Outlook Positive For Stronger Commercial Construction Heading Into 2012

07/29/2011 by John Clinkard

Despite the recent pattern of subpar growth in the United States, persisting uncertainty about the impact of the European sovereign debt crisis on global financial markets and the impact of supply chain disruptions mid way through the year, the outlook for the Canadian economy in general, and for commercial construction in particular, remains positive.

Turning first to the outlook for Canada, according to the Bank of Canada’s Business Outlook Survey (BOS) for the second quarter of 2011, an increased percentage (20%) of firms surveyed by the Bank expect stronger sales over the next 12 months than was the case in the first quarter (13%).

More significantly, the BOS reported that a record (53%) percentage of firms reported that they are planning to hire additional staff over the next 21 months.

Finally, according to the survey, more firms are planning to increase their investment in machinery and equipment.

With respect to the outlook for commercial construction, the fundamental drivers of investment are very strong. Specifically, operating profits of financial services companies in Canada were up by 10.1% quarter over quarter in the first quarter following an 11.7% rise in Q4/2010 due in large part to strength in banking (+26.2%), insurance (+25.8%) and real estate (+3.3%). Profits in the retail industry increased by 4.5% q/q in the first quarter following a 3% increase in the final quarter of 2010.

Regarding the outlook for office construction, according to Cushman and Wakefield, the national office vacancy rate in Canada declined from 8.8% to 8.6%, its lowest level since the fourth quarter of 2009. Also, office-based employment in Canada increased by 1.8% year over year in June due to strong growth in Regina (+5.7%), Toronto (+5.6%), Calgary (+5.0%) and St John’s, Newfoundland (3.9%), which offset declines in Halifax (-11.9%), Winnipeg (-6.4%) and Montreal (-5.8%).

Another positive for commercial construction is the fact that lending conditions eased significantly in the second quarter. According to the Bank of Canada’s Senior Loan Officer Survey, lending conditions have never been more favourable since their survey was initiated in 1999.

Finally, the most compelling indicator of strong commercial building over the near term is the fact that, according to Statistics Canada, the value of commercial building permits approved in Canada in May increased by 81% month over month to a record high of $1.9 billion due to strong gains in eight of the ten provinces, led by Manitoba, Quebec, Alberta and Ontario.

Commercial construction, profit growth and lending conditions