architects look for the bright spots while enduring the downturn.

Source: residential architect Magazine
Publication date: 2008-09-01

By Cheryl Weber

Time has passed, and the news media are still wailing about the economy. Energy and food prices are high, job growth is sluggish, foreclosures abound in some areas, and the lending industry is in turmoil. It's hard to tell exactly how bad a shape we're in overall, and so far the National Bureau of Economic Research has avoided the R-word. But recession or not, there is real pain in many of the sectors architects serve. Even firms whose work continues to flow reassuringly must contend with the fallout of a malaise-filled market. Many architects report that business is just fine. But that doesn't stop them from worrying about what the next six months may bring.

This is an uncertain period for architects, but also an interesting one, as market trends shake out in response to production housing's spectacular fall and the new energy realities. While the economic effect on architects varies widely by region and project type, many are doing what good entrepreneurs everywhere do in turbulent times: sticking with what works while tracking new opportunities, revisiting their business plans and networks, and providing stellar design service.

Let's start with the good news. Small firms in high-end markets and thriving urban areas seem to be faring the best in this flagging economy. They're agile enough to get by on a couple of big-ticket jobs at a time, and their clients have enough ready cash to rise above the mortgage mess, selling an existing home at a discount, if necessary. In the booming Dallas area, for example, Frank D. Welch, FAIA, says he's never had a strategy for downturns; work has always come. “I have three architects working for me, and we do large, expensive modern houses,” he says. “I haven't seen anyone cancel a large residential project.”

Ditto in Minneapolis, where Jean Rehkamp Larson, AIA, a principal of Rehkamp Larson Architects, is trying hard to see the downturn. “It's interesting to drive into work listening to NPR forecasts, get here, and have a full plate of things to do,” she says. On the boards are new houses, cabins, and remodeling projects ranging in budget from $200,000 to $2 million. Still, there are signs of unease. One project was put on hold when the husband's employer announced layoffs, and clients doing homes in the $1.5 million range are required by banks to come up with more cash than they'd like. Recently, a bank assessed a cabin's value at 25 percent less than the construction cost, causing the client to simply downgrade some appliances. But though day-to-day workflow seems healthy, anxiety lurks beneath the surface. “We're small enough that the workload stays steady, but the downturn certainly affects us emotionally,” says Rehkamp Larson, who, with spouse/co-principal Mark Larson, AIA, oversees a staff of seven. “I keep wondering when we're going to feel it.”

Others, too, are cautiously optimistic. It's business as usual for Boston architect Keith Moskow, AIA, a principal at the six-person office of Moskow Linn Architects. “Work was the slowest in the late 1990s, before the dot-com boom dropped off, and when the economy was slow in 1994, we were incredibly busy,” Moskow says. “It's entirely contrarian, and I have no idea why.” But he admits that being small, efficient, and diversified hasn't hurt. Seventy percent of his work is commercial and institutional, and Moskow has about 10 active projects. So when a couple of house commissions were halted on Martha's Vineyard recently, it wasn't the end of the world. However, he isn't tempting fate. A vacancy created by an employee who moved out of state will go unfilled for a while.

While no one argues that this downturn was a surprise, it's been swifter and deeper than most people expected. Those for whom the center holds have time to plan for contingencies. In Chicago's North Shore suburbs, the pace of leads has slowed slightly for Julie Hacker, AIA, and Stuart Cohen, FAIA. They oversee a six-person firm whose additions and new homes range from $250,000 to $4.5 million. If work falls off, they'll pay employees to work on the monograph they've been planning. The hourly, rather than salaried, pay structure offers some flexibility too. “Our people are working a ton of hours, so at some point they might be working less but still doing a 40-hour week,” Hacker theorizes. “I'm seeing that people with money will still build.”

It's true that serious architecture patrons are often untouched by national downturns. But for the first time, perhaps, what people are building is a response to broader economic pressures. Demand for green design is rising as people at all income levels try to spend smarter, and what's good for the planet is also good for business. A case in point is Aspen, Colo., a rarefied resort environment with its own boom and bust cycles. The real estate market there has flattened but not plummeted, and Harry Teague, AIA, principal of Harry Teague Architects in nearby Basalt, is seeing more of the area's billionaires remodeling their homes for energy efficiency. Last year his firm gained some credibility on that score when it built an office that generates more electricity than it uses. To fund it, Teague sold three apartments on the building's second floor for around $600,000 apiece, reserving a fourth rental unit for employees. “There's an encouraging sign of people modifying their homes to be more energy-efficient,” Teague says. “It wasn't visible before, but now they're thinking it will help sell the house.”

