Cautiously Optimistic
The tri-state area’s designers were on the front lines of a construction market choking on its excesses in 2008. Today, even if temporarily, most of the rampage seems to be over, but there is little cause for excessive optimism: colleagues across the three states remain unemployed, projects are stalled, and there are few indicators that the federal or state governments will come to the rescue to the extent they did in previous downturns. Among those still standing, there’s a growing consensus that business as usual is over, and the industry as a whole will need to reinvent itself to stay relevant.
“We as architects seem to be the canaries of the economy, because we’re the first ones hit when projects stop,” said Jason Kliwinski, president of the AIA New Jersey chapter.
Rick Bell, head of the New York AIA chapter, estimates that 25 percent of regular staff and interns at architectural firms across New York have been let go during the economic downturn. In New Jersey, according to Kliwinski, the design industry’s unemployment rate is at a whopping 40 percent, compared to the 10-percent average in the economy overall. “Four- hundred-person firms closed,” he said.
James LaPosta, Jr., head of the Connecticut chapter of AIA, said that since 2008 designers there “went through the seven stages of grief.”
“I finally started to understand the generation that grew up during the Great Depression.” Even firms that were geographically diversified experienced shocks.
“I think like others we were expecting a downturn in the local markets,” said Aaron Schwarz, a principal at Perkins Eastman, which had 15-20 percent of its portfolio abroad prior to the recession. “What everyone was caught by was the global ramifications—that it really hit worldwide.”
In New York, according to Bell, the sectors suffering the largest declines were corporate offices and the ubiquitous luxury residential.
“Some of those extras being spent on construction work at the height of the market, that over-the-top catering to only the super-luxurious—we’ll see less of that,” said Schwarz.
“The last gasps of extravagance are being finished today,” Bell said. “Will we see another Goldman Sachs or Beekman [towers] any time soon? I don’t know.”
LaPosta, who in addition to heading the Connecticut AIA chapter is chief architectural officer at the Hartford-based 75-year-old JCJ Architecture, said that Connecticut companies have cut their staffs and the entire design sector saw a number of mergers and acquisitions. Among the smaller firms, particularly those doing design work for the corporate office, residential (except for the very high-end) and retail sectors, were hit hard; some went out of business entirely.
More often than not, the ones able to survive were the ones that had the foresight to diversify, according to Kliwinski and Bell.
Projects in education, health care, institutional buildings, infrastructure work, particularly projects benefiting from the stimulus act, are getting funded or proceeding, according to Bell. “Even during the Depression,” he noted, “public facilities took the country out of unemployment.”
In upstate New York, the stimulus money meant more infrastructure work.
“We set up a little war room to attack that program and have been very successful, getting 60 projects in 12 states for $30 million,” said Raymond Kinley, president of the Albany-based Clough Harbor & Associates Engineers. “The stimulus had a big effect on sustaining us. It’s been a very difficult time for vertical construction, but the infrastructure stuff kept our numbers up—we’re a bit up over last year.”
Kliwinski and LaPosta both see health care work continuing in New Jersey and Connecticut—but they are not as optimistic about education.
“Two years ago, the world changed,” LaPosta said. JCJ’s San Diego office’s school work dried up completely in 2008-2009, for example. This was a “bit of a surprise,” LaPosta said, because in previous downturns work in education picked up due to stimulus funds. This time around, said JCJ’s Barbara Hubbard, the stimulus money went to teachers instead.
A similar trend happened in New Jersey, according to Kliwinski, whose firm, Trenton-based Spiezle Architectural Group, prior to the downturn started expanding into retail, banking, hospitality and health care, after 55 years doing almost exclusively educational projects.
“With the [NJ] state budget crisis and drying up of public school work, a lot of firms that only did that are no longer in business,” he said.
“Those that made it through already had public work in the pipeline,” Hubbard said.
And that was the main difference between public and private sources: privately funded projects already under contract stopped, while public projects continued. As a result, JCJ saw its share of public projects jump from 24 percent of the firm’s portfolio in 2008 to 45 percent in 2009 (numbers for 2010 were not yet available due to pending contracts). Kinley’s firm saw a number of new large projects in dam work across the nation, as well as power, utilities and communications work up and down the East coast. His firm, traditionally doing 50-50 public-private work, after the stimulus money, is now 65 percent public projects.
