February 9, 2010
Economic update
2010 to be another difficult year for construction
But take heart over the longer-term outlook
ALEX CARRICK
Chief Economist, CanaData
Last year’s total ICI (industrial + commercial + institutional) starts, at 48.5 million square feet, were down considerably versus the level achieved in 2008 of 75.5 million, according to CanaData’s latest square footage forecasts.
More significantly, they were only slightly more than half of 2007’s figure of 92.1 million. 2007 was the peak year for non-residential building starts in the most recent “up” phase of the construction cycle.
CanaData’s forecasts are set out for provinces and regions of the country in the accompanying tables. The forecast was made after compilation of 2009 year-end results.
2009 actual levels
The largest year-over-year drop on a percentage basis occurred in industrial square-footage starts, down by about two-thirds.
Commercial starts also fell dramatically, to about half of their previous year’s level. Institutional starts were also off, but not by much.
The declines in the first two categories are explained by the fact that private sector money spent the year hiding in a foxhole. Only the public sector was forthcoming with funds, keeping institutional work flowing.
2010 to be a struggle
2010 will be another tough year for construction starts.
The public sector may have already made most of its spending commitments. For example, in Ottawa’s case, approved projects have a target completion date of March 2011. Therefore, most of them are already in the pipeline.
There is also the significant problem that all levels of government are grappling with lower tax revenue. Budget shortfalls are going to demand spending-program and capital-investment cuts soon.
On the private spending side, the recovering economy, better stock markets, continuing record-low interest rates and profits that have been sustained by means of job cuts are raising confidence levels.
Nevertheless, investment lags general economic growth. There still remains way too much excess capacity in office buildings and manufacturing plants.
And retail sales will continue to be held back for as long as it takes employment levels to return to their pre-recession levels.
Reasons for optimism longer term
While these may be difficult days currently, there are many reasons to be optimistic about Canada’s construction outlook in 2011 and beyond.
For starters, due mainly to immigration, Canada’s population is increasing at a faster rate than in most other well-off countries. The nation’s total population has just crossed over the 34-million mark.
The annual rate of population increase is 1.1%. That means a net gain of 350,000 individuals per year. That’s a lot of people – a city the size of Victoria. They need jobs, housing, medical care and a range of other services.
Keep in mind, more people means more spending – on retail, entertainment, travel and shelter.
Canada is also fortunate in being well-positioned to benefit from growth in emerging nations. Swelling middle classes in China, Southeast Asia, India and Russia will drive up the demand for all manner of goods.
The building blocks of capital and consumer goods are commodities. Canada, along with Australia and Brazil, is in the forefront of nations that can fulfill that need.
Partly on account of the foregoing, the value of Canada’s currency has strengthened.
The Canadian dollar has been moving in tandem with the world price of oil. But the partial recovery in the price of oil is not the only reason for Canada’s greater prominence on the international stage.
During the worst of the 2008-09 credit collapse, Canada’s financial sector kept its head. The quality of Canada’s banking system has shot way up in the world’s estimation.
Furthermore, although Ottawa and the provinces have stepped forward with stimulus packages, the public debt- to-GDP ratio in this country is still lower than in any other major industrialized nation.
Foreign investors, looking for opportunities, want to put their money where it will not only earn a good return, but where it will also be safe; where any appreciation in value will not be offset by a decline in value of the local currency.
Canada now fits this description. Furthermore, when it comes to commercial properties, for example, office building investments are less volatile in Canada due to the substantial ownership positions of large pension funds, which are government-backed.
These entities are in it for the long haul. They provide a more stable investment climate.
The REITs are an additional source of solid residential, commercial and institutional investment.
For more articles by Alex Carrick on the Canadian and U.S. economies, please see his market insights. Mr. Carrick also has an economics blog. His lifestyle blog is at www.alexcarrick.com
Commercial starts
Institutional starts
Industrial starts
Total non-residential building (ICI) starts
Source of actuals, forecasts and tables: Reed Construction Data – CanaData.
