-By Jennifer Thiele Busch

Does it even bear repeating?

The economy is in a dire state, with virtually no market, industry sector, or geographic region (worldwide) going unaffected. And despite the wave of renewed hope that the inauguration of President Obama and the promise of a stimulus package has sent washing across a troubled nation, recovery is going to take some time. For the real estate and construction industries, which tend to lag behind other sectors, the wait may be just a bit longer.

Take a severely depressed housing market, a failing banking industry, an automotive industry on the brink of collapse, an impossibly tight credit market, plunging corporate profits, rising unemployment, and the destruction of personal wealth (did I forget anything?) and things would be bad enough. Throw in a massive investment scandal by a Wall Street icon and the current happenings become even more surreal. In fact, the only good news in January (other than the aforementioned inauguration) was about a major plane crash in the Hudson River. Now that puts things in perspective. We are living in strange times.

No one is arguing any longer whether or not the U.S. is in an economic recession—in December the National Bureau of Economic Research finally confirmed what we already knew. The only question right now is how deep and how long. In an article that appeared on Forbes.com on January 12, experts at the Wharton School of Business at the University of Pennsylvania in Philadelphia echo prevailing sentiments. "It's all pretty negative," said finance professor Franklin Allen in the article. "The economy is going into recession and my own view is that it will be deep and quite long-lasting. There doesn’t seem to be anything on the horizon that is a bright spot." Finance professor Richard Marston called the current situation on Wall Street "extraordinary," and says that until there is a revival in demand, businesses will continue to hold back from investing. But, "Where will demand come from?" he questioned. "I think the consensus in the press that the recovery will start some time in 2009 may be wishful thinking." It's not an uncommon viewpoint.

With the general economic outlook bleak, the prospects for the real estate sector are also grim, and not unexpectedly. "Although it is difficult to predict just how long and severe the current downturn will be, we believe that we have not seen the end of weakening consumer and business confidence, slowing manufacturing activity, and rising unemployment that is currently plaguing our economy," says Gary H. Hunt, interim CEO of commercial real estate advisory firm Grubb & Ellis, in his introductory letter to the company's 2009 Real Estate Forecast. "These are all factors that impact every aspect of the commercial real estate industry." The unemployment rate, one of the clearest indications of the still-weakening state of the economy, rose to 7.6 percent in January, according to a Labor Department jobs report issued on February 6. Payrolls fell by 598,000 from December to January--the biggest monthly drop since December 1974—with losses spanning almost all industries, from construction and manufacturing to retail, trucking, media, and finance. The best we can hope for right now, commented Raymond Stone of Stone & McCarthy Research Associates, on Bloomberg.com, is a slower rate of decline in the months ahead.

"Within the commercial real estate market, the investment sector was the first to feel the effects of the credit crisis, and as a result property sales were down by two-thirds during the first three quarters of 2008 as compared with the same period in 2007," continues Grubb & Ellis's Hunt. "Access to capital remains extremely limited, and the leasing market is starting to more severely feel the effects of the economic uncertainty. Needless to say, this is probably the most challenging market we have experienced since the early 1990s." He then goes on to state that as far as things look right now, Grubb & Ellis estimates that it will be late 2010 before we begin to see any meaningful recovery in the real estate industry.

NAI Global commercial real estate network's Commercial Real Estate Construction Outlook for 2009 notes: "Industry analysts have reported a record slowdown in the industry as both residential and commercial construction have slowed to a near-stop across most of the U.S. Non-residential construction tends to lag behind the rest of the economy due to the length of time it takes to secure financing, and the industry is just now feeling the full effects of the economic recession. Major construction projects currently underway are legacies of the now-ending economic boom." The report goes on to point out that the slowdown will have a trickle-down effect across a number of professions—including architects and designers.

To underscore how seriously this recession is affecting the A&D profession, look no further than the American Institute of Architect's monthly Architectural Billings Index (ABI) report, which provides a nine- to 12-month glimpse into the future of non-residential construction activity. Following months of record low scores, the AIA reported the December ABI rating was 36.4, up only modestly from the 34.7 mark in November, signifying that the design industry remains mired in a steep downturn (any score below 50 indicates a decrease in billings).

"As profits for businesses have fallen and the ability to get credit to finance projects has become far more difficult, construction plans have been put on hold or canceled outright in recent months," said AIA chief economist, Kermit Baker, PhD, Hon. AIA. "This is not expected to turn around anytime soon, and it’s likely to get worse before it gets better."

In addition, the AIA's mid-January Consensus Construction Forecast--which reflects the recent findings of the AIA Consensus Nonresidential Construction Forecast Panel, comprising the leading, national, nonresidential construction forecasters--predicts a steep decline in non-residential construction in 2009, as weakness in the general economy catches up with the previously booming construction sector. According to the report, construction activity will see an 11 percent decline in 2009, followed by an additional 5 percent drop in 2010. All major commercial sectors will likely be affected by this downturn, the report says, with declines expected to total between 25 percent and 35 percent for offices, retail facilities, and hotels over 2009 and 2010.

Nevertheless, nothing lasts forever. Though the Wharton experts generally agree that we still have a painful road ahead, John Percival, adjunct professor of finance, pointed out that consumers will eventually return to the malls, auto showrooms, and real estate market. "The consumer will be chastened for a while," he said, "But I can't see any dramatic change in the long run."

"There is, however, one silver lining," says the NAI Global Commercial Real Estate Construction Outlook. "Developers did not overbuild in advance of this recession as they had done in the past. A glut in properties holds down demand for new construction and slows recovery, which should be avoided as the financial markets begin to free-up capital and transactions and new developments begin to pick up in the next 18 months." And according to the AIA's Consensus Construction Forecast, institutional construction should once again fare better than its commercial/industrial counterpart as the health care and education sectors are generally expected to decline at a slower rate through much of this downturn. However, these sectors are also experiencing difficulties brought on by the credit crisis and diminished tax revenues and endowments, all major sources of funding for institutional projects.

One big and very welcome benefit of the recent downturn has been a drop in costs for key construction materials. "The downturn in nonresidential activity has helped stabilize construction costs," says the AIA's Baker. "For example, prices for steel, gypsum products, lumber, and cement have all come down recently, which makes taking on projects more attractive to developers."
 
Increased vacancy rates around the country, and a corresponding decrease in rents, will undoubtedly encourage some organizations to move to less expensive space in the months to come, resulting in new business opportunities for interior designers. At the same time, other companies anticipating a major move in 2009 or 2010 may decide to hold off, and limit their design and construction activities to renovations of existing space, another potential source of work for interior designers. However, these projects are likely to be smaller and more budget-driven than in the past.

On the institutional side, one architect I spoke with recently recommends that clients focus on programming for core necessities to keep projects moving forward or starting up, rather than going on hold. Extras, he says, can be easily incorporated later if additional funding allows. This practical approach is keeping his firm busy, so far. Never before have flexibility and agility been so critical for the A&D community.