September 27, 2012
The health of the Canadian construction industry continues to depend largely on the strength of the domestic resource sector, according to presenters at the 27th annual CanaData conference held in Toronto.
Canada continues to benefit from resource demand from emerging economies such as China, India and Brazil, despite a moderation in economic growth in those markets. The wild card? The health of the U.S. economy and the degree to which its revival may kick-start growth elsewhere.
The U.S. economy has flexed only a little muscle recently, and faces considerable political uncertainty, says Alex Carrick, chief economist, CanaData, Reed Construction Data. That country is also bracing for a “fiscal cliff”— a series of tax increases and across-the-board spending cuts that will automatically go into effect at the beginning of 2013 should lawmakers be deadlocked on budget compromise.
Like Canada and other European nations, the U.S. is also performing a balancing act as its government weighs demands for both economic stimulus and fiscal austerity.
“This recovery is different than in the past,” says Carrick. “The fiscal weapons that can be used aren’t in alignment with the monetary ones.”
Carrick predicts slow Canadian economic growth in the near term. “I see 2.0 per cent growth for 2012-13, and not much better for 2013-14,” he says. “Canada’s economy could do a lot better than we think it will, however, in particular because of the U.S. economy which is doing a lot better than people realize.”
If the U.S. faces a double-dip recession or expends more effort on extracting its unconventional energy, Canada will rely increasingly on emerging resource markets to the east to fuel growth. That will require greater infrastructure investments, including such projects as the proposed Northern Gateway oil sands pipeline to deliver resources to British Columbia ports and on to eastern markets.
However, Carrick says that the Canadian construction sector will outpace the economy. Based on a recent Statistics Canada investment survey, CanaData projects the value of total new construction will rise by 5.1 per cent in 2013, 7.6 per cent in 2014, and 8.3 per cent in 2015 to a total of $348 billion.
Peter Hall, vice-president and chief economist with Export Development Canada notes that the government stimulus programs that buoyed Canadian construction in the wake of the 2008 financial crisis have been confused by many with an actual recovery. Hall predicts true growth in domestic construction, with some emphasis on creating infrastructure from the ground up to support communities of workers migrating to long-term resource projects.
“We are on the leading edge of a building binge in Canada that we don’t believe lower commodity prices are going to undermine,” says Hall. “But growth from abroad is going to help Canada stay afloat and in fact prosper incredibly as we go forward.”
Commercial real estate is demonstrating strong demand in city cores, but stifled demand in suburban markets says Stuart Barron, national director of Research and director, Real Estate Finance, Canadian Markets, Cushman & Wakefield Ltd.
The vacancy rate in Canada’s five largest markets averages 4.7 per cent, while the suburban vacancy rate remains more than twice that at 9.8 per cent.
Barron notes that all markets are affected by a trend toward office densification and consolidation. “They’re reducing their footprints but maintaining personnel,” he says.
Vancouver’s generally weak market will bring 1.4 million square feet to the market over three years, with Asian markets determining demand.
Calgary is responding to downward pressure on oil and natural gas prices, with new development hinging on higher oil demand.
The Toronto market continues to “defy gravity” at 4.3 per cent vacancy. An anticipated five million square feet of new space will enter the market between the end of 2014 and 2017.
Central Montreal vacancy is down to 6.1 per cent, with combination office/condominium towers an increasing trend.
Ottawa vacancy remains stable at 5.8 per cent, with the federal government providing primary demand.
Barron says industrial numbers across Canada are “subdued” showing weak supply and demand, with some reason for optimism.
The Canadian housing market faces a general concern about high prices and possible overbuilding of condominiums in major cities, says Peter Norman, chief economist, Altus Group and general manager, Altus Group Economic Consulting. However, he notes he can identify no “smoking gun.”
Housing starts for 2012 are estimated at 208,000 units with 2013 predicted to decline to 187,000. In the short term, overall demand will remain weak. “We’re looking at slightly lower levels of housing starts,” he says. “Overall, we’ll also see a slight switch back to the single family home and a bit of a decline on the apartment side.”
Ryan Berlin, economy and housing market analyst with Vancouver-based Urban Futures notes that Canada’s population is aging, with the average worker’s age now approaching the mid-40s.
The construction industry will need to redouble efforts to recruit and retain workers, he says, while preparing for a shift in construction projects to apartments, condominiums, clinics, health care centres and hospitals that will serve the same aging population.
Emerging markets continue to drive commodity prices, says Dina Ignjatovic, economist, Autos, Commodities and Other Industries with TD Bank Financial Group. She predicts commodity prices will remain elevated but stable in the short run and then trend higher when the world economy recovers.
An optimistic outlook for commodities also continues to drive mega project construction across the country, says Mark Casaletto, vice president and general manager, Reed Construction Data. From oil and gas extraction, pipelines, hydroelectric projects and mineral extraction, Canada continues to invest in major resource projects. Also on the mega project table: naval ports, subway expansions, and arena and industrial projects.
However, foreign commodity demand will again be the key to the health of the construction sector.
“A huge build-up in the resource sector is really what’s going to drive Canada from what’s historically been the ninth largest construction economy into the top five,” says Casaletto.