September 28, 2004

CanaData’s construction industry conference

Big-box retail projects to surge

BY DAN O’REILLY

DCN CORRESPONDENT

Commercial and industrial contractors who pay scant attention to residential construction may be adjusting their attitudes following an overview of the housing renovation market at last week’s CanaData construction industry conference.

Big-box retailers are embarking on major expansion programs to meet the growing popularity of home renovation and do-it-yourself projects, said Beverly Allen, sales and marketing director for Hardlines, a news service for the home improvement industry.

“The retail home market is performing well,” said Allen, commenting on the industry whose $32 billion sales in 2003 accounted for approximately 10 per cent of overall retail sales in Canada.

The expansion includes new construction, reconfiguration and renovation of existing spaces and entry into first-ever urban markets. Examples include the recent opening of a Home Depot store in downtown Vancouver and a second one later this year in Toronto’s Gerrard Square. These stores will be smaller than ones in traditional suburban areas because of the difficulty of finding sites in urban settings, said Allen.

By the end of this year, there will be 187 big-box stores across Canada compared to 172 last year and 157 at the end of 2002. The three main players in this expansion are Home Depot, Rona and Kent, a regional retailer in the Maritimes.

Canadian Tire is also considering larger ‘Metropolitan’ stores such as its recently open 105,000-square-foot store in Kingston. The retailer is also building on the successful launch of its ’20-20’ format.

“They are reducing their warehouse space by 20 per cent and adding 20 per cent to their retail space. Twenty of these stores opened this year and there will be 20 more next year.”

Several factors are contributing to the home renovation market and—in turn—big-box growth. They include low interest rates, the popularity of television renovation shows and the trend to ‘cocooning’ where homeowners would rather stay in and enjoy their home, she said.

Allen wasn’t the only speaker to present a positive snapshot of the home renovation market. Similar observations were delivered by Peter Norman, vice-president of Clayton Research, a Toronto-based real estate consulting and economic firm.

“While builders and realtors continue to contend with hot housing markets across Canada, another important component of the housing sector is also growing. Residential renovation spending rose 8.5 per cent in 2003 after inflation and continues to climb at a steady space.”

Renovation spending is an important contributor to the Canadian economy, and about half of all residential construction investment shows up in the form of renovation spending, said Norman.

The spending is driven, in large part, by a buoyant market in the sales of existing homes, especially to first-time buyers. Norman, however, sounded a note of caution on the future of the first-time buyers market and the subsequent impact on move-up home sales.

“First-time buyer intentions are still strong. But we see this market peaking. The pool of renters we can draw on is shrinking.”

This will create fewer opportunities for existing owners to sell their starter homes to obtain the equity to purchase larger houses, he explained. That’s one reason housing starts in 2005 will slip down to 210,000 units compared to 225,000 this year. Another factor is more moderate job growth, said Norman.

While the predictions for the housing sector were fairly upbeat, the prognosis for other sectors such as office construction sectors was considerably less so.

“My remarks very much mirror my comments of last year (conference),” said John O’Toole, executive vice-president CB Richard Ellis, in his annual overview of the office market scene. “In terms of new (office) constructions . . . we don’t see much of that. We have had 13 quarters of lackluster performance.” Office vacancy rates in most urban areas remain high, said O’Toole, citing an overall Toronto vacancy rate of 15.6 per cent in 2003, with a forecasted rate of 16.9 per cent this year.

Limited development activity, increased efficiency in the workplace and continued outsourcing of jobs and contracts by corporations all contribute to a reduction in the need for office space. And when firms do lease office space, it’s considerably less space than in previous times, he pointed out.

But with more jobs, especially white-collar employment, and economic expansion the demand for commercial office space should increase, said O’Toole, who predicted a steady decline in vacancy rates during the next three years.

The outlook for hotel construction was also not very encouraging. With the exception of specific markets such as Niagara Falls, the accommodation industry is still adjusting to a series of turbulent events, said David Larone, national director PDK Consulting Inc., a consulting firm to the hospitality and tourism industries.

Those events include the overbuilding/downtown of the early 1990s, followed by a restructuring phase between 1993 and 1997, a recovery period from 1998 to 2000 and then the sudden downturn created by the 2001 World Trade Center bombing, said Larone.

The industry was starting to recover when it was hit yet again last year from the fall out from mad cow disease and the SARS outbreak. Those cumulative effects of SARS were also felt in Vancouver and Montreal. “In this industry Toronto is the gateway to Canada.”

There are some possible developments under way. Some investors will be attracted to accommodation construction because they need areas to invest and hotel occupancy rates are rising, said Larone. Even so, the predicted occupancy rates for 2008 will only match 2000 levels. “That’s not a very rosy scenario.”

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