As the architecture and design industry grapples with a steep decline in commercial work, firm leaders are turning their focus to practice areas and technologies they hope will safeguard their future relevance.
The American Institute of Architects/Deltek Architecture Billings Index score fell below 50 for the third consecutive month in October, indicating the majority of companies are experiencing a loss of revenue.
Well-diversified firms are leaning into noncyclical business. But technological advancements like artificial intelligence paired with the pinch of an economic downturn are driving many to double down on sectors that transcend the architectural realm.
In other words, firms must adapt or die.
“Do you want to be the author of the future or the victim?” HKS Inc. CEO and President Dan Noble said. “Clearly, we’d like to be the authors, so if with open eyes we realize, ‘This is happening and how do we respond?’ there are many, many opportunities.”
The majority of commercial projects are on hold as heightened interest rates stifle financing. Bank lending for commercial real estate plummeted 50% year-over-year in the third quarter, according to the Mortgage Bankers Association.
Commercial and multifamily construction starts declined 14% through the first six months of the year, in large part due to the limited availability of debt, according to the Dodge Construction Network.
The slowdown means architecture and design services have also been put on pause, though many firms are still working through backlogs stretching about 6.5 months on average, according to the billings index.
“The commercial mixed-use market is in a bit of a tailspin,” Noble said. “Interest rates, supply chain, the rising cost of labor, the cost of capital, land — everything is going up, so things aren’t penciling out.”
Knowing that pain on the commercial side was imminent, Gensler began investing more heavily in its recession-proof practice areas in 2020, said Todd Runkle, principal and managing director.
“We changed direction because we knew commercial interiors and commercial office buildings were going to take a huge hit,” he said. “We immediately refocused on education, hospitality … and civic projects that weren’t as dependent on financing.”
Office has been one of the hardest-hit sectors in terms of demand for new product, forcing workplace interior professionals like LPA Managing Director Teresa Rodriguez to find creative ways to drum up new business. Much of Rodriguez’s office work comes from repositioning rather than designing new spaces, she said.
“Even though there’s a lot of people that maybe are not going back to the office, there’s a lot of opportunity for developers, especially from outside of this market, to look at what we have here and jump on those opportunities,” she said.
Dallas-based Merriman Anderson Architects is also leaning into adaptive reuse as new business slows. Much of the work on the front end of a ground-up project is already taken care of in a repositioning endeavor, which saves time for the developer and is easier to accomplish with limited capital.
“I’ve got a building that’s existing, and it’s got all of the opportunity to be whatever you want to make it, and all of those big, tough site issues are already taken care of for the most part,” President Milton Anderson said. “So I’m jumping from one to 10 in a process that goes to 50.”
People who work on the commercial side of the A&D business are shifting into other areas, including mission-critical sectors like data centers and aviation, Noble said. LPA has invested heavily in life sciences, Rodriguez said, as emerging markets like Dallas prompt demand for more lab space.
“It’s really been working for us as far as a pivot,” Rodriguez said. “We’re getting more and more of that stuff coming in.”
Courtesy of Downtown Dallas Inc. Gensler's immersive digital installation at AT&T Discovery District in Dallas
Falling back on noncyclical business isn’t enough to ensure continued demand, Noble said. A&D firms should also be thinking about how they can be a part of the long-term usage and management of a building, especially as artificial intelligence and other technologies threaten to replace certain skills and expertise.
“Some of the basic services that we’ve done traditionally for many years will be commoditized and automated, so where does that leave us?” he said. “I don’t think that’s bad news. I think it’s good news, if you’re out in front of it.”
HKS is investing more in research and technology, positioning itself to leverage innovations coming to the market.
The company's Laboratory for Intensive Exploration focuses on the intersection between emerging technologies and architectural methodologies. It has doctors of philosophy, nurses, medical doctors, psychologists, anthropologists and sociologists on staff, all to create innovative environments that improve health and well-being, Noble said.
“We team up with hospitals, with education systems, with sporting clients to do the research on where the puck is headed to,” he said. “Sometimes we do it as a loss leader, but more and more we are getting profitable work from our opinions and our research.”
Gensler is turning its focus to its planning and infrastructure business, specifically in areas of the country slated for growth, Runkle said.
“Demographics in the U.S. are going to migrate to the central portion of the country,” he said. “We’re strategically looking at how we focus and expand our presence in the central U.S. markets to take advantage of GDP growth, population expansion and so on.”
The firm also creates digital content for its clients, Runkle said. Its digital immersive experiences have been featured across a spectrum of venues, including sports arenas, museums, mixed-use developments and airports.
At the AT&T Discovery District in Dallas, Gensler created a large-scale, globelike sculpture that is a physical manifestation of the company’s logo, which sits on top of a hydraulic turntable and is fully integrated with programmable LED lights, speakers and motion sensors.
“Those are the opportunities we are trying to focus on because they are equally as creative, and it’s just ongoing,” Runkle said. “Those projects could go on indefinitely.”
This isn’t the first down cycle and won’t be the last, Anderson said. Like all other areas of CRE, economic turmoil will separate the wheat from the chaff, and firms with a well-rounded scope of work, innovative leaders and a strong base of clients will come through the other side.
“Our variety, our collection of work really sustains us,” Anderson said. “We’re not greedy, and we understand that this, too, shall pass.”