2011 Conference Recap

September 29, 2011

Executive summary of CanaData’s 26th Annual Construction Industry Forecasts Conference

PETER KENTER
correspondent

Twists, turns and gentle volatility for Canadian economy

While the global economy loses momentum, Canada’s strong position in commodities and well-balanced approach to public spending and debt will see the country ride out the next few years in reasonable shape. That is the message from economists and industry experts, including Scotiabank's chief economist, Warren Jestin, addressing the recent 2011 CanaData Construction Industry Forecasts Conference in Toronto.

But, while Canada’s strengths will help it to endure the international slowdown, its small size relative to the world economy and dependence on buoyant commodity prices will see the country buffeted by medium-sized economic tailwinds into 2013.

The effects on the economy may translate into anything from currency fluctuations to the scope and schedules of large infrastructure and resource projects and the price of construction material.

Increased trade with emerging economies — particularly in the commodities sector — will play an important role in the country’s economic fortunes. Just as a red-hot Chinese economy helped Canada to weather the last recession, a cooler Asian business climate is tied to more moderate economic growth here. While the U.S. will continue to be Canada’s largest trading partner for the foreseeable future, the country shouldn’t look to the sluggish U.S. economy to buoy domestic growth. Ontario’s stronger ties to the U.S. economy will see that province lagging behind the rest of the country.

Slower economic growth poses little threat for an inflationary spiral. Likewise, governments have announced they intend to keep interest rates low into 2013 to protect the fragile recovery.

In a word, short of a major international political or economic crisis, Canada will find itself in reasonable economic shape through 2013.

“Canada is the best place to be,” says Jestin. “Almost everything I look at screams that out to me.”

Mega-projects to drive Canadian construction: commodity demand to fuel growth

A slate of Canadian mega-projects could create a decade-long boom in domestic construction, says Mark Casaletto, vice president and general manager, Reed Construction Data.

“The bottom line is that the Canadian construction industry is absolutely primed for some significant growth,” he says. “It could double in 10 years.”

Many of the projects are driven by foreign demand for mining products, fossil fuels and hydroelectricity.

Current and planned construction will provide significant near-term opportunities, including such hydroelectric projects as the $6 billion Lower Churchill Development at Gull Island and Muskrat Falls, Newfoundland and the $7.9 billion Site C Clean Energy Project below BC’s Peace River Dam, with other significant projects in BC, Manitoba and Quebec. Mining projects include the $3.5 billion Kémag Mining Project in Quebec, and the $2.9 billion Schaft Creek Copper-Gold-Molybdenum-Silver Deposit Project in BC, with other large projects in the Northwest Territories and Quebec. Fossil fuel projects include Suncor’s $10 billion heavy oil processing plant, and $3.6 billion Firebag 4 oil sands projects in Alberta, and Chevron’s $10-billion Hebron oil refinery in Newfoundland.

A modest but continued demand for commodities by developing economies and domestic demand for new energy sources are one of the keys to construction of Canadian mega-projects

A predicted stable demand for commodities to mid-2013 will encourage such projects to move forward, says Derek Burleton, vice president and deputy chief economist (Canada), TD Bank Financial Group.

“The upside for commodities is that there will be no underlying shortages,” he says. “The downside is that it’s a symptom of a slowdown in the world economy and particularly in China, so prices will remain elevated, but constant.”

Burleton sees oil no higher than $120 a barrel, and natural gas prices edging up through 2013. Copper, nickel and coal prices will moderate as 2013 approaches. Steel will remain flat through 2012 and lumber prices will not see a recovery until 2014.

Barring an unforeseen political or economic crisis, Burleton says he does not expect to see a sudden boom or bust in commodities.

A relatively robust Canadian economy, fueled by those same commodities should see continued spending on domestic projects ranging from more than a $1 billion in construction for the 2015 Pan American Games to the $1-billion Toronto-York Region Spadina Subway Extension, and arena projects across the country.

Casaletto notes that many of the large resource projects will place a premium on the ability of Canadian builders to service large operations at very remote sites.

“Because they’re so remote, builders will literally have to put cities and towns next to them,” he says. “That will create almost as much work as the total projects over their lifetimes.”

Continued forecast growth in Canadian construction market through 2014

Despite a soft U.S. economy and a slowdown in the economies of the developing world, the Canadian construction market will continue to make moderate gains through 2014, says Alex Carrick, chief economist, CanaData. Total new construction is expected to rise from about $232 billion in 2010 to $300 billion annually in 2014.

While the country is building a too-large inventory of unoccupied condominium and residential units, overall Canadian housing starts should remain stable through 2013 at about 180,000 units per year, he says.

Peter Norman, senior director and general manager, Altus Group Economic Consulting, however, sees multi-family buildings as the engine of future residential construction with less emphasis on single-family homes across the country.

Carrick forecasts overall office building starts to rise from about 5.7 million square feet last year to about 11 million square feet in 2013.

That trend is echoed by Paul Morse, senior vice president and general manager and national practice director, Cushman & Wakefield LePage, who says declining vacancy rates are setting the stage for more construction in most major cities across the country.

Trends in construction include a greater intensification in use of office space and a move toward downtown; particularly in the area surrounding Toronto’s expanding Union Station. Companies heading downtown include Google, SNC-Lavalin and Coca-Cola.

Companies vacating old premises for new will continue to provide the Toronto market with a supply cushion.

“The initial supply of about 1.8 million square feet will keep rental rates in check,” he says.

Carrick says that retail and mall starts are expected to rise from 8.1 million sq.ft. in 2010 to 14 million in 2013. Warehouse building starts are predicted to double from 4.1 million sq.ft. in 2010 to 8.5 million sq. ft. in 2013. Commercial starts are expected to rise from 30.8 million square feet to 46 million sq.ft. in 2013 and industrial starts from 2.3 million sq.ft. in 2010 to 5.0 million sq.ft. in 2013.

Carrick says the big surprise is a continued demand for institutional construction in a post-stimulus environment. Institutional starts soared at 40.8 million sq.ft. in 2010 and are expected to rise from 24.5 million sq.ft. in 2011 to 29 million in 2013.

“It’s not yet dead,” he says. “I think it will gradually increase in the years ahead.”