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Economics Panel June 2024: How to find the sweet spot in a recovering economy

Words:
Michèle Woodger

Is the architecture market looking up? The RIBA’s latest economics discussion found prospects to welcome at a time with political and economic change in the air

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As any gardener knows, spring weather can never guarantee success with seedlings, observed RIBA publishing director Helen Castle, chairing the RIBA’s latest Economics Panel. Yet after a barren winter that ended in recession, the architecture profession is seeing promising signs of new growth. ‘How to find the sweet spot in a recovering economy’, sponsored by Milient, shed light on sector performance and revealed several opportunities on the cusp of blooming.

A bright outlook amid patchy showers?

‘There is some good news ahead – that’s the first thing to say’, said Allan Wilen, economics director at Glenigan, in his macro-level status overview of construction market pipelines. In the somewhat stagnant public sector, the general election of 4 July will certainly churn up the soil (to continue the gardening metaphor), but it may also contribute further spending delays. In the private sector however, softening interest rates and reduced inflation (down to 2.3% in recent days) have increased confidence. This ‘bodes well, as it gives contractors bidding for work, and clients, more certainty about the cost of projects’, explained Wilen.

So architecture is exiting wintery hibernation. According to Adrian Malleson, head of economic research at the RIBA, the institute's latest Business Benchmarking Survey (a detailed analysis from 3,900 RIBA chartered practices) reveals a ‘robust architects’ market that managed to navigate the post-pandemic downturns’ whose revenue totalled £3,586 million in 2023.

Feedback from the RIBA Future Trends Survey also suggests ‘a brightening picture’. The monthly attitudinal survey (regarding whether work will grow or contract), reveals that, after nine pessimistic months, optimism has returned; the workload index is now at +2. But, just like delicate seedlings, there is caution. Around a quarter of surveyed architects report personal under-employment, and workloads are at 89% of where they were a year ago.

According to Glenigan’s research, 2019 to 2022 saw a dramatic increase in project progression times (including a 50% longer lag between award of main contract and start on site) and this has been exacerbated by lengthy waits occasioned by Building Safety Act-related delays. But there is movement and this experience was corroborated by the experience of the panel: ‘Things are happening. It is looking pretty positive, but everything’s taking longer,’ commented Paula Willmore, founding director of Willmore Iles Architects. She attributes this to ‘the systematic under-funding [caused by austerity] leaving local planning authorities under-resourced… we are finding it particularly difficult in some areas to get planning consents through,’ she said. Likewise, at the HSE, where the practice has seven projects still waiting approval with no indication of their status, ‘this adds to the uncertainty for our clients’.

Architect Liz King’s local-to-Cambridgeshire projects marry Passivhaus sustainable design principles with listed buildings requirements – a niche the practice has carved for itself.
Architect Liz King’s local-to-Cambridgeshire projects marry Passivhaus sustainable design principles with listed buildings requirements – a niche the practice has carved for itself. Credit: Liz King Architect

Uncertainty vs confidence across sectors

Sole practitioners too have felt the uncertainty of the feast-famine cycle. Liz King, architect at LKA and chair of the RIBA Small Practice Network, revealed that members have seen a ‘noticeable reduction in new enquiries since the start of year’ and are concerned for ‘increased tender prices over last 18 months [undermining] the viability of the small housing market.’ Nevertheless, a recent uptick in project starts suggests increasing confidence, with refurbishment and smaller projects gaining traction. A rise in the number of mortgage approvals since October is an indicator of future demand for home improvement work into 2025. ‘The gap in affordability in relation to homeowner’s earnings has closed a little’ Wiles believes. Given that private residential accounts for 80% of sole practitioners’ work, according to Malleson, this is important news. Wiles also hopes that more certainty over costs may encourage social landlords to move projects forward, as will cross subsidy with private rental defraying costs.

The student housing market, on the other hand, which fell back sharply during the pandemic, is anticipated to recover but not to 2018 levels; a sharp drop in overseas students is dampening the pace of recovery. According to Willmore, for whom universities comprise one of the practice’s two main sectors, ‘40% of institutions in the higher education sector are forecasting a deficit this year, so we are looking to the government – whoever that is in the future – to make some structural changes [to ease these financial struggles]’.

Within state education, work is forecast to be steady throughout 2024, as there continues to be a need for increased secondary school estate due to pupil numbers, and work relating to RAAC remediation.

Glenigan forecasts gradual recovery this year, gaining momentum through 2025 – percentages by sector.
Glenigan forecasts gradual recovery this year, gaining momentum through 2025 – percentages by sector.