Sobering economic conditions have pushed both sustainability and affordability to the fore, and architects are riding that momentum. One example is San Diego, where home values have taken a beating due to the overheated condo market. “An advantage to the economy being down is that people are literally trying to save money,” says Jennifer Luce, AIA, principal of Luce et Studio, “and that correlates to green design and downsizing.” Two years ago she began experimenting with executing details at a lower cost. Rather than the usual $400 per square foot for renovations, she has mastered designs for half that price to meet a budget more people can afford. Modest, mid-20th-century tract house renovations are a growing part of her portfolio too. By leaving most of the structure intact, she gives clients more money to spend inside. These kinds of projects send a message that, even in a bleak economic period, they can do something transformative.

The story is similar in Phoenix, where homes are about 15 percent overpriced, estimates Peter M. Koliopoulos, AIA, principal of Scottsdale, Ariz.-based Circle West Architects. Though business has slowed for his 15-person firm, multifamily developers are asking for infill units that are practical and economical, yet memorable. They're spending money where it's most appreciated, because good design and planning got lost in the real estate rush. “The units don't need to be large in scale as much as well-designed,” Koliopoulos says, with amenities like patios, efficient kitchens, rooftop gardens, and a welcoming building lobby.

“Projects <i>are</i> getting smaller,” agrees E.J. Meade, AIA, principal of arch 11 in Boulder, Colo. “I don't know if it's a reaction to the economy or energy issues, but the time of the 7,000-square-foot house is coming to an end.” His eight-person practice is busier than ever, however, with everything from small additions and pricey energy-independent homes to a 26-home LEED-certified development in the Roaring Fork Valley of western Colorado, where oil and gas exploration is creating a boomlet. “Our strategy is somewhat omnivorous—there are very few projects we turn away,” he says. “But we've also gained a reputation for doing exceptional work—the secret in any bad economy.”

There are many spec homes on the local market, and arch 11 avoids that kind of work, but the Roaring Fork developer has asked for modern architecture. “Everything here has a rustic flavor, and his strategy is to set himself apart with a completely different product,” Meade says. “We'll see how that works.”

The ability to distinguish oneself is even more critical in the production home market, where the pain has been felt the worst. In the midst of too much supply and tumbling prices, only the fittest products will sell, and hitting the magic spot of perceived value is the challenge for architects in those sectors. Most of West Des Moines, Iowa-headquartered BSB Design's clients were publicly traded home builders—a market that has virtually dried up. With two-thirds of its employees laid off and the Boston and Denver offices being served out of West Des Moines, the firm is reaching out to the small, privately funded builders that once made up its client base, and identifying successes it can adapt in other parts of the country.

“‘Retooling' is a word we're getting used to,” says company president Stephen C. Moore. “We're looking at how we can change builders' financial payoff on a piece of land by increasing density or decreasing up-front costs.” The focus is on smaller lots and simpler houses for first-time buyers, because anyone who doesn't need to sell a house right now is a good bet. A recent project in Sarasota, Fla., involved replatting a townhouse parcel with smaller, cottage-style detached homes, which lowered the price from the $300,000 range to roughly $150,000. “A fire storm of people were interested in buying because they saw it as a great value,” Moore says, adding that the biggest competition for builders is their own resales—the same houses in older, more established neighborhoods where prices are lower. In addition to doing high-density housing in foreign markets—East Asia, Mexico, and Russia—BSB is also staying afloat with mixed-use and light-commercial projects. “Everything we're trying is working, but when we think we're done, the housing market slips even further,” Moore says.

With offices and clients spread across the United States, Memphis, Tenn.-headquartered Looney Ricks Kiss (LRK) also sees pockets of opportunity. Million-dollar production homes are still selling apace in Houston, and Texas as a whole remains strong for planned communities targeting a mix of incomes, says Mark Jones, AIA, principal in charge of LRK's Celebration, Fla., office. The firm's multifamily clients are also looking to develop high-density suburban villages with transit service—bus or light rail—30 miles from downtown Dallas in Richardson, Plano, and McKinney, Texas. “DPZ's Elizabeth Plater-Zyberk, FAIA, is using the term ‘smart sprawl,' and that may be a trend we'll see over the next five years,” says Paige C. Close, AIA, principal in charge of LRK's multifamily group. With rising fuel costs, the firm's clients are also discussing the need for more live/work spaces. Jones calls it urbanizing the suburbs. At Celebration, ground-floor flats are being converted to offices and retail shops. “Affordability and sustainability are huge components, whether it's trying to replace housing from Hurricane Katrina or development here in Florida,” he says.

