For Architects, a Downturn
Is in the Designs

A key barometer of construction-industry activity is signaling that the abrupt downturn in commercial construction could run deeper, and last longer, than previously expected.

The American Institute of Architects said its Architecture Billings Index for last month declined to 41.8, its lowest monthly reading since the aftermath of the Sept. 11, 2001, terrorist attacks. As recently as July, the index was near 60. The index's 8.9-point slide in February follows a 4.3-point drop a month earlier, amounting to a 24% swoon over those two months. (Any reading above 50 indicates an increase in billings; a reading below 50 means billings for the industry declined.)

Jan Hatzius, chief U.S. economist at Goldman Sachs Group, said the ABI's decline indicates that the economic slump has engulfed commercial construction in addition to residential and likely confirms that the broader economy is in recession. "We're really just starting to see significant deterioration in the commercial construction market," Mr. Hatzius said. "I would tend to play down month-to-month moves, but this [February decline] certainly is consistent with the idea that the economic downturn is becoming more broad-based than it was a few months ago."

Researchers at the AIA said the index's drop means the commercial-construction sector will remain under pressure through this year and next, as the credit crisis -- initially born of subprime-lending excesses -- continues to roil the economy. "I don't think we're going to see a score above 50 for a while at least," said Jennifer Riskus, the institute's manager of economic research.

Economists consider architectural billings a leading indicator for construction activity because architects are hired to do work that has just passed the planning stage. The largest declines in billing occurred in the commercial and industrial projects, such as shopping centers and office buildings. Billings were also down sharply for mixed-use projects, which often combine several different types of buildings such as apartments, office space and retail.

Architects note that some industries still are generating strong demand for their services. Chief among those are expanding hospitals, universities and office parks near military bases. Hospital systems continue to expand as health-care needs increase, particularly for aging Baby Boomers. Universities are less susceptible to economic cycles than private industry, and some have started drafting comprehensive plans for their campuses. And some military bases are expected to add troops -- and, subsequently, military contractors -- transferred from other bases slated for reduction.

But for many architecture firms, the construction boom has come to an end. Some firms that added hundreds of staff are considering cutbacks. Others are diversifying into more stable fields such as pursuing contracts abroad and designing hospitals and university complexes. But don't expect a wave of mergers and acquisitions, since struggling firms are likely to specialize in out-of-favor fields that buyers don't covet. "We were looking for 10% [revenue] growth this year, and we'll probably come back to 5% or 6%," said Ralph Hawkins, chairman and chief executive of Dallas-based architect HKS Inc. "We may be looking at reducing staff in the future as well."

HKS, which employed 500 people five years ago, now has 1,230 U.S. employees and nearly 100 abroad. Like its peers, HKS has found strong demand for firms that design medical buildings, such as hospitals, and education centers, such as schools or university campuses. Among HKS's latest contracts are those for the Ahuja Medical Center in Beachwood, Ohio, and the Royal Children's Hospital in Melbourne, Australia. Yet cancellations are becoming more frequent. Among the projects HKS was designing that were recently postponed were a hospital in Richmond, Va., and a 300,000-square-foot office building in the San Francisco area.

SmithGroup Inc., a Detroit-based architectural firm, also is reining in its revenue projection for this year, now targeting a more conservative 6% increase instead of the 9% gain it forecast earlier. The firm has registered more demand from expanding universities, hospitals and technology-and-science companies, but it has lost projects, too. Mixed-use projects in Ann Arbor, Mich., and Phoenix that SmithGroup was designing recently were cancelled, eliminating $6 million in revenue for the firm. Smith Group has responded by scaling back some of its hiring and marketing spending.

Some firms have found work in foreign markets, including the Middle East's oil centers. RTKL Associates Inc., a Baltimore-based firm, acted last year to prepare for the economic downturn by shifting more of its prospecting for new business overseas. It anticipates that its mix of work -- of which international projects accounted for 30% last year -- will shift by another 5% to 10% to foreign contracts this year. RTKL reports that it has inked more contracts for projects in the Middle East, Europe and the Pacific Rim.

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