In the business of, a rule of thumb goes that the ups and downs of the industry generally lag those of the economy by anywhere between six months and a year. By now, the six-month anniversary of the collapse of two Bear Stearns subprime hedge funds is long gone, the housing bubble has burst and the dollar continues hobbling along. But at prominent retail architecture firms, it's practically business as usual.
Why aren't these architects losing their shirts, at least for now? The answer is diversification. Big firms with international reach are keeping busy by increasing their work overseas to mitigate a downturn in business they are experiencing at home.
For many architecture firms in the U.S., the picture isn't as rosy. Domestically, the slowdown is taking its toll. In February, the Architectural Billings Index, a measure of workload by the American Institute of Architects (AIA), fell to 41.8 from a July 2007 score of 58.8, its most recent peak. That means that workload is declining for firms: A score of 50 is the threshold by which activity is considered to be in positive or negative territory, and the only lower-scoring month in the 13-year history of the index was October 2001, at 40.1.
After months of trending downward, AIA's chief economist, Kermit Baker, notes the index's figure suggests a long-term hit to nonresidential construction. With banks pulling in the reins on their lending, some retail development projects have been put on hold, causing a ripple effect.
“We have one big client who, I noticed, hasn't been calling much lately,” says Jeff Gunning, a vice president in the Dallas office of Baltimore-based architecture firm RTKL. Now it's become clear why. In an early April press release, the developer announced that it was pulling back on its development pipeline, only moving forward with select projects and postponing others.
In addition to postponing new construction, Atlanta-based Thompson, Ventulett, Stainback principal Tom Porter says as a rule, developers are behaving more cautiously. “I think clients are looking at the return on investment a lot harder, hence we've seen a lot of renovation projects slow down or not go ahead.”
Last year, a 6 percent or 7 percent return would have been enough to justify a design implementation, according to Porter. Today, he says, that no longer cuts it. That figure is now between 10 percent and 12 percent.
Also compared to a year ago, Porter says, “Clients want department-storedone. We were working on several projects that didn't have the department-store anchor secured, and some ran into problems.”
To adapt to slowness in the retail pipeline, firms like Seattle-based Callison are reconnecting with clients they may have been too busy to once service. There has also been a smattering of layoffs — of which Baker foresees more. “Firms were running fairly high backlogs as of the end of last year, so I don't expect to see problems until mid-year or third quarter,” he says. “And while larger firms are better positioned to cope, no one is spared from a downturn.”
Architects are most visibly adapting to the downturn in the American economy by reshuffling some designs. Developers are repositioning mixed-use properties, in particular, to adapt to the changing market conditions. Although many mixed-use buildings are still moving forward, says Sy Perkowitz, president and CEO of Long Beach, Calif.-based Perkowitz + Ruth Architects, because “People have said that by the time I get this on-line, these economic conditions won't be an issue,” other project teams are transforming condos into rental units or dropping residential components altogether.
These changes can be expected of properties scheduled to come on-line soon. In early 2009, the Bravern, a 1.8-million-square-foot complex in Bellevue, Wash., designed for developer Schnitzer West, has gone through iterations ranging from condos to hospitality, says Bill Gartz, principal of commercial and international markets for Callison. The first tower topped off in February, and a second, 23-story piece is under way. Final plans call for the Bravern to encompass two class-A office towers occupied by Microsoft Corp., two condominium towers and 300,000 square feet of upscale retail anchored by Neiman Marcus (the only one in the Pacific Northwest).
Could one of the condo towers be dropped from the project completely? Another project on Callison's boards is facing that prospect. Gartz won't name names, but he says in this case, the issues architects face are not about engineering — the seismic bracing is overdesigned and the mechanical systems are independent of one another — but of management. “Where do you draw the line around the piece you're going to hold?” Gartz asks. “Do you hold it horizontally, or do you divide it vertically, postponing a corresponding piece of the base until you build the whole thing? It's about how you phase the project, and how you make it look complete so people still want to go there.”
Callison has not had to perform such dramatic surgery on any of its designs yet. But clearly architects are feverishly running what-if scenarios through their heads on in-progress projects. Some of the factors still being weighed: Is the U.S. entering or in a full-on recession? And, if so, will it be prolonged? In such an environment, some architects say that urbanism and innovation will be two critical qualities for projects to move forward.
Joe Pettipas, vice president and practice leader for hospitality and retail at Hellmuth, Obata + Kassabaum. (HOK), says the majority of the Toronto-based firm's retail assignments fit within the scope of mixed-use. For example, HOK recently completed Chevy Chase Center, a 412,000-square-foot project in Maryland that features public amenities that complement pedestrian activity. Demographic trends support an increased demand for such projects. Major cities are seeing an uptick in population. New York, for example, is projecting nine million residents by 2030, up from 8.2 million people today. “The folks who wish to live downtown are the people who can afford to do so,” Pettipas says. “These are not people affected by the subprime crisis.”
Perkowitz applauds projects that evoke a downtown vibe, even if it means fashioning a cityscape from scratch. Bridgeport Village, a lifestyle center located outside Portland, Ore., was designed by Perkowitz + Ruth for developers CenterCal Properties and Opus Northwest.
Ron Pompei, creative director and CEO of New York-based Pompei A.D., is touting the C3 Center. C3 stands for culture, commerce and community, the three founding principles of his eponymous design firm. The highly regarded architect foresees more systemic change in the places where people shop. Within a mall, that translates to locating its client, Urban Outfitters, within close proximity to like-minded retailers — a centerpiece around which people with the same values congregate.
“There are a number of different brands involved,” notes Pompei. “The way brands will differentiate themselves in the future is by the networks they create around themselves, even if that includes [embracing competing] businesses.”
Leverage from globalization
Retail architects haven't had to prove these hypotheses just yet because many have buttressed domestic shortfall by expanding internationally. The massive urbanization and development boom occurring in areas from the Middle East through Korea has spelled a tremendous amount of work for American retail architects.
In combination with the softening demand domestically, international demand has increased to the point that it accounts for almost 40 percent of a firm's business. Baker says that nationally and across all industries, average international exposure typically ranges between 4 percent and 8 percent.
Some architects note their foray into foreign markets goes back to previous recessions. “We were first sought out by commercial developers outside the U.S.,” says Gunning. “There was a big fascination with design and development in the U.S.”
The boom also comes with challenges. “You cannot appply the natural laws of the North American retail indsutry to Dubai,”says Pettipas, citing HOK's design of the 2.4-million-square-foot Dubai Festival City. Only half the project is traditional retail with the rest consisting of cultural and sports venues and spas. “Shoping is not entertainment, but social life.” he says.