Construction workers construct a building in downtown Miami, Florida, on June 14, 2023.
Jim Watson | AFP | Getty Images
Architectural firms reported a sharp decline in business in September, suggesting the commercial real estate market could come under even greater pressure next year.
The AIA/Deltek Architecture Billings Index fell to 44.8 in September, the lowest since December 2020, during the peak of the pandemic. Any value below 50 indicates worsening business conditions. The assessment shows that more and more architectural offices are reporting a decline in billings.
The index is a forward-looking indicator of demand for non-residential construction activity, both commercial and industrial. The aim is to predict construction activity for nine to twelve months.
“While more firms are reporting a decline in billings, the report also shows clients’ reluctance to commit to new projects as the number of new design contracts signed has declined,” said Kermit Baker, AIA’s chief economist. “As a result, the order backlog at architectural firms fell to an average of 6.5 months in the third quarter, the lowest level since the fourth quarter of 2021.”
Commercial real estate was hit by a double whammy. The return to the office is happening slowly, affecting both office buildings and the retail stores and restaurants that support them. The inner cities are suffering. But a sharp rise in interest rates has exacerbated the problem, causing investment and deal-making to come to a halt in most sectors.
While all regions of the country are seeing declines, the West is the deepest, with returns to office slower there than other regions. Among real estate sectors, companies focused on multifamily housing experienced a steeper decline. Multi-family construction has boomed in recent years, and record numbers of residential units are now flooding the market and putting pressure on rents.
However, analysts warn that the decline in housing activity does not bode well for the future.
“I’ll say it again: We have a lot of multifamily construction to get through, but after that there won’t be much in the next few years,” said Peter Boockvar, chief investment officer at Bleakley Financial Group.