Unequal Shares

TEXT Adrian Lightstone

Over the past decade, growth trends in the Canadian and US markets for architectural services have differed significantly. This has well-known effects in the day-to-day operations of Canadian firms–one observes, for instance, an influx of CVs from American architects seeking employment, and the avid acquisition of Canadian firms by US-based entities. Examining architectural billing and construction figures allows us to better understand the bigger picture.

According to Statistics Canada, Canadian architectural revenues nearly doubled from $1.8 billion in 2002 to $3.1 billion in 2011. Billings grew sharply from 2006 through 2008, while only a modest contraction of 2.5% occurred with the financial crisis in 2009, driven by a drop in residential construction. Over the entire period, the compound annual growth rate was a respectable 6.2%.

By contrast, billings in the US over the same decade grew from $25.2 billion to $26.0 billion, representing a compound annual growth rate of 0.3%–far less than inflation. What’s more, these numbers conceal the volatile market for architectural services south of the border during this period. In 2008, US architectural billings peaked at $44.0 billion. Since the economic downturn, architecture firms in the US have seen billings dramatically decline.1

What has allowed the architecture industry in one country to sustainably expand over a decade while the other country has experienced a boom-and-bust cycle? It has to do with what each country is building and the strength of the component construction sectors.

Architectural billings in Canada in 2011 were split 23% residential, 32% commercial, 41% institutional and 4% other.2 Over the last 10 years, the breakdown between sectors has remained more or less stable at these levels. South of the border, the individual sectors show greater variability. At the peak of US housing construction in 2005, architectural billings divided up 18% residential, 33% commercial and 49% institutional. By comparison, in 2011 they were split 14% residential, 28% commercial and 58% institutional.3 This shift reflects a steep decline in demand for new homes and businesses as the US reeled from mortgage defaults: from 2002-2011, total US residential and commercial construction spending decreased by 38% and 8% respectively. The US became more reliant on government-funded institutional projects–the 2009 stimulus package included $4.2 billion to repair and modernize Defense Department facilities, $890 million to improve housing for service members, and $750 million for federal buildings and courthouses–resulting in an increased share of institutional construction spending and a related rise of architectural billings in that sector.

Despite the mid-2000s boom in residential construction stateside, Canada’s share of residential construction has consistently outpaced that of the US. At its peak, residential construction in the US represented 63% of total construction spending, declining to a low of 38% in 2009. In Canada, single- and multi-family homes represent some 70% of current construction, and roughly a quarter of Canadian architectural billings are derived from the residential market. Canadian architectural firms have benefited from continued growth in the residential sector as hundreds of new condos reshape skylines in Vancouver, Toronto, Ottawa and Montreal. Firms should, however, be conscious of the heavy reliance on this sector, particularly as market observers including the Bank of Canada show concern that high-rise construction may be outstripping demand. 

Commercial construction in both Canada and the US has been in decline since the pre-financial crisis peak. In Canada, total commercial construction has dropped 12% from $26.8 billion in 2008 to $23.6 billion in 2011.4 In the US, total commercial construction has dropped 47% from $243.8 billion in 2008 to $129.3 billion in 2011.5 This indicates developers have been shifting away from commercial construction since the financial crisis.

By far the largest sector in both countries in terms of architectural billings is institutional work–including health care, entertainment, recreational, cultural, educational and transportation facilities. Roughly 40% of architectural billings in Canada are institutional. In the US, the institutional share is currently even larger, at almost 60% of total architectural billings in 2011–a marked increase from 49% during the residential construction boom in 2005. Spending on institutional buildings is largely driven by government, particularly in Canada where health care represents roughly a quarter of institutional construction spending. Visible examples in this sector include two mega-hospitals in Montreal, Bridgepoint Health and Humber River Regional Hospital in Toronto, and the massive Calgary South Health Campus.

On both sides of the border, owners and developers have attempted to reduce design and construction costs by tightening design fees and construction bid prices. This has hit exceptionally hard in the US, where, combined with the construction downturn, architecture billings have dropped by 40% since 2008.6 As a result, US architecture firms have cut payroll employment by over a third. In order to mitigate the decline in billings, US architecture firms are increasingly looking to increase market share through growth into international markets such as Canada. The continued steady growth of architectural work in Canada will be contingent on the long-term stability of Canada’s construction sector. CA

Adrian Lightstone is a Toronto-based economist with HDR Decision Economics. HDR Inc. also includes HDR Architecture, a global firm with offices in both the US and Canada.

1 The American Institute of Architects, 2012 AIA Firm Survey; US Census Bureau EC0700CCOMP1.
2 Statistics Canada, Service Bulletin: Architectural Services, Catalogue no. 63-245-X.
3 The American Institute of Architects, 2012 AIA Firm Survey.
4 Statistics Canada, Capital Expenditures on Construction, Table 029-0040.
5 United States Census Bureau, 2012.
6 The American Institute of Architects, 2012 AIA Firm Survey.