think we’re just in a different economic situation than before. In fact, if you talk to contractors, they’ll say their biggest concern is getting labor to build. That actually provides natural restraint from overbuilding.

What are other crucial issues for the construction industry, design professionals and businesses?

KB: Some of the key issues include economic cycles, regional trends and labor. The current economic cycle is winding down, and the housing market has already begun to slow in many areas of the country. According to the AIA Work-on-the-Boards survey, 62.3% of clients concerned about the economy are putting the brakes on projects.

Many architecture firms are seeing erratic business conditions. Still, those same firms are seeing growing workloads and backlogs — in fact, these backlogs are at their highest post-recession level (AIA Architecture Billings Index 2019).

Meanwhile, labor shortages are constraining industry growth. The construction force lost 2 million workers during the last downturn and has only gained back a fraction of that (JCHS tabulations of U.S. Census Bureau, American Community Survey). In confronting staffing shortages, firms are only making modest progress.

For many firms, growth will come from outside of traditional domestic markets. We’re seeing a disproportionate share of design opportunities outside of the U.S., with the Asia Pacific region accounting for 52% of global construction spending (IHS Markit Global Construction Outlook).

What must marketing and business leaders in the home and building category do to be successful?

KB: I think we’re beginning to see how globally interconnected most businesses are in terms of international economics and politics. If you’re a marketing or business leader, you should really be thinking about how you build your products.

In addition, it’s important to be concerned about environmental sustainability and stewardship. How can you use your resources more efficiently? How can you make your buildings more sustainable in the face of growing challenges?

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