Construction workers erect a building in downtown Miami, Florida, on June 14, 2023.
Jim Watson | AFP | Getty Images
Architecture firms witnessed a significant decline in business during September, signaling potential further downturns in the commercial real estate market over the next year.
The AIA/Deltek Architecture Billings Index fell to a record-low score of 44.8 in September, the lowest since December 2020, when the Covid-19 pandemic was at its peak. A score below 50 indicates deteriorating business conditions, implying that more architecture firms are experiencing a decline in billings.
The index serves as a forward-looking indicator for the demand in nonresidential construction activities, including both commercial and industrial buildings. Its purpose is to predict construction activity for the following nine to twelve months.
“While an increasing number of firms are reporting a decrease in billings, the report also highlights the reluctance of clients to commit to new projects, evident in the decline of newly signed design contracts,” stated Kermit Baker, AIA’s chief economist. “Consequently, backlogs at architecture firms have dropped to an average of 6.5 months in the third quarter, the lowest level since the fourth quarter of 2021.”
Commercial real estate has encountered a double blow, with a slow return to office affecting both office buildings and the retail stores and restaurants that rely on them. Downtown areas have been greatly impacted. Moreover, a steep increase in interest rates has aggravated the issue, causing investments and deal-making in most sectors to come to a halt.
While all regions across the country are experiencing a decline, the impact is most severe in the West due to the slower return to office compared to other areas. Among different real estate sectors, firms with a focus on multifamily residential properties have seen a greater decline. This sector had experienced a surge in construction activity in recent years, resulting in a record number of units flooding the market and putting pressure on rental prices.
However, analysts caution that the decrease in multifamily construction activity does not bode well for the future.
“I’ll say it again, we need to absorb the current surplus of multifamily construction, but after that, there won’t be much for a few years,” warned Peter Boockvar, chief investment officer at Bleakley Financial Group.
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