Architecture firms reported a sharp drop in business in September, suggesting that the commercial property market could be in for more pain next year.
The AIA/Deltek Architecture Billings Index fell to 44.8 in September, the lowest score since December 2020, during the height of the Covid-19 pandemic. Any score below 50 indicates deteriorating business conditions. The score shows that an increasing number of architecture firms are reporting a decline in billings.
The index is a forward-looking indicator of demand for non-residential construction activity – both commercial and industrial. It aims to predict construction activity nine to 12 months ahead.
“While more firms are reporting a decline in billings, the report also shows that owners are reluctant to commit to new projects with a slump in new design contracts signed,” said AIA Chief Economist Kermit Baker. “As a result, architecture firms’ backlogs fell to an average of 6.5 months in the third quarter, the lowest level since the fourth quarter of 2021.”
Commercial property has been hit by a double whammy. The return to office space has been slow, hitting both office buildings and the retail and restaurants that support them. Downtowns are suffering. But a sharp rise in interest rates has compounded the problem, bringing investment and deal-making to a halt in most sectors.
While all regions of the country are experiencing a decline, the West is the hardest hit, as the return to office space there has been slower than in other areas. Among the property sectors, those with a focus on multi-family housing have suffered more. Multi-family construction has boomed in recent years, with a record number of units now flooding the market and putting pressure on rents.
However, analysts warn that the decline in apartment activity does not bode well for the future.
“I’ll say it again, we need to absorb a lot of the multifamily construction that’s going on right now, but after that, there won’t be much for a couple of years,” said Peter Boockvar, chief investment officer at Bleakley Financial Group.
