The billings index has hit a record low. Is that as scary as it sounds?
It's too early to tell. What it's telling us is that design activity in a broad sense is slowing very sharply—more than in the 13 years we've been tracking it. We started in '95, well into a recovery. Then we hit a steep recession in 2000–2001, and we've been in recovery ever since. So we really only have one other downturn to compare this to.
It sounds worse than the last downturn. We're heading into it a little more sharply, but, on the other hand, the economy seems on much firmer ground now than it did after 9/11.
Despite consumer confidence reports that are pretty grim? Consumer confidence reports that are pretty grim. Business confidence reports that are pretty grim. A housing market in turmoil that's threatening to shut down credit markets. There are certainly more than a few challenges out there. The way I'm reading it (and I think the consensus now) is that we're probably in a recession. But it looks like it's going to be reasonably shallow: three quarters. I would say it's going to be a lot more mild than the last time.
In the late '90s, nonresidential construction was incredibly overheated. This environment is 180 degrees from that. Companies have been very cautious. The fundamentals here—office vacancy rates, hotel occupancy rates, retail rents—they're all at very healthy levels. Once the economy starts growing again, I think nonresidential construction will just click back into gear.
Many of the architects I talk to say they don't feel the downturn at all. With a bit of luck, a lot of them won't. A midsized firm with four, five, six ongoing projects; a large-sized firm with 10, 15, 20 projects—they're not going to see a downturn at all. We're going to see a decline in nonresidential activity in the single-digit range, inflation adjusted: a 5 or 10 percent decline. A lot of firms are going to hold their own. Some are going to see a 15, 20 percent decline. It's certainly not going to be across the board. It's going to be regional, by sector.
What sectors and regions? Institutional looks very solid across the board, and it will be unless this recession spirals out of control and starts affecting government revenues. If we went from a six- to nine-month recession to an 18- to 24-month steep recession, the institutional market's going to get hammered. But if we don't, they may not skip a beat. Commercial looks weak.
Two-thirds, three-quarters of the country is seeing some broad economic slowdown. The other quarter to a third, it hasn't hit them yet, and it may not. Firms in the industrial Midwest started seeing weakness 12, 18 months ago. California is starting to get hit, Florida, to some extent up and down the Northeast corridor.
Areas that are doing well: Texas, oil economy; the agricultural Midwest north of Texas through Minnesota; the Pacific Northwest. South Atlantic, kind of mixed: Charlotte, I hear good reports; Atlanta seems to be overbuilt.
Any advice for firms on how to weather the current economic climate? Try to diversify and develop strategic partnerships with firms in other areas or sectors. Get back to serious marketing. Now is probably not a good time to add staff. In general, they should hesitate to expand, stay close to the vest in terms of what they're doing, pay a lot more attention to current clients, and reconnect with former clients.
Where do you fall along the spectrum of current economic forecasts? Are you being cautious? An optimist? Providing advice to architecture firms, I try to be cautious. If I say things look like they might be weak and it turns out they're pretty strong, that's an annoyance, but probably not fatal. If I say it looks like things are going to be strong and they turn out to be weak, that could be fatal. When I started at the AIA in the mid-1990s, there was a board resolution to get an economist on staff because of the severity of the downturn from the early '90s. I've heard stories—almost impossible to confirm—that 25 percent of architecture firms in the U.S. went out of business.
Has the profession wised up, gotten better at business? Firms have gotten more sophisticated and, for that reason, more cautious. They've also got more arrows in their quiver to fend off problems. They're more diversified, they're bigger, they can cope with cycles better than 10 or 15 years ago. The flip side is that our memories tend to be short. There is a generation of architects that hasn't gone through a recession. A lot of folks I talk to say, “Things have been great for the last few years. Why are you bothering us with this stuff?” It's easy to understand that perspective.