July 8, 2010

Economic update

Canada’s construction starts make solid gains in first half

ALEX CARRICK

Chief Economist, CanaData

The pattern of CanaData’s construction starts (+77% in square footage and +66% in dollar volume) through the first half of this year has been fairly predictable. The big winners have been institutional and engineering work, thanks to government funding.

Commercial work has been relatively flat and industrial starts have been in steep decline. Residential has exhibited surprising strength. Unless stated otherwise, the percentage changes in what follows are square-footage first-half figures this year versus first-half last year. Engineering is only expressed in dollars.

In the residential category, CanaData applies square footage and dollars-per-square-feet factors to Canada Mortgage and Housing Corp.’s single-family unit starts. For multi-family starts, CanaData researches and collects its own data on individual row and apartment/condo projects. Total Canada residential starts year to date are +90% in square feet and +80% in dollars.

Record low mortgage rates during much of the period contributed to the strength. There have been recent signs of an easing in residential starts. The Bank of Canada was the first among G8 nations to raise its policy-setting interest rate. Also, harmonized sales tax introductions in B.C. and Ontario will cool the market, as will some cost resistance, as prices have remained high.

First-half commercial starts were -4% in square footage and +22% in dollars. A strong public sector presence can be found in this segment in the government office (+88%) and recreational (+21%) building categories. Private office building starts (-18%) have not fared as well.

The retail and wholesale services category (+29%) in commercial also performed fairly solidly. This is traditionally one of the first private-sector categories to bounce back. Individuals and families spend money on many consumer items – for example, food, beverages, cosmetics, the movies, etc. – even in the worst of times, both through necessity and as a form of recreation.

Institutional starts were +161% in square footage year to date and +96% in dollars. There were large gains in all of the major sub-categories – hospitals (+290%), medical/welfare buildings (+270%), defence and law enforcement buildings (+80%) and educational facilities (+136%).

Year-to-date institutional starts received a shot of adrenaline from May’s groundbreaking for the McGill University medical centre in Montreal, at 4.2 million square feet. The school construction strength is mainly at the level of community colleges and universities. This is to serve the needs of baby boomers’ children and of mature students who are going back to school for upgrading.

One key demographic (aged from late teens to early 20s) influencing institutional construction is the tail-end of the children of the boomers. A developing story, however, is the grandchildren of baby boomers who are accounting for a mini baby boom. The first wave from this grouping will be reaching the lowest grades in the education system in another couple of years, from 2013 on.

Industrial construction starts have all but disappeared (-67%). This is the long-term consequence of many manufacturing firms locating their operations in lower labour cost regions in emerging nations. There might be some re-alignments coming. For example, China is developing a labour movement, with some dissatisfaction over wages, and allowing its currency to move more freely.

In any event, there will be more industrial investment in Canada as the recovery phase leads to expansions. Some auto firms, most notably General Motors, have already revealed major expansion plans in Ontario. And aluminum concerns that had been planning major investments before the recession will bring them back out of storage once markets improve enough.

Several industrial and engineering sub-categories depend on commodity prices. These were increasing rapidly, but have paused of late. Engineering starts in January-June (+114%) were aided by April’s start on the $8 billion Kearl Oil Sands project near Fort McMurray in Alberta.

Elsewhere in engineering, public sector work has accounted for the base. The dollar volume of bridge starts is +137% year to date. Sewer and watermain, water treatment plant and road construction starts are all about even with last year, but 2009 was a good year in those categories.

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