October 10, 2007

Executive Summary of CanaData’s 22nd Annual Construction Industry Forecasts Conference

Dan O’Reilly

The Canadian economy is strong and well positioned to withstand the ripple effects of the sub-prime mortgage crisis in the United States, delegates to the 22nd annual CanaData Construction Industry Forecasts Conference in Toronto Canada were told.

Held on September 20, the very day the Canadian dollar reached parity with the American dollar, the conference featured speakers from the fields of economics, finance, real estate and construction. They cited this country’s oil reserves, trade and fiscal surpluses, buoyant house market, rising employment and a partial dampening of the Québec sovereignty debate as some of the reasons for their optimism.

But most acknowledged there are factors working against the economy. The manufacturing sector in Central Ontario remains weak; unemployment rates remain high in Atlantic Canada; non-resource exports to the United States have actually decreased dramatically; there is a serious lack of trained construction workers; and Canada, along with most other industrialized western nations, faces serious challenges from emerging countries.

The global economic landscape is changing rapidly and as the American economy—in terms of real gross domestic output—gears down, the rising powerhouses of China, India, Russia, Mexico and Brazil are gearing up, said Warren Jestin, senior vice president and chief economist for Scotiabank. Not only are the populations of India and China considerably larger, the percentage of the combined population growth of those two nations far outpaces the United States and Canada in the period from 2000 to 2015.

As an example of how that population expansion is shifting global demand, driving industrial growth and reshaping financial markets, Jestin pointed to the rapid rise of auto manufacturing and the even more rapid acceleration in car sales in those nations between 2000 and 2006. There was a 252% increase in motor vehicle production in China, with car sales climbing by 589%. In India production increased by 120% and sales climbed by 70%.

For Canada, however, these trends are the catalyst for a strong commodity export market and international investors consider it a resource-rich nation in a resource-short world. With positive factors that include trade and fiscal surpluses and a strong dollar, the Canadian economy is substantially stronger than the United States and it is highly unlikely the Bank of Canada will follow the recent lead of the Federal Reserve Board and implement interest rate cuts. With a projected 2.5% growth rate for 2007, there is enough economic activity underway to support at least moderate growth even if the 2008 rate falls short of that figure, said Jestin.

Alex Carrick, chief economist with Reed Construction Data – CanaData, forecast a 2.6% GDP growth rate for 2007, inching up to 2.7% in 2008 and then lowering to 2.5% in 2009. Reasons for that forecast include the shelving—at least temporarily—of the sovereignty debate in Québec: the ramp up of several mega offshore oil projects in Atlantic Canada; the resurfacing of the information services sector from the high-tech meltdown of a few years ago; tightened office vacancy rates which are a harbinger of a rebound in office tower construction; and the growth in construction jobs.

Unlike the United States, where the construction has been hurt by the weakened housing market, constructed-related employment has been on the rise. Residential building now dominates total construction spending, representing between 40% and 45% of the total dollar value. Engineering and non-residential building make up the rest.

Still, housing starts for 2007 are projected to come in at 215,000 units compared to 227,000 in 2006, with a further easing to 200,000 in both 2008 and 2009. Housing construction and the employment that comes with it are uneven and reflect the shifts in economic power from Central Canada to the western provinces, said Carrick.

While Ontario and Québec have a combined population of 20 million versus the eight million people who live in Alberta and British Columbia, employment growth in the central provinces has been considerably lower. From August 2006 to August 2007 there was a 2.4% increase in jobs in Québec and 1.5% in Ontario. During the same period there was a 4.7% increase in Alberta and 3.2% in British Columbia. To illustrate the nation’s disproportional employment scene, the economist showed a graph listing the 10 leading Canadian cites with strongest job markets and 10 with the weakest. Of the 10 cities with the strongest, seven are in Western Canada. Eight of the 10 weakest are in Ontario.

Newfoundland and Labrador has generated the least amount of jobs of any region in the country with a 13.7% unemployment rate as of August 2007, only slightly lower than for the same period in 2006. But as more offshore projects come on stream, its economic prospects will improve and the province actually led the country in percentage gain in retail sales this year. Retail sales are buoyant throughout the country, said Carrick, who estimated that by the end of this year construction of 17.2 million square feet of retail and mall starts will have gotten underway.

