The June Architecture Billings Index (ABI) shows that demand for architectural services declined for the third consecutive month. The ABI is a leading indicator of construction nine to twelve months in the future.

“This seems to be a case of not thinking it can get any worse – and then it does,” said AIA Chief Economist, Kermit Baker, PhD, Hon. AIA. “While a modest turn around appeared to be on the way earlier in the year, the overall concern about both domestic and global economies is seeping into design and construction industry and adding yet another element that is preventing recovery.”
(See for charts: <https://www.architectmagazine.com/economic-conditions/abi-report.aspx> https://www.architectmagazine.com/economic-conditions/abi-report.aspx)

That’s the bad news.

The good news is that fewer new projects means better fundamentals (i.e. rents and occupancy rates) for existing properties. As I wrote in my forecast earlier this year, it is looking more and more likely that this cycle will see an extended period of rent and occupancy growth without the normal effect of new supply.

For example, the multi-family cycle usually runs abut 7 years… it takes about 18-24 months from a cycle trough for new supply to be planned, built and come online. During this time existing properties enjoy rising fundamentals. As new construction comes online, fundamentals begin to flatten. Building usually continues for about two years past the peak, then oversupply conditions set in around the sixth year, falling to form the next trough. Then the cycle starts all over again.

My view is that the existing properties will not have the normal new supply to compete with for 2-3 years due to the lack of development funding in the capital markets.

Metros and coastal markets will likely get the attention of private equity groups who do not rely on debt capital, and stick closer to the normal cycle. But micro-politans and tertiary markets will benefit from inattention until the larger markets become crowded.