Structural change from ‘external shocks’

The pandemic and other external shocks are shaping the direction of growth. Hybrid working continues to drive the refurbishment of office spaces into more high-end and collaborative spaces. ‘That will help to underpin a recovery in the commercial office market …around the middle of this year,’ says Wiles. Retail and industrial spaces, logistics hubs and ‘final-mile’ delivery facilities are also growing as a result of a long-term increase in online purchases, reinforced by increased consumer discretionary spending, and the expansion of deep-discounter supermarkets. According to Kevin Hong, associate director and studio lead, AtkinsRealis, ‘digital infrastructure or mission critical architecture (ie data centres)’ are an increasingly important area for his practice. ‘They are not glamorous on the surface, but they are interesting for the leftover post-industrial locations they take place in, so from a built environment viewpoint I find that interesting and an opportunity as a new sector to move into,’ he remarked.

Think global, buy local: the 15-minute practice

One nuance picked up by the RIBA Business Benchmarking Survey 2023 is the outsized role of London in buttressing the market: 70% of all architects’ revenue originates there. But, interestingly, overseas work is also demonstrably gaining in importance. Practices saw a 43% increase in overseas revenue from the year before accounting for around £750 million and the ONS recently also reported a 93% jump in overseas revenue for architectural services. While trade in goods to Europe has been hampered by Brexit, this is not so for architectural services, which has more than doubled since 2022 and is now worth £306 million – evidence of a ‘powerful and growing creative market’, says Malleson.

The value of the overseas market.
The value of the overseas market. Credit: RIBA

But this London-centric picture does not tell the whole story – as evidenced by the panel, which hailed from Wales, Cambridge and Northumberland. In each case, local wherewithal has proven invaluable in building resilience. For Tim Bailey, head of practice, Xsite architecture, 95% of the practice’s work sits between Berwick and Teesside, and local knowledge (in particular, relationships with local planning authorities and contractors) ‘is our USP’, he said. ‘With eight active projects within walking distance of the practice, clients walk in through the door. I see this as a great opportunity [to find out about] what they want to do next.’ He characterises his studio as ‘a 15-minute practice’, which has made it competitive in terms of costs. Meanwhile Liz King has tapped into a growing local market in buoyant Cambridge and developed a specialism in sustainable retrofit of listed buildings.

Exiting hibernation

All panellists, regardless of practice size, agreed that the long winter of 2023 has had one benefit – the opportunity to be introspective and scrutinise their businesses at a root and branch level. ‘We have been strategic and much more targeted,’ Hong said. ‘We are concentrating on what we do well, and staying within those boundaries.’ And as King summarised: ‘Our plans for this year and next are to take good work and take good care of work in hand’.

‘I will end on a few reasons to be cheerful’ said Malleson. ‘Project starts are improving, and architects’ work starts before construction starts. There is a healthy overseas market and a need for more and better buildings’.

Reception, University of Exeter, Partnerships Program.
Reception, University of Exeter, Partnerships Program. Credit: Willmore Iles

Tips from our expert panel

  • Stay local

Do not underestimate the value of local networks: ‘Recommendations and referrals are gold-dust for continuing to practice in a healthy way,’ says Liz King. When you are ‘doorstep architects’, argues Tim Bailey, you have competitive advantage.

  • …or look overseas

A 93% jump in revenue from British architectural services overseas (ONS figures) and £749 million reported (RIBA figures) is evidence that creativity is a powerful British export.

  • Sit tight, housing will improve

An increase in average monthly property transactions to 80,000, and mortgage approvals to around 60,000 in January 2024 (Bank of England and HMRC data), bodes well for home improvement projects in the near future. 2025 is forecast to slightly overtake 2021 figures in terms of the value of underlying residential project starts.

  • Unglamorous projects may be diamonds in the rough

The value of industrial sector starts is forecast at £6 billion in 2025, including warehousing, logistics and manufacturing.

  • Focus on what you do well

Offering your clients an expert service, and doubling down on what you know you do well, helps to solidify your brand reputation and secure reliable work. Harvest time will come round soon enough.

 

This RIBAJ event is sponsored by Milient

 

Speakers:

  • Chaired by Helen Castle, Director of Publishing and Learning Content, RIBA
  • Allan Wilen, Economics Director, Glenigan
  • Adrian Malleson, Head of Economic Research, RIBA

Panellists:

  • Tim Bailey, Head of Practice, Xsite architecture
  • Liz King, Architect, LKA
  • Kevin Hong, Associate Director and Studio Lead, AtkinsRealis Cardiff
  • Paula Wilmore, Founding Director at Willmore Iles Architects

 

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