Architecture firms reported a sharp drop in business in September, indicating that the commercial real estate market could see even more pain in the next year.
The AIA/Deltek Architecture Billings Index dropped to 44.8 in September, the lowest score since December 2020, during the height of the pandemic. Any score below 50 indicates worsening business conditions. The score shows a growing number of architecture firms are reporting a drop in billings.
The index is a forward-looking indicator of demand for non-residential construction activity, both commercial and industrial buildings. It aims to predict construction activity nine to 12 months out.
“While more firms are reporting a decrease in billings, the report also shows the hesitance among clients to commit to new projects with a slump in newly signed design contracts,” said Kermit Baker, AIA’s chief economist. “As a result, backlogs at architecture firms fell to 6.5 months on average in the third quarter, their lowest level since the fourth quarter of 2021.”
Commercial real estate has been hit with a double whammy. Return to office is slow, hitting both office buildings as well as the retail and restaurants that support them. Downtowns are suffering. But a sharp rise in interest rates has exacerbated the problem, causing investments and dealmaking in most sectors to grind to a halt.
While all regions of the country are seeing a decline, the West is deepest, as the return to office there has been slower than in other areas. Among real estate sectors, firms with a multi-family residential focus saw more of a decline. Multi-family construction boomed over the last few years, with a record number of units now flooding the market and putting pressure on rents.
Analysts, however, warn that the drop in apartment activity does not bode well for the future.
“I’ll say again, we do need to absorb a lot of multi-family construction currently in place but after that there won’t be much for a few years after,” said Peter Boockvar, chief investment officer at Bleakley Financial Group.