Posted on: February 01, 2022
A new set of near- and long-term challenges, however, could complicate an optimistic forecast for the industry.
From a business perspective, most architecture firms had a better-than expected 2021, with the momentum continuing into 2022. However, there will be several challenges over the next three to five years that will dramatically reshape the construction industry and design professions, including an extremely tight labor market for architects and contractors; navigating remote work and rebuilding firm culture; and responding to emerging priorities of both staff and clients.
After entering last year in the midst of a steep downturn, almost six in 10 firms nationally ended 2021 with revenue gains of at least 5%. On average, revenue increased almost 6%. This year, even more growth in revenue is expected, almost 7% on average, with very few firms anticipating a revenue decline.
Even in the face of this generally positive outlook for the architecture profession, there are likely to be significant challenges. Supply disruptions, although showing signs of moderating, will continue to plague the construction sector. These disruptions, coupled with a strong economy, will continue to stoke inflation and put upward pressure on interest rates. Finally, labor shortages that have dogged construction contractors and architecture firms over the past year look to become more serious this year.
What started as production challenges as the pandemic hit has morphed into a surge in consumer demand that has outstripped the production capacity of many manufacturers. Construction has been particularly hard hit by supply chain issues. Construction costs overall rose about 20% last year, with those for some products (e.g., steel and oil-based products) rising more than 50%. While overall price increases for construction materials are beginning to moderate, most products will see elevated costs over the next several quarters.
Supply chain disruptions have been a major source for rising inflation throughout our economy. Consumer prices were increasing almost 7% annually at the end of last year, while producer (wholesale) prices were increasing at an even faster pace. This is as high as inflation has been in our economy in almost 40 years and comes on the heels of an extended period of lower-than-expected inflation with occasional threats of deflation. Given the strength of the economy, this high rate of inflation will force up interest rates. Short-term interest rates are expected to increase a full percentage point by the end of the year, with long-term rates rising by a similar amount.
Adding to inflationary pressures is the surprisingly tight labor market. After losing over 22 million payroll positions almost immediately when the pandemic hit, the economy has added almost 19 million since April 2020. Building construction contractors have seen a comparable share of recovery in payroll employment. Notably, architecture firms are one of the few sectors of the economy where employment had exceeded its pre-pandemic high by the fourth quarter of last year.
A recent survey by the small business– focused National Federation of Independent Business found that 57% of business owners reported that they were finding few or no qualified applicants for their open positions, a record share in the history of this survey. Most workers throughout the economy feel that jobs are plentiful and therefore are increasingly comfortable leaving their current job in favor of searching for a better one. Architects, like many other occupations, have been rethinking their career priorities during the pandemic. Often that means seeking higher compensation, as this is routinely a key issue for many in the profession.
However, there are several other factors that as many or even more firm leaders rated as very important for staff satisfaction in the future. These included: firm benefits (e.g., health coverage, work schedule, time off, ability to work remotely); advancement potential; types of projects worked on; firm culture; and workplace comfort. More than one in five of these firm leaders ranked firm culture and workplace comfort as the most important factor for staff satisfaction in the future, even ahead of compensation.
source: AIA Architecture Billings Index
source: AIA Work-on-the-Boards Survey, November 2021
However, it is not only architecture staff, or workers in general, who are rethinking their priorities in the face of changes brought on by the pandemic. Building owners and developers are beginning to articulate a more inclusive set of goals for projects that they are undertaking given the changing public health, environmental, economic, social, and demographic concerns that they see across the national horizon.
The financial performance of a building, measured as the return on investment or improved-asset value, has traditionally been a key metric for clients, and therefore a design priority for architects. In a recent survey, 44% of architects reported that the financial performance of projects is likely to be a very important design priority of clients in coming years. A quarter of respondents rated it the most important consideration.
