Capital markets experts have been very focused on commercial real estate and a loan wall that is approaching in Q4 of 2023. The focus is so intense that many market participants have just decided to avoid the sector altogether. But last week, the Deltek Architectural Billings Index, largely thought of as a good leading indicator for economists, had its first increase since the middle of 2022. As is often the case with national data, there is a lot going on under the covers that helps us understand why the ABI is up. And there’s even more going on that helps us find new opportunities in areas that may not be intuitive.
First, what drove the index higher in May? New Inquiries – New inquiries showed a score of 57.2, which was up from 53.9 the previous month. This is actually a fairly large jump from one month to the next, and the value of new design contracts was also up from 49.8 in April to 52.3 in May. Another decent jump. But what’s most interesting about this is that hospitals, schools, museums, and government agencies drove the results. Obviously, we’re not seeing a whole lot of office inquiries today, so the offset by these other types of property must be huge to counterbalance the weakness in office…this is a big deal.
One of the reasons architecture billings are so interesting for economists is how much they generally lead the resulting economic activity. In some cases, like the current situation in office, we can assume that the uncertainty of demand means a near shut down of new design work. But housing, hospitals, schools? Design work may see ebbs and flows, but they are far more likely to operate through an economic cycle. While some of the activities inherent in these data are indicators of economic strength and better times for investors, others, like the current lull in multifamily design activity, is really encouraging for improved rents in future periods as new supply in some markets will finally be absorbed.
As one may also guess, location matters. The ABI data saw growth in the South for the last two consecutive months. That’s a far cry from the constant din of negativity that we’ve heard about the Sunbelt for the last year. Meanwhile, billings in the coastal regions of the West and Northeast have been below 50 for some time. We’ve been fans of the architecture business for a long time. They have helped us shape our multifamily decisions for years, but the more closely we pay attention to the data surrounding their activity, the more clearly we see their impact and the timing of design work relative to construction and operation. In order to make investment decisions at Willow Creek Partners, we use the Mosaic Theory. We collect data from as many sources as we can to build toward the best outcomes for our investors. The ABI data is an excellent tool in that pursuit, and you’ll hear more about it in coming months.