Construction cost is one of the biggest issues affecting the economic forecast in Canada, said the chief economist from Altus Group at the recent CanaData 2018 conference in Toronto.
“Construction cost is somewhat elevated right now across the country in a variety of markets but in the GTA in particular it’s almost at a crisis point,” said Peter Norman.
“We’ve got construction cost particularly on the highrise product which is running at between 10 and 15 per cent year-over-year rise. We’re seeing the fallout of that in terms of quite a number of projects, which have launched and sold, are now being cancelled because the cost of actually building it is escalating above the income that came in for that project.
“This is being driven in part by the trade dispute and the costs that are coming through in terms of steel and some of the other products that are related to steel. Some of it is coming in terms of the way the trades have responded to that uncertainty and a lot of the supply shortage of trades as well.”
Norman focused on the residential outlook during the Outlook Express panel discussion, which also featured Raymond Wong, vice-president of data operations with Altus Group Ltd., and Alex Carrick, chief economist with CanaData and ConstructConnect.
“There is a confluence of different factors right now and it’s making it that we’ve got kind of a moving target on where consumer demand, housing demand is going to land,” said Norman.
He said there was tremendously strong growth in Canada last year and jobs were growing at twice the normal rate.
“Job growth has been lagging and lax this year. We’ve got a lot of uncertainty around the trade environment, a stall in terms of the recovery in the oil sector…not just trade issues with our biggest partner the U.S. in terms of the trade agreement but also the trade environment in general is getting softer.”
As for housing starts, Norman said it will be a “stable but moderating environment nationally.”
“We had a near record year last year for housing starts about 230,000 units,” said Norman. “We’re certainly going to be above 200,000 units for the next couple of years.
“I would like to see this chart turn tails a little bit and start to show a lot more single family coming in because that’s what we need, that’s what people are demanding…but it’s not for the next few years unfortunately.”
In his presentation, Wong focused on the outlook for the commercial sector, which he said is all about talent.
“The challenge for companies not just on the commercial side but on the residential side, on the construction side, the problem is finding people and talent especially for a specific skill set,” he said. “The challenge for real estate now especially with tenants is trying to figure out how can we attract and retain key talent.”
Owners are now investing in amenities to attract new tenants such as creating collaboration space in the lobby of a building.
“They want that sort of flexibility and this is actually adding value for owners of buildings as well,” Wong said.
He also talked about co-working spaces that are gaining in popularity. Instead of paying on a per square foot basis and a 10- to 15-year lease term, you are paying for flexibility, he said.
“They don’t want to have to commit to 100,000 square feet space for the next 10 to 15 years and not be able to adapt and adjust,” explained Wong. “A lot of companies are purchasing memberships to allow their workers to work in projects space, a meeting room or to house their employees for a specific time frame.”
The downside to this, he said, is that the increased number of tenants will tax the amenities in the building especially the elevators and the HVAC systems.
“We’ve seen some landlords resist or not allow it…or set up their own type of flexibility space within their building and we know that this is going to continue,” said Wong. “It is estimated that at least 30 to 40 per cent of all corporate space will be some sort of co-working space in the next five to seven years.”
In downtown Toronto there is about eight to 10 million square feet of space under construction and a good chunk of it has been pre-leased. These new spaces provide modern amenities and more efficient systems, he noted.
“The interesting thing is over the next two or three years, when the space is complete, what is going to happen to the older facilities and whether or not that’s going to be either demolished, changed or allow for mixed use property,” said Wong.