ABI Plunges 3 points

As reported by the AIA, June 23, 2010:

“After three straight months of improving conditions, the Architecture Billings Index (ABI) fell nearly three points…The American Institute of Architects (AIA) reported the May ABI rating was [at] 45.8, down substantially from a reading of 48.4 the previous month. This score reflects a continued decline in demand for design services … and comes on the heels of the highest score since January 2008 when revenue at architecture firms headed into recession.”

What does this mean in the real world? Why should you care? I know, you don’t work in Architecture or Design so why should you care about the AB I?

For those who have tuned in late to our program, please indulge me as I once again explain why everyone should care about the ABI.

The Architecture Billings Index (ABI) is an [almost] real time look at the amount of design work on the boards at AIA member offices around the country. By measuring the billings of projects from month to month, the ABI is a “crystal ball” for the amount of construction which will inevitably follow.

Except for Civil Engineering projects, most construction projects begin in the office of either a Developer or an Architect. Since AIA members work in both of these industries, the ABI has proven to be very accurate in predicting the amount of construction that will follow – 9 to 12 months later, as the design is completed and the project moves into the Construction Phase.

So declines in Architecture today AUTOMATICALLY indicate declines in Construction tomorrow – it is as predictable as clockwork. In total, Design & Construction represent almost 22% of our economy. So it is really important to pay attention to these numbers.

For the last 3 months the news has been getting “less bad” (to use the word “improvement” is misleading, because a “slower decline” – is still a decline). However, the plunge of nearly 3 points in May represents a staggering loss in billings, almost 7%. Apparently, everyone is “shocked and surprised” at this news. Except those of you who read my blog on a regular basis, who fully expected it. And who, I will add, expect it to get worse. Once again, here’s why.

Architecture is always one of the very first industries to feel the sting of a recession. When people or businesses start to feel pinched economically, the first thing they do is end all plans for expansion. They will chose NOT to expand into that new lease space. They will chose NOT to build that new facility. NOT to build (or buy) that new home or to start a business.

This situation remains until:

Once the economy bottoms out, confidence will grow and the money supply will return – and then Architecture will pick up. It will then be reflected in the Architects monthly billings, and thus the ABI goes up. 9-12 months later, the project hits the streets as a new Construction project and that money finally works its way into the economy.

The first projects to be seen in an actual recovery are almost always “Tenant Improvement” projects. These are usually small remodel projects such as putting in a new sandwich shop in the corner strip mall. Some larger companies who survived the storm will take advantage of all the empty office, retail or warehouse space and gobble up what they can while the price is still low. New construction won’t come until much later.

But this time it is much harder than it has ever been. Tenant Improvement projects are almost non-existent. There is almost no market for Residential Design, and there won’t be for a very long time because of all the vacant properties. This part is obvious to just about everyone. But unless you deal with it on a day to day basis, you might not know that the Commercial Real Estate Market is on the verge of Collapse, just as the Residential Market was 3 years ago. Only the effects of the Commercial Real Estate Market will be far greater.

Vacancy rates for Retail Properties are expected to hit 20% by the end of year (“normal” is 5%). Furthermore, financing for Commercial Properties is usually based on a 3-5 year adjustable rate mortgage. The bulk of those loans (from 2005-2007) are now starting to reset. But the properties are empty and have lost value, just as your home mortgage has lost value. The owners can’t get enough rent to cover the mortgage increases and they can’t refinance either – because they owe more than the property is worth. Whereas the average value of a Residential property in foreclosure is $160k – the average value of a Commercial property is $650k.

Massive business bankruptcies are going to be the result. Expect to see many more vacant buildings and shopping malls. Banks will once again be looking for someone to bail them out – again, for the bad decisions they made by lending money on risky investments. But this time the resistance will be strong, the people will be watching and bail-outs will be fewer. The end result is that the recession will deepen even further, until equilibrium is reached. Should Obama try to kick the can down the road with another stimulus package, it will only delay the inevitable and amplify the results even further.

The Obama stimulus package has made the economic situation worse than if they had done nothing at all. Normally, a recession would last from 12-18 months. We are now at the point of where we “would have been” if we had done nothing to stimulate the economy. We should be seeing an improvement in unemployment and consumption. But by abandoning the free market, Obama has prolonged the recession, and pushed back the recovery. It turns out that now all those 3-5 year loans will be coming due at the absolute worst possible time. The unforeseen consequence of interfering with the free market has led us to a perfect storm where all economic models will converge in 2011-2012.

Unemployment; Low money supply; Mortgage resets; Bankruptcies of Residential Mortgages and Commercial Mortgages; Manufacturing Declines; Service Business Declines; Higher Taxes; Skyrocketing Debt; Outsourcing of jobs to foreign nations; Inflation – All will converge at a single point in 2011. I estimate that we have at least a 40% chance of a full blown Depression by the end of 2011 or the beginning of 2012.

Anyway, that is why you should care about the Architectural Billings Index. Until you see improvement in the ABI, you will NOT see any improvement in Construction or any field related to Construction. And without improvement in these industries there is no improvement in the economy as a whole. Or to put it another way, recovery cannot occur without it being reflected in the ABI. And for now, the ABI shows no signs of ANY recovery.

So when you see someone on TV making claims that the economy is recovering, you will know that they are an idiot (Including Joe, “the idiot” Biden as well as Barack “The Great Divider” Obama). They have no foundation on which to base such an assertion. Unemployment figures (which don’t reflect actual unemployment), sales figures, goods on hand (inventory), imports & exports – are all historical indices which don’t forecast a damn thing. It would be like saying, “Gee, Microsoft stock is up 2 points from yesterday – that means that tomorrow it will be up 4 points. I better go buy some.” The concept is ludicrous but this is what the so called “experts” do all the time. And it is why not one of them saw this recession coming.