by Kermit Baker, PhD, Hon. AIA
Chief Economist

Summary: From a business perspective, May was a good month for architecture firms, showing a solid acceleration in billings compared to the prior three months. All construction sectors had healthy gains, as did all regions of the country, with firms in the West reporting particular improvement. Architects report a general increase in efforts by municipal governments to manage and control growth, with design guidelines cited as the technique increasing the most in popularity.

The AIA’s Architectural Billings Index (ABI) jumped to 55.0 in May, after remaining between 52 and 53 for the previous three months. Any score above 50 indicates an increase in design activity. Inquiries for new work scored 62.4, just about on par with readings for the past few months.

Business conditions in all regions were reported to be improving at a reasonable pace for the month. The one exception to this trend was reported by firms in the West, which indicated that conditions were improving at a much faster pace. Design activity in this region has been accelerating for the past three months. Likewise, design activity in all the major construction sectors was reported to be growing. While the commercial/industrial and institutional markets are in the midst of a major extended upturn, the residential markets remain very weak by most accounts. Architecture firms are recently reporting stabilization in residential design activity, in part because design activity at firms is concentrated in multifamily structures, a sector of the residential market that recently has begun to show signs of firming.

General improvement in the economy
The recent upturn in nonresidential design activity is coinciding with a general improvement in the economy. Business payrolls increased in May by 157,000, above the 127,000 average of the first four months of the year, while the national unemployment rate remained at the unusually low rate of 4.5 percent. The manufacturing sector of the economy is improving, according to the Institute for Supply Management survey for the month of May, reaching its highest level in over a year. And even though economic activity was reasonably weak in the first quarter, pre-tax corporate profits bounced back in the quarter after a small decline in the fourth quarter of 2006.

In fact, the recent uptick in the economy, higher energy costs, and other inflationary fears have nudged up long-term interest rates. The 10-year Treasury bond rate is currently about 5.25 percent, up 50 basis points from the May average, and at its highest level since early 2002. Higher interest rates will have direct effect on construction activity, increasing financing costs for nonresidential projects and mortgage rates for home buyers.

Managing growth by varied means
In an effort to manage growth better within their jurisdictions, municipal government has relied more heavily on several mechanisms to manage and control development. This month, we asked our Work-on-the-Boards panel to indicate which of the many growth management techniques available to municipal government were increasing in popularity in their areas. A majority of respondents indicated that environmental regulations (land restrictions or required remediation of environmental concerns), design guidelines (design and performance standards), and impact fees (where the developer offsets some of the costs typically borne by government) were all increasing in popularity. Also, fully 44 percent of respondents felt that even basic zoning (restrictions on land use or density allowed) was increasingly used to manage development.

Firms in the Northeast and Midwest were more likely to indicate that basic zoning was increasing the most in popularity by municipal government. Firms in the South and West were most likely to mention design guidelines. Impact fees were more likely to be mentioned by firms in the West, while environmental regulations were mentioned about equally by firms in all regions.