BY: Steven Hall, AIA
While she promised no crystal ball regarding what the economic future could bring, Michele Russo, the Managing Director of Research and Practice at AIA National, did provide some hope in her October 27, 2020 webinar to AIA California members. The “Alphabet Soup” in this title relates to the four possible recovery curves of recovery Ms. Russo explained: V for “victory,” a quick recovery that is the best we can hope for, U for “uh oh,” or revisiting the Great Recession, W for “whoa,” a possible double dip, or L, as she put it, a “looooooong and painful” recovery. More on that later.
While not repeating Michele’s presentation word-for-word (a video is available online), here is a general overview. In her presentation, she touched on five topics: The presidential election, economic indicators, employment and skills, the industry outlook, and what firms are telling the AIA.
First the presidential election. This is written prior to the election and the outcome is not known. However, Ms. Russo quickly touched on the differences, specifically climate and taxes, and similarities, infrastructure and, surprisingly, trade, of the candidates. Each affects the economic recovery.
The economic indicators do point to a recovery in some sectors. For example, national and western regional housing starts are recovering from dips at the start of the pandemic. Housing starts have increased in the recent year and, while multifamily is projected to drop, there is an overall increase in housing starts in 2020. As this is being written, the noise of construction of a new house is taking place below.
One of the revolutions that affects architects is e-commerce. Once up to over 16 percent of the total retail revenue, it is now around 15. This affects the commercial sector especially lodging which is down almost 10 percent. Nevertheless, Ms. Russo told the audience that while construction spending is softening, it does not reflect the magnitude of the downturn. The percent change of the total nonresidential construction is -0.1 percent from 2019.
Regarding employment and skills, there is no question that unemployment claims are at unprecedented levels. Michele showed the audience a graph of weekly unemployment claims since 2007. It is mostly flat with the Great Recession a mere bump. Then an almost vertical jump from approximately 150,000 to more than 7,150,00 between April and May. Construction unemployment had been slightly rising before the pandemic and stood at 6 percent in February before soaring to 17 percent in April/May. It is currently at 7 percent, slightly better than the overall unemployment of 8 percent.
Unfortunately, nationwide, almost half of firms expect to reduce payrolls with the exhaustion of PPP loans. But 48 percent do not anticipate any changes in staffing while seven percent actually anticipate adding employees. In answering the question what skills and characteristics are the most valuable, 60 percent stated technical skills and 49 percent said interpersonal skills are important.
As for the outlook of our industry, Ms. Russo stated that the Architecture Billings Index (ABI) scores have declined dramatically with the downturn. With 50 being the medium, since November 1995, the range has been above 60 during the housing bubble and about 35 in 2008 during the Great Recession. It dropped to 30 in May of this year. Nevertheless, the Abi is stabilizing: 40 in July, 40 in August and 47 in September. This indicates that business conditions at architectural firms seem to have stabilized with a more positive uptick in new design contracts and inquiries. In looking at quarterly revenue, the overall expectation in the fourth quarter is anticipated to be just above two percent: Commercial/industrial is down 3.1 percent, institutional down just about three percent while residential is anticipated to be up almost three percent. Overall, the West has seen a lesser slowdown that most of the rest of the country.
2021 is forecast to be better than this year, but overall will be a decline from 2019. Construction spending in 2020 is expected to fall just over eight percent but climbed back to negative 4.6 percent in 2021. The biggest declines in construction spending will be in the hotel and the amusement and recreation sectors. Health is expected to be up 2.4 percent in 2020 and 3.2 percent in 2021. Construction starts in California are expected to do better that national. Up by almost 17 percent in 2022.
Which leads us to the Alphabet Soup mentioned in the opening paragraph. Well Ms. Russo explained that the AIA did not see a V “victory” recovery nor a “long” L. Most likely, the economic recovered will be more like the “uh oh” U but with a faster rise than what occurred with the Great Recession.
Michelle concluded the recession outlook by explaining the shifts due to the pandemic that would affect our profession. First are the changing locations of work – “work-from-home” – which could lead to de-urbanization of cities. Demand for commercial space will continue to be weak again due to e-commerce and telecommuting. However, architects could become involved with repurposing commercial and hotels into alternative, mainly affordable residential, uses.
In the last section, Ms. Russo gave an overview of what firms are telling us, the AIA. There are many firms, large and small, that are reporting what is on their minds – too much for this article. It would be interesting to hear what firms said about of working remotely. In terms of positive benefits, almost 30 percent said they have more empathy toward staff personal situations and almost 20 percent reported increased level of digital proficiency. Almost 10 percent said there was an increase of collaboration and sharing, especially in multi-office firms. In opening offices back up, 31 percent stated they would be giving their staff the option of working from home.
Michele concluded with “five steps to thrive:” First T, get the talking points ready. Second S, see things as your clients do than help them see things as you do. Third M, make the call. Fourth R, make short- and long-term recommendations. And finally, fifth C: “Be ready for construction ready.” Concluding, she stated the future opportunities are unchanged. It is still existing building focused, sustainable designs, developing a diverse workforce and be technology savvy. Constructing a better alphabet soup for the future of the profession.
Again, Michele Russo’s presentation can be found here.