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2006 Top Design Firms
Design Market Hot
In Midwest-For Now
by Craig Barner
The market has been torrid for design firms in the Midwest
so far this year, but there are pessimists out there who say
the blazing sun is about to set.
Starts are hot in the region, and billings are rising. Also
increasing are backlogs, and architects are getting job offers.
The overall economy continues to move at a steady pace even
if it is not the wealth-producing juggernaut of the late 1990s,
and as the year edges toward completion, the industry appears
that it will enjoy prosperity through the early part of next
year.
But are design firms in the twilight before the inevitable
decline into dusk and darkness?
There are pessimists who say so, but optimists still are reigning
in the design arena.
"The quantity of work is still healthy, and we're getting
regular inquiries for new work," said Michael Kaufman,
partner with Chicago-based architecture firm Goettsch Partners
Inc.
Strong 2006; Questionable Future
It is clear that 2006 was an exceptional year for most design
firms.
Starts were up through second-quarter 2006 vs. the comparable
period in 2005 in each of the major metropolitan areas where
Midwest Construction circulates, according to data from McGraw-Hill
Construction, publisher of the magazine.
The increase was dramatic in Milwaukee (63 percent, to $2.1
billion), due in part to the start of the $2.3 billion Oak Creek
Generating Station, the continuing activation of contracts on
the $810 million reconstruction of the Marquette Interchange
downtown and the start of the $417 Columbia St. Mary's hospital
project, also downtown.
Also strong were the increases in St. Louis (25 percent, to
$3.2 billion) and Chicago (10 percent, to $11.2 billion).
"It's been a good year, and the activity continues to be
strong in the Midwest," added Clark Davis, vice chairman
of St. Louis-based Hellmuth, Obata + Kassabaum.
Indianapolis had only a 1 percent increase, to $2.4 billion,
but the central Indiana city was probably due for a modest rise
due to a string of double-digit increases for the two-plus years
prior.
But the good times cannot keep rolling forever, and some observers
are now asking when the bubble will burst. The Architecture
Billings Index, a gauge of the American Institute of Architects
in Washington, D.C., might be the first herald of moderation
industry-wide. The measure's dividing line between a drop or
rise in billings is the score 50.
In May, the AIA announced that the ABI, which is derived from
a work-on-the-boards survey of design firms, posted a negative
score, 49.6, for the first time since September 2004. The measure
had previously been positive for 20 straight months.
"After such a prolonged period of positive business conditions
at architecture firms, it is inevitable that the market would
soften a bit," said AIA chief economist Kermit Baker, who
released the data. The June ABI, the latest available, fell
again, to 49.2.
Residential had the biggest drag on the overall June index because
it had the lowest score (44.3). Institutional (57.1) and commercial/industrial
(54.3) were still positive.
The Midwest was only partly immune for the trend of falling
billings. Though the region was still positive in May (51.4),
it fell markedly in June (46.8).
Indeed, the Midwest had the worst score of four geographic regions
nationwide that month.
Some Midwest design firms are finding their expectations frustrated.
"We were hoping it was going to be a big, robust year,
and it has certainly not been," said Pat Quinn, president
of Eau Claire, Wis.-based Ayres Associates Inc., a civil engineering
and architecture firm.
Ayres does a lot of work in the public sector and in transportation
design for municipalities, counties and states, but the structuring
of the Wisconsin transportation budget, with its reliance on
the issuance of bonds vs. appropriations, is having an impact.
"Theoretically, the workload has been the same, but the
trouble is that those bonding debt-service payments come against
your federal-aid dollars," he added.
The costs for construction materials keep rising, and the reverberations
could affect work for design firms.
The Alexandria, Va.-based Associated General Contractors of
America announced that the Producer Price Index in June, the
latest available, for construction materials and components
was up 7.7 percent over the previous year, thereby outpacing
the overall PPI (4.9 percent.)
Some of the highest increases were experienced in copper (82
percent), asphalt (71 percent) and diesel fuel (33 percent).
And ominously, building permits fell 4.3 percent in June over
the previous month and 15 percent from the comparable month
in 2005, also according to AGC data.
Detecting the softening economy, the Federal Reserve decided
in August against raising the prime interest rate, normally
a measure to keep inflation under control and the economy out
of recession. The Fed had approved 17 straight increases since
June 2004.
