Architecture-Billings Drop Worrisome for CRE?

Architecture Billings Index dropped below 50 for the first time in a good many months, so what does this mean for the commercial real estate industry?

The American Institute of Architects reported its latest Architecture Billings Index (ABI) this week, noting that the index dropped below 50 for the first time in a good many months. As a measurement of architects’ billings, the ABI is a leading indicator for the commercial and multi-family real estate industry, since architects tend to do their work roughly nine months to a year before construction on a new property begins. The better the architects are doing this year, the better the commercial real estate industrial is (probably) going to do next year.

The ABI is based on the monthly “Work-on-the-Boards” survey, which is done by the AIA Economics & Market Research Group. Survey panelists are asked to report whether their billings significantly increased during the previous month, remained about the same, or significantly decreased compared with the month before. It’s a fairly standard setup: If an equal share of firms report an increase as report a decrease, the score for that month will be 50. A score above 50 means that firms (as a whole) are reporting an increase in activity that month; a score below 50 indicates a decrease in activity.

The ABI came in at 49.9 in January 2015, or just barely negative, compared with 52.7 in December. Overall, the index was mostly positive during 2014, reflecting the generally good growth patterns that are now occurring in CRE. The organization’s new projects inquiry index was a strong 58.7 in January, but down from 59.1 the previous month. The ABI also beaks down by sector: multi-family residential, institutional, and commercial/industrial architects were all slightly positive in their assessment of billings, while architects with a mixed practice, for whatever the reason, were in negative territory (46.9).

The ABI drop for the month was something of a surprise, considering how strong it’s been recently, and slightly worrying. But it also could be a fluke, since this kind of index also includes a fair amount of month-to-month noise. It’s also possible that the weather was a factor, since Northeastern architects reported slower activity than their Southern counterparts. A run of three or four poor months for the architects would be much more ominous for the future of CRE, but so far that hasn’t happened.