November 8, 2012

2012 Leaders

The outlook for construction in Western Canada

The most dramatic construction event in Eastern Canada over this past year has been the strength in Toronto housing starts. Condominium construction, in particular, has soared.

Through August, home starts in Toronto have been 33,000 units. A straight-line projection of that figure would yield a total for the year of 50,000 units.

CanaData is expecting some moderation in the number this fall. The federal government has introduced measures to slow housing demand. The amortization period for an insured mortgage has been dropped in stages from 40 years to 25 years. This is cooling first-time homebuyer demand.

Nevertheless, if Toronto realizes home starts of 46,500 units or more this year, that will set a new annual record. The previous peak was achieved in 1987 and almost reached again in 2003.

Toronto is one of the nation’s top locations for population growth. The city is adding close to 100,000 people per year. That’s a whole new census metropolitan area almost the size of Peterborough, a staggering measure of increase.

The rise in the number of people is driving a long list of rapid transit and subway projects. Queen’s Park and the municipal government have allocated funding for some major initiatives, but others are up in the air until clearer goals have been established. Mayor Rob Ford and the Toronto Transit Commission don’t always see eye to eye.

There are two other prime population magnets in the country, Alberta and Saskatchewan — primarily on account of the work they offer in the resource sector — but that is covered in the “Western Canada Construction Outlook” section.

Toronto, Montreal and Vancouver account for 33% of Canada’s total population. Their share of multi-unit housing starts (i.e., condos), however, is twice as high at 66%.

Toronto condominium starts so far this year are one-third above last year. The city is famous for having the strongest high-rise residential construction scene in North American. Taxi drivers proudly point out to visitors the number of construction cranes dotting the skyline.

Walk-in traffic in showrooms may be slowing down, but developers are still pressing on with projects. David Mirvish, heir to the Honest Ed’s and Royal Alex fortunes, is proposing a 2,600-unit condo project on King Street that would require the demolition of the Princess of Wales Theatre.

It will be a showcase project designed by Toronto-born architect, Frank Gehry. There will be three towers ranging from 80 to 85 storeys each, making it among the tallest of its kind in North American. Mr. Mirvish’s modern art collection will be displayed in a gallery at the base.

Office buildings hold out the hope of construction activity in the period ahead. The downtown office vacancy rates in a number of major cities have recovered remarkably well since the recession. Toronto, Calgary and Vancouver all have empty-space ratios below 5.0%.

Even in Montreal, where no major new office tower has been built in many years, there are prospects on the books. Cadillac Fairview has announced a 500,000 square foot building with a leading consulting firm as the major tenant.

Hotel and motel construction is picking up. In the U.S., “leisure and accommodation” has been one of the few sectors in which employment is now higher than it was before the recession. Resort owners in Las Vegas have been adding elaborate entertainment venues to attract “guests”.

The recovery has been a spur to business travel. Tourism travel has also improved, partly due to greater stability in gasoline prices. A year ago, the price of petrol was up by one-third year over year. Since then, the charge at the pumps has stayed relatively calm.

In Canada, a disproportionate number of upcoming hotel projects are in Niagara Falls, our answer to Las Vegas. The largest is a two-tower complex of 60 and 61 storeys for Hunter Milborne, which will make it the largest such accommodation project in the nation.

Eastern Canada features other upcoming entertainment projects tied to sports. New arenas are being built both in Markham and Quebec City, the latter being a new coliseum. The hope is that they’ll eventually attract National Hockey League franchises.

Don’t forget the Pan and Parapan American Games to be held in the Greater Toronto Region in 2015. Work is underway on swimming pools, track and field sites, and the athletes’ village. A new stadium in Hamilton, before it hosts Canadian Football League games, will be home to Panam Games soccer matches.

The auto sector is enjoying a strong rebound in demand. Motor vehicle sales to-date in 2012 are up 7% year over year in Canada. The pace of gain in the U.S. is twice that rate.

The capacity utilization rate in the sector has risen to 89.6%. Such a high level would normally trigger a spate of investment announcements. But as is the case for so much of the economy, these are not normal times.

Canada is no longer the number one exporter of cars and parts to the U.S. Mexico now has that honor. We’re in a virtual tie with Japan for second spot.

Most auto-sector investment in the U.S. is going to southern states where right-to-work legislation (i.e., promoting non-union employees) keeps labour costs down.

The September labour negotiations between the Detroit Three and the Canadian Autoworkers Union (CAW) froze wages for three years and established a lower pay scale for new hires. It remains to be seen whether these terms are judged attractive enough to spur on new capital projects.

In Quebec, the separatist and left-leaning Parti Quebecois has taken charge in a minority government. The previous Liberal administration instituted Plan Nord to ramp up investment on resources such as iron ore in the frontier regions of the province.

Premier Pauline Marois will be less supportive of the business community. During the election campaign, a key PQ proposal was for higher royalties to be charged for resource extraction. There are also plans to increase the tax liability for wealthy individuals in the province.

Whatever is enacted, however, will require some level of support from at least one of the other parties, the Liberals or the CAQ (Coalition Avenir Quebec).

The province needs major aluminum sector investments to get the industrial sector humming again. Rio Tinto Alcan in March of this year launched a $3.3 billion modernization project at its smelter in Kitimat, B.C. Similar investments in Quebec will be contingent on an improvement in aluminum prices.

Aluminum goes into airplane and car parts, construction materials and all manner of consumer goods. The aerospace industry is a particular darling in Quebec. The province is home to Bombardier Inc., which is investing heavily in new product development. Selling airplanes is a fiercely competitive business and the company is placing a great deal of hope in its new C-Series jet.

Ontario and Quebec form the industrial heartland of the country. Their combined GDPs make up 60% of the national total, with Ontario’s 39.5% accounting for almost double Quebec’s 20.4%.

On many occasions in the past, Quebec has been home to the largest hydroelectric construction projects in the country. At this time, however, that honor goes to Newfoundland and Labrador.

An agreement has been reached between Nalcor Energy of Newfoundland and Emera Inc. of Nova Scotia to carry electricity across the Gulf of St. Lawrence by means of an underwater cable. This has provided the go-ahead for work to begin on the Muskrat Falls station on the Lower Churchill River in Labrador.

Groundbreaking on this immense project is expected imminently. Further down the road, a second even bigger station is planned for Gull Island. At 2,250 megawatts, it will be large enough to supply all of Nova Scotia’s needs.

Newfoundland also has more offshore oil project work coming up, with Hebron next on the list to augment production from existing wells at the likes of Hibernia and Terra Nova.

Elsewhere in the Atlantic Region, major momentum for the local economy will come from the shipbuilding industry. The federal government has committed to spend $33 billion over the next 30 years to bulk up Canada’s naval fleet, as well as our other seagoing assets.

The Irving Shipyards in Halifax has the lion’s share of the contract, $25 billion. That’s where our new frigates will be built. This will provide a solid base of employment long into the future. It will also guarantee the retention of specialized trades skills that might otherwise be lost.

The lesser, but still substantial, portion of the shipbuilding work — icebreakers, patrol vessels and coast guard ships — will be carried out by Seaspan Marine at the Port of Vancouver.

Alex Carrick, Chief Economist, CanaData.

Provincial Populations

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