Downsizing will be a core value for at least the next year or two, LRK believes, whether it's a one-bedroom rental, a move-up, or an empty nest. The firm is analyzing every square inch and branding some of its apartments as the Mini Cooper—“600-square-foot studios, cute as a button, with all the bells and whistles, but smaller, for absolute rental value,” Close says. “People have just so many dollars in their pockets, but they still want great design and quality finishes. It's about understanding how people live and what's essential, but still remembering that there's a quality to proportion and scale that doesn't cost extra money.”

For LRK and similar firms, this is one way out of housing's perfect storm. He's hopeful that by January 2009, with the presidential election behind us, people will be tired of the negative news and ready to move on. “Business has been soft; it's the strangest time we've ever seen,” Close says. “We're the most nervous from now to March of next year. We're trying to hang onto our folks—and watching the economy closely.”

It takes about three years to position a firm for surviving a dreary economy, according to business consultant Hugh Hochberg, principal of The Coxe Group, Seattle. “We've been telling clients for quite some time to expect a downturn in 2008 and 2009,” he says, while acknowledging that the depth of the current crisis has affected the residential market more than he and his colleagues had anticipated. “Certain firms are somewhat isolated from the weak economy,” he says. “Those specializing in high-end and resort homes haven't lost commissions; they're doing $7 million homes instead of $10 million homes. But most firms have been affected substantially more than that—mostly those in the condo market, which is dramatically overbuilt.” Hochberg, whose clients typically head design firms of fewer than 100 employees, offers these tips for tough times.

Operational. In many cities, building projects have started and stopped, and the usual operational cautions are doubly important in a down market. Get payment up front, if possible, and stop work when the checks fall more than 30 days behind. It's nonproductive to think your clients are the exception. Hochberg also recommends having three months of operating expenses in reserve, though firms with a good client base don't need a lot of cash on hand, he says.

Watch financial indicators closely from month to month. Two key indicators are how long it takes to get paid and the direct labor multiplier, which is revenue received for direct labor paid. (The average firm takes in $3 for every dollar it pays in direct labor.) Additionally, owners should keep compensation reasonable. Take the money out of profits rather than building in high fixed costs for salaries, and base bonuses on individual performance. This is also a good time to identify up-and-coming leaders and do what you can to keep them, rather than letting their entrepreneurial spirit compete with the firm. While many employees cling to job security in a nervous market, others may leave if they think the firm won't succeed.

Sometimes, downsizing is inevitable. Let economic forecasts, rather than wishful thinking, be the guide. “It makes sense to keep going on a line of credit if you expect a reasonable turnaround,” Hochberg says. “But if you accommodate everyone in the firm who isn't fully occupied, you're under-accommodating those who can do the most, and you'll end up weakening the overall firm. It's better to be stronger and smaller than weaker and larger.”

Strategic. Financial stability positions firms to move forward with new initiatives, and so does a deep understanding of potential clients' business models. Architects who provide more than architecture—confidence, connections, strategic planning—will be the first out of the block when things turn around, particularly in the multifamily and mixed-use sectors. “You're better off if you understand the implications of economic forecasts, return on investment, and the ins and outs of equity versus debt financing,” Hochberg says. Knowing players who can help potential clients strategize also puts architects a step ahead. “There's money out there, and investors who are open to good opportunities,” he continues. “Even architects who have that capacity often don't value it enough to do it. You can't know too much about your client's world. It's a question of judgment and how much you capitalize on that knowledge and are part of organizations, like the Urban Land Institute, that provide that perspective.”

Of course, it's easiest to leverage work from people you've already done business with—a client who's shifting from multifamily to campus housing or building a private home, for example. Hochberg recommends that firms making a big push into new project types hire leaders who can land the commission, rather than people who can deliver the work. Affiliations with other firms may also provide the tactical link to new sectors and scales.—<i>c.w.</i>