Most firms anticipate issues related to ownership transition within the next five years
Architecture firms started 2018 on a positive note as AIA’s Architecture Billings Index (ABI) score rose to 54.7, its highest January score since 2007. Any score over 50 indicates an increase in billings, and a higher score than in December of 2017 means that billings continues to grow in the new year. Inquiries into new projects also remained strong, as did the share of firms reporting an increase in the value of new signed design contracts—a good indicator of work in the pipeline. Firms have seen consistently strong growth in new project activity for the last 15 months.
Business conditions also remained strong at architecture firms around the country in January, with the exception of those located in the Northeast. Billings softened there in December after a generally strong 2017, and declined further in January. Although ABI data are seasonally adjusted, the decline may be at least partially due to the unseasonably cold weather that gripped much of the Northeast in early January. Billings growth was also strong across the board for firms of all specializations.
Conditions remain generally positive in general economy as well, strong enough to make investors nervous about future interest rate hikes and their potential impact on stock prices. Nonfarm payroll employment increased by 200,000 positions in January, while construction employment grew by 36,000 positions, for a total of 226,000 new positions over the last year. Architecture services employment increased by 1,700 in December—the most recent data available—and now stands at a total of 193,200, after adding 9,000 total new positions in 2017, and has recovered to 89 percent of its pre-recession peak of 217,800. Consumer sentiment was also generally high in January, as the University of Michigan’s Survey of Consumers reported that 2017 had the highest yearly average for their Index of Consumer Sentiment since 2000.
Planning for succession
With the general aging of the population and increasing numbers of people approaching retirement age, succession planning is an issue of increasing importance for many business owners. Two-thirds of architecture firms indicated that they expect that ownership transition will be a significant issue for their firm within the next five years, with more than four in 10 respondents indicating that it is very likely to be a significant issue in that period, according to this month’s special business question. This share is even higher for large firms, with more than half of firms with annual billings of $1 million or more indicating that it is very likely that ownership transition will be a significant issue in the next five years, in contrast to just 4 percent of firms with annual billings of less than $250,000.
The majority of firms (76 percent) believe that when ownership transition takes place at their firm, it will be current staff member(s) that will increase their ownership share(s). While 14 percent expect that their firm will shut down, this is most common among sole practitioners. Firms report that their biggest concerns when it comes to ownership transition are encouraging current staff to assume partnership responsibilities, developing a strategic plan to ensure a smooth transition, and ensuring financial solvency for the firm after the transition. Firms are less concerned about finding potential buyers, finding new potential partners from outside the firm, and identifying merger or acquisition activities.
This month, Work-on-the-Boards participants are saying:
- “An atypically busy and fast start for January. We have a reasonably diverse portfolio and are seeing inquiries and starts across all sectors, though multifamily continues to lead the way.” —23-person firm in the South, mixed specialization
- “Continue to be strong, however, there are real delivery problems in construction, exerting upward price pressure on projects.” —8-person firm in the Northeast, institutional specialization
- “Cost of construction is depressing new starts in the downtown area.” —101-person firm in the West, residential specialization
- “We are now having to turn away good commissions and not pursue projects that are in our wheelhouse because we cannot find architects with the right level of experience to design, manage, and produce the work.” —23-person firm in the South, commercial/industrial specialization