In September, architecture firms reported a significant decline in business, signaling potential challenges for the commercial real estate market in the coming year. The AIA/Deltek Architecture Billings Index, which serves as a forward-looking indicator of demand for nonresidential construction activity, dropped to 44.8. Any score below 50 indicates deteriorating business conditions, and this was the lowest score recorded since December 2020, during the peak of the Covid-19 pandemic. The decline in the index reflects an increasing number of architecture firms reporting decreased billings.
This index primarily focuses on forecasting demand for nonresidential construction, encompassing both commercial and industrial buildings. It aims to predict construction activity for the next nine to twelve months. The chief economist of the AIA, Kermit Baker, highlighted that not only are more firms reporting reduced billings, but there is also a hesitancy among clients to commit to new projects, resulting in a decrease in newly signed design contracts. Consequently, backlogs at architecture firms have decreased, with an average of 6.5 months in the third quarter, marking their lowest level since the fourth quarter of 2021.
The commercial real estate sector faces challenges from multiple angles. The slow return to office work impacts office buildings and the businesses that rely on them, such as retail stores and restaurants. Downtown areas are particularly affected. Additionally, a sharp increase in interest rates has further complicated the situation, leading to a slowdown in investments and deal-making across various sectors.
Although the decline in business is widespread across the country, the Western region is experiencing the most significant impact due to a slower return to the office compared to other areas. Among real estate sectors, firms with a focus on multifamily residential construction have witnessed more significant declines. Multifamily construction experienced a boom in recent years, leading to a surplus of units on the market and placing downward pressure on rents.
Analysts warn that the decrease in apartment construction activity does not bode well for the future. They anticipate that once the current surplus of multifamily construction is absorbed, there may be a dearth of such projects for several years to come.