Backlogs, Hirings Up; Fees Steady
Even if the economy sours, many design firms have built up
a backlog to keep busy for the near term. Many are reporting
double-digit increases in backlogs or better.
"Backlogs for the firm as a whole and for most of our
individual practices are at record-high levels since this
time last year," said HOK's Davis. "They increased
rapidly through the third quarter of 2005. Since then they've
flattened a little bit but are stable."
With a greater backlog level comes the need for architects
to do the work. As expected, the job market for architects
is exceptional.
Richard Smith, principal of Chicago-based Loebl Schlossman
& Hackl, was recently at an industry event for architecture
firms, and he said some discussion centered on hiring.
"To a firm, everyone was looking for architects,"
he added. "We're interviewing people who have three and
four job offers, and this is entry-level people."
Because of the heavy competition, design fees are holding
steady because of stiff competition.
"A lot of times we'll go after a project that in total
dollars is not really a big project, but 10, 15 even 20 firms
are going after it," said Ayres' Quinn.
Selected market sectors in commercial design are strong, including
health care because of aging facilities and aging baby boomers.
Except for St. Louis, which was down 35 percent because of
a large number of recently completed projects, starts were
up elsewhere, including 389 percent in Indianapolis ($135
million), 52 percent in Chicago ($254 million) and 7 percent
in Milwaukee ($58 million).
Pent-up demand is driving the work, Smith said.
"We went through a little bit of an extended period in
health care where nobody was doing anything," he added.
"Now it is being exercised and is almost unprecedented.
You're seeing a half-dozen $100 million to $200 million projects
in the area all at once."
The hospitality industry, including hotels, casinos and restaurants,
is also seeing a demand in projects. Hotels were up 944 percent
in St. Louis, to $187 million, in part because of a hotel/casino
project downtown.
Indianapolis and Chicago were also strong, and the groundbreaking
for the 50-story-plus Mandarin Hotel in the Loop is expected
soon. Both the 92-story Trump International Hotel & Towers
and the 89-story Waterview projects in Chicago have incorporated
hotels.
Infrastructure design is a good market because every major
Midwest city had an increase in starts. Milwaukee had the
highest increase (376 percent, to $1.2 million) because of
the Oak Creek Generating Station.
More opportunities are expected in infrastructure because
of the $286 billion federal transportation bill that President
Bush signed late last summer.
Outside the country, opportunities are attracting a lot of
American design talent, especially in China, India and the
Middle East.
About 35 percent of Goettsch's work is in China, Kaufman said.
"There are 40 to 50 cities with more than two to three
million people in China, and we're busy in 10 of them,"
he added.
SIDEBAR 1
Milwaukee and St. Louis are riding big gains in construction
starts, and the rest of the Midwest is strong.
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Midwest City Starts
(first two quarters; in billions of dollars)
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YTD 2005
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YTD 2006
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% Ch. 06/05
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Chicago
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$10.2
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$11.2
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+10%
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Indianapolis
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$2.4
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$2.4
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+1%
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Milwaukee
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$1.3
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$2.1
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+63%
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St. Louis
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$2.5
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$3.2
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+25%
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Source: McGraw-Hill Construction
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SIDEBAR 2
The year 2006 could see a record number of deliveries of
residential units in downtown Chicago.
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Architecture Billings (first six
months 2006; 50 is the dividing line between a fall
or rise in billings)
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| |
Midwest
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Nation
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| June |
46.8
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49.2
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| May |
51.4
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49.6
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| April |
50.4
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54.2
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| March |
53.9
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50.5
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| February |
60.3 |
55.5 |
| January |
53.5 |
55.5 |
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Source: American Institute of Architects
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SIDEBAR 3
Useful Sources
Several Midwest affiliates of the American Institute of Architects
provide design firms and engineers with the opportunity for
networking and learning.
They include:
AIA Chicago, phone 312-670-7770 or visit www.aiachicago.org
on the Internet.
AIA Illinois, phone 217-522-2309 or visit www.aiail.org.
AIA Indiana, phone 317-634-6993 or visit www.aiaindiana.org.
AIA Northeast Illinois, phone 630-527-8550 or visit
www.aianei.com.
AIA St. Louis, phone 314-621-3484 or visit www.aia-stlouis.org
AIA Wisconsin, phone 608-257-8477 or visit www.aiaw.org
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