However, social upheavals and evolving concerns over the past few years have altered and expanded the corporate perspective of design priorities. Improved occupant health and well-being is deemed as likely to be a very important design priority for clients by well over four in 10 architects, with almost 10% ranking it as the most important. Energy performance almost matched public health as a design priority with over 40% feeling that it likely will be a very important consideration and almost 9% feeling that it will be the most important design priority of clients.
The pandemic has shown that building uses need to change as space demands fluctuate. For example, with more remote work, some markets will need less office space, providing the opportunity to convert that excess space to functions with growing needs, like distribution facilities, data centers, or affordable housing. Therefore, adaptability is likely to be a growing design priority. Likewise, ensuring that buildings engage with the local community, that they are resilient and accessible, and that they source sustainable materials and reduce waste in the construction process are all considerations that are thought to be emerging design priorities in the coming years.
source: AIA Work-on-the-Boards Survey, November 2021
While there are always complicating factors in predicting where the design and construction industry is headed, the list is unusually long and complex this year. Supply chain issues have disrupted schedules and rising inflation has complicated project budgeting. Furthermore, many architecture firms and construction contractors are facing serious labor challenges, raising their cost of doing business as well as complicating the scheduling on projects. For architects, shifting client design priorities offer an opportunity for architecture firms, but also introduce an element of uncertainty into developing design solutions.
Factoring in all these challenges, the outlook for construction spending next year is generally quite positive. On the heels of a decline in spending for buildings in 2020 and 2021, the AIA Consensus Construction Forecast panelists are predicting a recovery of over 5% this year and an additional 6% in 2023.
As is the case with most nonresidential building recoveries, this one is driven in large part by an upturn in the residential market. Low mortgage rates and the pandemic-induced desire to move from cities to suburban and exurban locations, particularly in affordable Sun Belt markets, has stoked the housing market. Housing starts nationally will approach 1.6 million this year, making it the best year for housing in a decade and a half. Home construction typically generates demand for stores, offices, schools, health care facilities, and other commercial and institutional structures. In fact, work at architecture firms confirms that this process is well underway. The AIA’s Architecture Billings Index turned positive early in 2021, and given its traditional nine- to 12-month lead over construction spending, it points to a healthy rebound in construction this year.
The commercial construction market was expected to be the hardest hit by the pandemic. Remote work meant less need for offices; e-commerce reduced the demand for traditional brick and mortar retail; and travel cutbacks dramatically cut into the lodging market. While the commercial market has been generally weak since the pandemic hit, some sectors have done surprisingly well. Retail space, in particular, was one of the few major sectors to see an increase in construction activity last year, reflecting consumer spending on goods given the limited desire to purchase services. Some of the strength in the commercial sector came from repurposing existing space to uses more in demand. Commercial construction activity is projected to see growth of almost 5% this year, and close to 5.5% in 2023.
source: AIA Consensus Construction Forecast Panel, December 2021
The industrial market will pace the building construction upturn this year and next, with projected gains of close to 9% each year. This sector has been one of the few in construction to benefit from the pandemic. The strong growth in e-commerce during the pandemic meant increased need for distribution facilities. Additionally, supply chain problems have provided the incentive for companies to increase their domestic production in an effort to avoid the long delays often seen with imported goods.
The institutional sector tends to be the last to recover from a downturn, and that looks to be the case with this cycle. Overall spending for these facilities is projected to increase 4% this year, and 6% next year. The two largest institutional categories moved in opposite directions last year. Healthcare construction eked out a small gain and is projected to see growth of 6% this year and next. Education, with reduced need for facilities given the widespread reliance on remote learning, saw a decline last year, and is projected to see a rebound of 3.5% this year before benefitting from accelerating growth in 2023.
The opinions, forecasts, educated comments, and predictions expressed in this article above are a reproduction of the article written by Kermit Bakery, with contributors as indicated above. This article was originally posted on `AIA ARCHITECT’ website.
GT/AD Studio makes no claims or assertions about the validity of the same. As an additional closing comment, we previously stated, our 2021 experience indicates that the cost of construction, qualified labor shortage, and material scarcity has had a dramatic impact on project delivery expectations.