Other sectors such as institutional construction also look promising. Ontario has eliminated its deficit; the Québec election has been held; and demographic factors such as the influx of workers and their families into British Columbia and Québec are forcing those provinces to invest in institutional buildings. The popularity of public private partnerships for the timely delivery of health care facilities also makes it easier for governments to facilitate those projects, said Carrick.

Office construction is also gaining momentum, the audience was told. There is, or soon will be, a need for new Class A office buildings in the downtown cores of major Canadian cites as absorption increases and vacancy rates decline, said Paul Morse, senior vice-president and general manager, Cushman & Wakefield LePage. Fueling that momentum are the significant employment gains in finance, insurance and real estate services, as well as in government and the professional, scientific and technical fields. With its stable economy and political environment and generally lower property prices than other countries, Canada continues to attract international investors searching for office product.

A prime example of the activity underway is downtown Toronto, which is emerging from almost 15 years of stagnant growth. Four major towers are under construction, including the already 60% leased Bay Adelaide Centre, while five more are proposed. There is a strong correlation between the development of those towers and the City of Toronto’s waterfront revitalization plans, notably its ($230 million 6,000-unit) West Don Lands project. Many of the future employees who will be working in those towers will want to live in the city, he said.

Toronto’s dominance of the financial office market, however, could be challenged by Calgary — if it moves beyond the energy sector — because its property taxes are considerably lower. Focusing on other cities, Morse said Vancouver has a shortage of developable land for office buildings; Ottawa has a tight market and is still recovering from the high-tech meltdown; while there’s limited or no growth in office demand in cities such as Montréal and Halifax.

One of the most upbeat presentations was an overview of the residential market. Even if there is a downturn in the economy, there is enough activity currently underway to sustain the market for the next 18 to 24 months, said Will Dunning, president of the economic research firm Will Dunning Inc. With the exception of Ontario, employment growth has outpaced population growth during the past three years and that employment creation is the foundation for a healthy housing market. Housing demand is driven by employment, affordability and the attitudes and confidence that come with job growth, he said.

While prices have risen substantially in the past few years, committed purchasers will find a way to buy a home. Still, affordability is a pressing concern in some regions of the country and is an issue that will rise to the forefront in a few years in British Columbia’s extremely high-priced market. On the other hand, interest rates are lower than five years ago, said Dunning who predicted rates would increase by 0.5 percentage points in 2008 and then stabilize.

As well, more equilibrium is returning in residential resales with a move away from a seller’s to a more balanced market. On an overall national basis, resales by the end of 2007 will reach 503,900 units from 483,609 units in 2006. There will be a gradual drop to 485,100 next year and then they will climb slightly to 497,500 in 2009.

Touching on other housing forms, Dunning predicted a rebound in condominium construction in 2008 and continued high levels of spending on renovation projects, with perhaps just a slight pause in activity this year.

Despite the positive forecasts and atmosphere generated during the day-long conference, there was cautionary message — although it was message of the challenges that are coming with Canada’s robust economy. With one of the oldest workforces in North America, there’s a real need to lure new recruits into apprenticeship programs, said George Gritziotis, executive director of the Construction Sector Council. During the period from 2006 to 2015, approximately 155,000 new workers will be needed simply to replace older workers who will be retiring, while another 92,000 will be required to meet the demand generated by new projects coming on stream. In a continuation of a message he has delivered before other audiences, Gritziotis said more effort is needed to attract young people, women and aboriginals into construction industry trades.

One of the connecting threads of the day-long conference was the heightened awareness the private and public sectors are placing on sustainable construction. The Canada Green Building Council is aiming to have 100,000 buildings certified under its LEED® green building rating system by 2015, said council president Thomas Mueller.

While the focus of the conference was the Canadian economic and construction scene, the delegates were given a snapshot of the economic and political forces shaping the American market. Despite the impact of the U.S. mortgage crisis, there should be no recession because other segments of the economy are strong. Examples include an improved foreign trade balance and near record-high corporate profits, said Timothy Duggan, senior project manager, RSMeans Business Solutions. Duggan was a last minute replacement for RSMeans senior manager, John Ferguson, who was killed in a motorcycle accident in September. In recognition of Mr. Ferguson’s contributions to the industry, there was a moment of silence.

Featured keynote speaker was retired Major-General Lewis MacKenzie who spoke about his experiences in Bosnia as part of a talk on the qualities needed for good leadership.