The American Institute of Architects (AIA) publishes the quarterly Architectural Billings Index (ABI), which is generally viewed as a leading indicator for the construction industry. While the data fluctuated throughout the year, architects’ billings have been largely positive, according to the Washington, D.C. trade association. Heading into 2018, AIA Chief Economist Kermit Baker generally expects more of the same, albeit with some uncertainty surrounding national policy issues.
The last Architectural Billings Index from November showed the Midwest lagging a bit compared to other areas of the country. What do you attribute that to?
Some of the original numbers do bounce around a little bit. We had some weakness up in the northeast earlier this year and a good chunk of 2016. The south has been pretty consistently strong. … I think the broad regional trends are that we’re reverting back to trends that we were seeing before the last downturn.
What would that be?
Most of the population growth, and therefore the construction gains, are likely to be in the Sunbelt moving forward –– south and west –– and I think the northeast and Midwest are likely to revert back to a slower growth mode. But I don’t think anything significant beyond that trend.
What do you think that period of slower growth might look like?
The construction sector was really pretty slow in coming out of the last downturn. Because it was a financial collapse principally and construction is so reliant on financing, it just took a long time for that sector to get off the ground (with) housing, commercial as well as institutional (projects). The numbers for the various sectors have kind of pulled up at different points in time, but I think now we’re in a pretty good growth mode for the industry, low to mid single-digit growth.
What’s your overall projection for 2018?
It looks to be pretty much more of the same. 2017 was a bit of a disappointment. We were expecting growth in the 5- to 7-percent range. It looks like it’s going to be closer to 2 to 3 percent, but I think the flip side of that is that the growth we expected to see this year is probably going to be pushed into 2018 and 2019. I don’t see any big issues within the industry.
So you’re not forecasting 2018 as the year for a recession?
I think what’s going to bring down this construction cycle is … not something in construction but likely something in the broader economy. We’re long overdue for a cyclical correction –– some type of a recession. It’s probably likely to be a pretty mild one. But, I think if the overall economy is slow, and even turns negative a bit, that’s likely to take some of the steam out of construction, likely to take some of the steam out of the investment side of the economy (and) likely give that a little pause.
With the federal tax bill that’s making its way through Congress, do you buy the claim that a large corporate tax cut will result in greater investment that could lead to more work for architects and contractors?
I think that’s basically true. I think the tax bill –– which is really a business-focused tax bill –– is designed to stimulate more investment and I think we will see more investment. We’re at a sort of funny stage in the cycle to kind of expect an awful lot of investment. I think most folks feel we’re kind of at the tail end and not likely to see a lot of growth moving forward in the economy. Is that a good time to invest in facilities? So, I’m guessing that a lot of companies will say, ‘Let’s just kind of wait and see if we get demand out of this or not before we just willy-nilly go ahead with an expansion of our physical assets.’
What do you see as potential negatives from the tax bill?
Residential (is) a bit of the opposite there. For households, how much additional income are they going to see? That’s going to vary by circumstances. But taking away a few of the incentives for home buying — for example, the limitations to the mortgage interest deduction, the limitations to state and local taxes, however that works out –– is going to slow some of the incentive there. And it’s going to slow in areas that have high property values, high home values. That is mostly the coastal areas, but also areas that have relatively high property taxes and state and local taxes. That’s kind of a broader base, that’s not only the coastal areas. That’ll hit a broader list of areas in the northeast and Midwest.
Much of the current building boom in the apartment sector has come from various tax credits and incentives. Should those be eliminated as part of the bill, what kind of impact do you envision?
On the margin, we’re going to see some of these niche markets get hurt because we’re not going to have those preferences or likely not to have them — or not to the extent that we have had historically. I think that’s going to slow down some of those targeted areas in an effort to bring down business taxes and do away with a lot of the other tax preferences that might have helped some of these markets.
What other issues are you hearing from architecture and construction firms around the country?
There’s just a pretty significant shortage of labor in this industry and it doesn’t seem to be turning around. It’s an industry that’s traditionally very cyclical and traditionally loses a lot of its labor force during downturns, and then they cycle back up when the industry recovers. This time we haven’t seen that, particularly on the basic construction side, and so contractors are just really, really hurting for labor. That doesn’t seem like it’s gotten a lot better, even though the industry’s been recovering for the last four to five years.