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Interview with the architectural economist

Kermit Baker is the chief economist for the AIA, where he analyzes business and construction trends in the U.S. economy and examines their impact on AIA members and the architectural profession. He developed both the AIA’s Architectural Billings Index and the AIA Consensus Construction Forecast Panel. Baker also serves as project director of the Remodeling Futures program at Harvard University’s Joint Center for Housing Studies.

Recently, the BSA talked to Baker about the economy, our profession and his work for both the AIA and on the first comprehensive analysis of U.S. remodeling activity ever undertaken by the Joint Center for Housing Studies.

Why did you create the Architectural Billings Index?

I started working with the AIA in mid-1995. They created my position because of how painful the early 1990s downturn was for architecture firms, given the number of positions lost and firms that were closed.

Upon talking to some architecture firms, it struck me that they just didn’t have information about what was happening across the broader profession. They had a good sense of what was happening at their own firms, but they couldn’t generalize from that.

For example, when their billings decreased, had they simply missed out on jobs that they might otherwise have won? Or was it because there wasn’t much activity out there? And if they were doing well, was it because there was a general increase in construction activity? Or were they efficiently marketing themselves and their projects?

So we devised the index as a way for architecture firms to get a sense of what was going on with their peers—comparing small firms with other small firms, residential firms with other residential firms, firms in the Northeast with other firms in the Northeast.

How does the index work?

We started with a panel of about 500 firms, but that panel has grown so it’s now closer to 600 firms. There are 18,000 firms in the U.S., so we have a very small percentage of those. But we do know the composition of them in terms of size, specialization and location, so we work very hard to make sure that the panel that reports to us each month is representative of the spectrum of firms in the U.S.

At the beginning of each month, we send firms a very simple question: What was business activity at their firm like last month compared with the prior month? (This used to be done by fax when we started out, but we’ve kept up with technology.) For example, how was business in January compared with business in December? We don’t ask them to provide detail such as “billings were $1.5 million in January versus $1.01 million in December.” Instead, we ask if billings were “up a lot,” “down a lot” or “generally flat” to get a general sense of direction. Firms check off whatever applies on the forms and send them back to us.

We compile all the information from the firms and develop it into an index that’s centered on 50. A score of 50 on our national index indicates that, on average, as many firms are seeing an improvement in activity as those seeing a decline in activity. Any score above 50 indicates that more firms are seeing good times and growth than bad times. And any score below 50 indicates that more firms are seeing declines than increases in revenue activity.

Are you seeing more demand for this kind of information now?

Absolutely. Firms are very nervous about the economic climate. They want to know when things are going to get better.

How bad is it out there?

This is the steepest downturn the U.S. economy has seen since the 1930s. We’ve lost 7 million jobs, which is between 5.0 and 5.5 percent of all jobs in our economy. For architecture firms, the job losses are three times that—more than 17.0 percent of all architecture jobs since losses peaked.

So as bad as things are in the broader economy, job losses are at least three times as bad in the architecture profession. For better or worse, we are in a cyclical profession serving a cyclical industry, and we really do feel the brunt of business cycles.

It seemed like two and a half years ago, you couldn’t find enough architects. When was the major shift?

We are in a boom-or-bust profession, working within a boom-or-bust industry, so the climate goes from good to bad very quickly. So you’re right in that two-and-a-half years ago, there was a lot of discussion about how the schools were not turning out enough architects and firms were offering signing bonuses for new recruits.

The market turned around very quickly—as it often does—right around the beginning of 2008. For all of 2007 conditions were still quite healthy. By spring of 2008, they were weakening for many firms. And by that fall, around the time of Lehman Brothers’ demise and all the insurance companies going under, business conditions turned very soft at nearly all architecture firms almost instantly.

When there finally is an upswing, will it be as dramatic as this decline has been?

We’ll see. Having done the index since 1995, we have 15 years of history but only one complete cycle, which featured the dotcom/9-11 recession of 2001, 2002 and 2003.

Recently, I have spent a fair amount of time reviewing that period. The recovery wasn’t dramatic: the index slowly moved up and bounced around a little bit. But once the index did cross over the 50 mark—which indicates recovery territory—it consistently stayed above that line. There wasn’t a series of ups and downs. However, it was late 2003 and early 2004 before we crossed into growth mode. Recovery occurred about three years after the decline initially began, and once the index did move up, it was moving upward every month.

So I wouldn’t predict a sharp upturn, but I would expect a clear indication of when we have finally begun to move from recession into expansion mode.

What can the AIA Consensus Construction Forecast tell us?

For the Consensus Construction Forecast, we look to a group of organizations with staff that spend a fair amount of time and energy trying to decipher what’s going on in the construction industry. We ask these experts—including those from construction-research firms like McGraw Hill Construction and Reed Construction Data, economic-forecasting houses like and Global Insight, consulting firms like FMI and trade associations like the Portland Cement Association—to share their forecasts for the major nonresidential sectors.

