The short-term might not look pretty. The mid-term is pretty good. The long-term is very strong.
That was the message Marlon Bray, senior director of cost consulting with Altus Group, told the crowd gathered for the Residential Construction Council of Ontario’s AGM in Concord, Ont. when it comes to the construction industry outlook for 2023 and beyond.
“It’s all about looking at a different level and looking at opportunities in the right place,” he said.
His presentation, entitled Fortis Fortuna Adiuvat, or fortune favours the bold, focused on construction costs and supply chains, specifically for the residential sector.
“2023 is the hangover year,” Bray described. “Basically, it’s been going great since 2017, not so great this year, so a little bit of a hangover from the good years.
“Next year, ‘hair of the dog,’ a little bit of recovery time to ramp it up and then basically in 2025 you’re back in the madness again.”
The industry will likely experience some ups and downs this year.
“We’re going to see trades that have financial difficulties, we’re going to see developers have difficulties, we’re going to see projects that fail, we’re going to see cancellations, we’re going to see a lot of that sort of negativity,” he noted.
“The people that have overstretched themselves, that aren’t managed properly or don’t have the capital…they’re going to struggle.”
What’s the moral of the story?
“Just keep calm and carry on. Carry on doing what you are doing. It works and have a strategy,” Bray said. “A lot of people tend to spend their entire lives looking backwards…but the problem is walking forwards looking backwards you hit a wall.”
There are going to be some fantastic opportunities for Tier A developers, he noted.
“We’ve got guys calling us saying, ‘can you let me know when this project is going to get cancelled, when that project is going to get cancelled? Can you give me a list of them?’” Bray told the audience. “Why? They want to buy them all.”
He referred to rising interest rates as a hammer.
“4.25 per cent in 12 months, it’s really the hammer that just killed an industry who’s been very strong,” said Bray. “I use the term killed loosely because it’s still going to be good. In the short-term there is a little bit of pain.
“How does this cause problems? Well, obviously financing, then most of the trades are running on lines of credit as well so cash flow becomes a significant issue. A lot of developers are using revolving lines of credit as well. (This) becomes a major issue and the first-time buyer can no longer buy a home it becomes an issue.”
He discussed a survey that asked developers about what their strategy is in dealing with the Bank of Canada interest rate increases.
“Thirty-three per cent in August were looking to place new projects on hold, by November that changed to 73 per cent,” Bray said. “Why? Time. It all takes too long.”
City of Toronto approval timelines are getting worse, he noted.
“How come Calgary can approve stuff but Toronto can’t?” asked Bray. “Because Toronto is broken…It is a system built to delay stuff and not approve stuff.”
Highrise is expected to slow in 2023 and low-rise construction is expected to wind down significantly.
said Ontario needs 1.85 million homes to make housing affordable on top of what the province already plans to build. However, housing starts are expected to decrease for the next three years.
“We need to double our construction of housing and it’s grinding to a halt,” he noted.
The good news is the government is going to have to do something about it before the next election.
“The government has attached itself to building housing and solving it…They have no choice,” he said.
Bray also said construction costs are likely to level off.
“It’s half the number of project starts in the next year or two than we have seen over previous years,” he said, adding commodities, manufacturing, shipping costs are all coming down. “Everything is starting to free up slowly, it’s just taking time, hence the fact that as we go through this year it’s going to get easier. The only problem is we’re not going to do new projects, we’re just finishing up stuff.”
Many believe if there is a recession construction costs will plummet.
“Even if we go into a recession, best case scenario, construction costs will come down over one year and then they’ll go right back up again,” he said.
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