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Blog/December 6, 2018

Canada’s Top Construction Market Trends

This year’s CanaData conference highlighted the latest trends and provided insights that engineering and construction (E&C) firms can leverage to build their forecasts for the future.

In 2007 the U.S. imported over $140 billion in automotive parts (down by about 0.01% from the prior year), with the top-five importers being Mexico, China, Canada, Japan and Germany. Today, that order has since shifted, with Canada not even making the top five, which now comprises Germany, South Korea, Thailand, Italy and the U.K.

This and other economic revelations came to the forefront at the recent ConstructConnect® CanaData conference, where chief economist Alex Carrick presented a variety of key data points of interest to the engineering and construction (E&C) industry.

The fact that Canada reduced importance as a top automotive part supplier to the U.S. was just one of many observations that should be of interest to the E&C community on both sides of the border. The November 26 announcement by General Motors of the planned 2019 closure of its Oshawa plant further highlights Canada’s falling manufacturing competitiveness relative to the U.S. and Mexico. Equally as interesting was Carrick’s comparison of U.S. versus Canadian construction material costs, which painted a picture of two very different markets.

Comparing July 2017 to July 2018, he pointed out that construction costs, as a whole, are climbing dramatically in both countries, with fuel costs being one of the biggest variables. In the U.S., for example, diesel fuel costs rose 43.6% during that time frame. In Canada, diesel fuel prices were up 36.1%. Year-over-year plywood prices were up just 6.6% in Canada, but increased by 22.5% in the U.S. Other increases included asphalt costs (up 44.9% in the U.S. and 35.9% in Canada) and regular unleaded gas (40.7% versus 27.7%).

However, since the July conference, virtually all commodities and raw materials have seen a significant retrenchment in price, with West Texas Intermediate (WTI) crude oil falling back to levels not seen since October 2017. The global economic growth, outside of the United States, fell steeply and unexpectedly in the third and fourth quarters of 2018, reducing demand for most commodities and raw materials. This has led to a significant cooling of raw materials- driven inflation experienced in 2017 and the first half of 2018.

The numbers speak for themselves, but what they tell us is that Canada’s inflation rates never fully matched the U.S. inflation rates in labour or products like fuel and building supplies. Put another way, the significant inflation pressures that U.S. E&C firms were experiencing in the first half of 2018 did not impact Canada to the same degree.

Higher Construction Costs

Construction costs are going up in both countries right now, although the U.S. is definitely seeing bigger spikes in certain industry sectors. Comparing July 2018 to July 2017, new residential construction now costs 8.1% more in the U.S. (versus a 5.1% uptick in Canada), while new nonresidential construction costs 8% more (versus 4.5% in Canada).

New construction, as a whole, is costing Canadian owners 6.6% more than it did during July 2017 and 8.1% more in the U.S. In looking at these numbers, it’s clear that while the Canadian market is still dealing with modest inflation, it’s the cheaper place to be if you’re doing business right now.

Going forward, Carrick expected Canadian economic growth to maintain what he calls “reasonable momentum,” with the monthly Gross Domestic Product (GDP) advancing 0.1% in April (his most recent numbers) after a stronger gain in February. Overall GDP is expected to rise by 1.8% in both 2018 and 2019, he says, and the balance of growth is expected to shift away from consumers and housing activity and toward firmer business investment. “The economy has eliminated much of the excess capacity that developed in the wake of the oil price crash of 2014-16,” Carrick points out in his economic outlook report, “and higher oil prices are likely to support stronger sector investment.” However, the renewed precipitous decline of oil prices, exacerbated by a steep discount for western Canadian crude oil due to a lack of pipeline capacity, will likely stall any contemplated growth in sector investment.

Here at FMI we’re expecting more of the same from the Canadian market as we move into 2019, with the concerns over inflation becoming muted as the new year kicks off. In fact, we expect labour-driven inflation to continue in the U.S. and to a lesser degree in Canada and—absent a further cooling of the markets—the United States construction costs to continue to climb at a faster rate than those in Canada. As both markets continue to evolve, labour availability will remain a key challenge for companies across all industries.

More Coworking Space, Please

Also at this year’s conference, Raymond Wong and Peter Norman of Altus Group laid out their prognoses for the housing market, noting that Canada’s job growth has come off its 2017 highs. Net migration trends are boosting the market in the provinces of Ontario and Quebec, they pointed out, with new policies expected to increase immigration intake by 20% over the next three years. The majority of those new residents will migrate to Toronto, Montreal and Vancouver.

With nearly all industries struggling to find skilled workers right now, the commercial real estate market in Canada is going through a transformation. For example, Wong and Norman say that coworking space continues to gain in popularity. Key benefits include reduced costs (cited by 45% of companies), the need for short-term space solutions (42%), increased flexibility of leasing terms (41%), and the need to acquire satellite/remote office space.

A key takeaway from the Altus Group’s report focused on how design is becoming a key factor in worker recruitment and retention. Right now, a lot of companies are spending significant resources on tenant improvements and/or transforming their existing spaces to better attract individuals who are like-minded and who want to work in a more “flexible” space. To meet these needs, building owners are adding employee locker rooms, large gathering spaces, places to park bikes and parking spaces to accommodate carpooling.

A Tale of Two Cities: Office Vacancy Rates

In looking at year-over-year office vacancy rates, the Canadian market rate is hovering around 12%, with Vancouver, Edmonton and Winnipeg experiencing the lowest rates right now. Challenged by the collapse of the oil and gas industry—with producers pulling out of the region and leaving behind a glut of office space and a smaller industrial workforce—Calgary’s official vacancy rates are the highest in the country at nearly 23%, according to Wong and Norman.

Finally, in looking at the supply-demand balance in the nation’s residential housing sector, Wong and Norman highlight a “gross mismatch” between recent housing starts and the demographic need for housing. Right now, for example, there are entirely too many apartments coming out of the ground versus actual demand for those dwellings. The opposite is happening on the single-family home side of the market, where demand is outstripping supply.

In other words, the E&C industry is building a lot of apartments and high rises, but the demographics indicate that there is still strong demand for single-family homes, that is in excess of new single-family home starts. And while the apartments could help provinces address some of the new immigration numbers that Canada is expecting over the next three years, there’s clearly a disconnect in the market. It will be interesting to see how it plays out over the next year or so.

With a new year ahead of us, we’re looking to where the market is forecasted to grow or decline with the launch of “FMI’s Canada Construction Outlook,” in conjunction with the “U.S. Construction Outlook” release in early January. Receive this report directly to your inbox on the release date.

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