We compile that information and come up with a consensus: an average of all their views. The purpose is to give a sense of what’s going to happen in the construction industry over the next year or two, as well as to see if the perspectives are divergent or if most of the experts agree.

Now, if all the projections for office construction are pretty close, architects can have higher confidence that there is a real emergent trend. If the opinions are all over the map, architects may have more cause to be nervous about what’s going to happen in that sector and therefore keep a closer eye on it.

What did the most recent panel have to say?

By the time we get to 2011, most of the experts share pretty optimistic expectations. But there aren’t many expecting good news any time before then.

Has your work with the Remodeling Futures program yielded any data that could help architects seeking to reinvent their practices?

Most architects who are involved in the residential marketplace work in smaller firms and tend to have less access to business data than architects who do commercial or institutional work.

Our research indicates that as much money is spent on remodeling, renovations and historic preservation—a market dominated by unlicensed designers who subcontract to contractors or who work in design/build firms—as is spent on new construction, which is what most residential architects focus on.

Architects may never get engaged with replacing a HVAC system, and generally have little to do with siding and roofing projects, other than specifying products. But kitchen/bath remodels, room additions and many other projects that involve structural work would benefit from the skills and vision of an architect. So although this market has been tough for architects to crack, it holds many opportunities for those who decide to go after that business.

What impact has foreign investment had on the profession?

I haven’t heard that foreign owners have any less respect or appreciation for good design than U.S. owners, so I don’t think there’s a big issue there. However, more and more firms are looking to diversify after going through this steep downturn, and I think developing international business is going to be top among their strategies.

There is likely to be more growth from emerging economies than anywhere in the U.S. or Western Europe. China, India, Russia, Central and South America, and the Middle East—where construction tends to ebb and flow with oil prices—are the emerging economies where much of the future international growth is likely to be centered. Working internationally is a difficult transition for a firm to make, and so far this transition has been dominated by larger firms, which have the resources to develop a presence in those markets.

According to the firms I talk to, it is a multiyear proposition to do the legwork and develop the contacts you need to be credible. But those that have made the investment are happy with the opportunities it presents.

Is interdisciplinary diversity within firms the future of the construction industry?

That’s the way I see the profession going mostly because that’s what I hear from owners. Owners think it’s a pain to work with their architecture firm separately from their engineering firm and their interiors firm. They would rather do one-stop shopping. It’s more convenient that way and you get a lot less finger-pointing: the architects pointing at the engineers, the engineers pointing at the architects and everyone pointing at the contractors. As soon as those services are integrated, it’s all their responsibility to make sure that everything works out.

I think the promise of building information modeling (BIM) and integrated project delivery is that there are more incentives, and the ability, for the design and construction team to share a vision and information as they work their way through the process.

What critical financial information are most architects missing?

One thing that we can’t do very well is to localize financial trends, and most architecture forms do serve a local, or, at best, regional market. Some national trends economists watch—such as job growth, unemployment and population growth—would give firms a strong leg up if they could be collected for a local marketplace. Any time you see changes in the economy—say, job losses—some places, like Detroit, are really hard hit, and other areas—such as some of the Texas markets until recently—hold up pretty well.

Is there anything architecture firms can do to boost their business in light of the tighter lending conditions that are slowing development?

The best they can do is to be aware of the changed climate. Three or four years ago, most architecture firms with a design contract would move blindly ahead and assume that a project would go forward to completion. Now most architecture firms are more skeptical, or at least aware of the risks with that, and may well be asking their clients if financing is arranged yet or if there are any issues that may come up.

Firms need to determine the likelihood of being asked to stop work through the process, or slow down, or modify plans if a lender comes back and says it can now only lend $5 million instead of the $10 million expected for a project. It’s not something that architects have been trained in, either. It’s a new world for many of them, which has meant they’ve had to reevaluate what their skills are.

What else can architects do to move toward a healthier financial situation?

When I talk to architects now, I encourage them to think about how a firm might be organized in a year or two.

During down times, architects tend to get very short-term and inwardly focused. Where is the next project coming from? What am I working on this week? What am I working on next week? They rarely pull their heads out of the sand to see how things are changing. We have gone through the most serious recession of the last 75 years, and when we come out of it, the world is going to look a lot different. Practice will be different. The construction industry will be different.

We don’t know how exactly, but it will be. But practitioners will have the best sense of how their world is changing and how it will likely change if they just sit back and reflect over their experiences in the last few years. Is green design going to continue to be important? Is BIM going to accelerate in popularity? Should other design professions be integrated in the practice to serve future clients?

This is a time when most architects aren’t thinking of things like this. But that means they won’t be in a position to take advantage of the opportunities that will most assuredly present themselves as we emerge from this recession in the next six to nine months.

Top photo: Kermit Baker by Edua Wilde.