Vultures Among the Canaries
Perhaps the most troubling effect of the two-year-long recession has been the slashing of fees, or even underbidding entirely, in some cases, for firms just to stay in business. “Feasting on your young” is how Connecticut’s Hubbard described it, adding that that average fee there went from 7 percent of total project cost three to four years ago, to 4 percent today.
“People are doing what they need to do to keep business,” Kliwinski said. “If that means taking a project at a loss, that’s their business decision.
“We’re seeing that fees are holding in niched expertise, be it sustainability or whatever it may be.” “There are many practice areas we have expertise in which then got more competitive because architects not involved with those markets before flooded the market, and that put pressure on the fee structure, which is unfortunate,” Schwarz said. “There will always be those firms that will ‘buy’ the work and not do justice to the work. The good developers will see right through it, and the bottom-feeders will fall through the trap.”
“It’s a very competitive fee situation,” Kinley said. “If you go into an RFP, there’s 20 people now, double the number from before. We have streamlined our company, reduced our overhead, so we can compete properly on the profit side.”
Adapting to Changing Times
More competitive bids, and underbidding, has forced firms to adapt: most firms put a higher emphasis on technology to reduce man hours and ease collaboration with developers and contractors. Team structure within firms was re-examined as well.
“There’s a higher sense of urgency,” Hubbard said.
As a result of this belt-tightening and the necessity to find new ways to work with clients, even the relationship between construction managers and architects is changing.
“I think historically CMs have had this…distrust, a halfway bemused fear of architects being extravagant, not grounded in realities of construction and the costs attended to it. “Now, you have to know better than anyone else what you’re designing, what it costs, if you don’t want to see substitutions and changes.”
Design companies have also started pushing out geographically. Connecticut’s JCJ, for example, started going after K-12 projects in Massachusetts, Pennsylvania and California.
Bell brought up the New York Now exhibition AIA NY puts on annually highlighting projects by the state’s architecture practices. This year, AIA decided to open the exhibit to projects outside the state. After first glance, Bell said, he saw that around 20 percent of the projects were overseas, and “not just offices towers in China”: education projects, hotels, resorts, in Korea, the Middle East, but also “less predictable” locales like Panama and Portugal, “places at least I haven’t heard of planning commissions. I find that very heartening.”
“International markets that were stymied came back quickly, and international projects are now probably 30 percent of our practice,” compared to 15-20 percent in 2008, said Schwarz. “Our expertise in design programming and planning can be exported to those countries and imported by our offshore offices.”
An Uncertain Future While there are indeed some indicators that work is coming back to designers, there are few economic indicators to give cause for downright optimism.
“I’ve heard things stabilizing, some folks rehiring people they’ve let go—but there’s still a long way to go,” Kliwinski said. “I’m cautiously optimistic. It’s still a pretty tough situation that a lot of people are in.
“The biggest challenge over the next 12 months is the credit market, and it’s beyond our control, but it’s what makes or breaks the design industry. “
“In the absence of liquidity and funding for projects put on hold, things starting to come back to life is not necessarily reflected in the architectural billings index,” said Bell. “Release numbers that show a, quote, small uptick, doesn’t mean everyone’s jumping up and down that the recession is over. It’s anecdotal—we see here [in New York] a diminishing of layoffs. … I don’t know if it’s cause for excessive optimism, but these things do have cycles.”
“With all the projects, there were times over the last decade when it was like shooting fish in a barrel, and I believe it’s not going back to that level,” Schwarz said. “We will have to sharpen our pencils on how to compete—it will not be easy just to get work.”
On the other hand, designers are mindful of being too afraid to move on.
“We have to be careful that, after the irrational exuberance [pre-2008], followed by the past two years, we are not being overly cautious as work comes back,” said LaPosta.
“The nature of the economy is changing,” Bell said. “It changed from industrial to post-industrial, from a service economy to an information economy. What’s next?
“If I knew,” he said, “I’d be an investor.”
