Construction Industry Overview Winter 2012
March 15, 2012
Non-residential construction activity in Canada is expected to decline for the second year consecutive year in 2012 according to the Conference Board's Winter 2012 outlook. Spending on non-residential structures is expected to decline by one per cent this year, with employment expected to be reduced by 2.9 per cent. The industry weakness is predominantly due to governments cutting spending in order to reduce deficits. Demand from the private sector is not yet solid enough to offset those cuts and economic growth will remain modest.
The commercial and industrial segments experienced healthy growth in 2011, mostly due to the fact they are still in their post-recession recovery cycle. Spending on commercial and industrial buildings is still below pre-recession levels and vacancy rates remain high compared with pre-recession levels, yet they are improving.
Global factors are still not completely aligned to suggest a year of strong economic growth in 2012. Uncertainty affects the confidence of businesses and reduces their willingness to take risks and make large investments in new buildings.
When all is taken into consideration, 2012 is not expected to be a solid year for the non-residential construction industry. Profitability will improve slightly due to muted cost increases. It is expected that into 2013, and beyond, the industry will return to a more ‘normal’ level. Business demand will increase at a healthier pace, yet profitability will not reach its 2008 peak before the end of the forecast horizon in 2016.
Industry Trends
The industrial segment was hardest hit by the recession. Spending on industrial structures, such as factories and warehouses, fell by roughly 28.7 per cent as a result of the recession. Since the start of 2010, industrial spending has risen together with the rising manufacturing activity, however manufacturing output remains well below what it was before the recession. The vacancy rate for industrial facilities is still well above the average. In the third quarter of 2011, the vacancy rate was 6.4 per cent. This highlights the amount of unused space that needs to be absorbed before the vacancy rate comes back to its average, around 4.5 per cent.
The commercial sector is the largest, accounting for roughly 58 per cent of the spending on non-residential structures in 2011. The sector includes the construction of offices and other commercial buildings, like retail stores and hotels. Spending on offices during the recession didn’t decline by as much as the other types of commercial construction, but the decline lasted longer. Construction spending on offices had not increased much from its lower point of the downturn and was still 10 per cent lower than its previous peak in the second quarter of 2009.
The vacancy rate for office space in Canada dropped dramatically in 2011, but still remains above average. Since leveling out at nine per cent in the second quarter of 2010, it has been falling steadily while employment has been rising and generating healthy levels of absorption. During the third quarter of 2011, the vacancy rate was at 7.5 per cent, the lowest it had been since the recession. Despite this, it was still higher than a level that would suggest a need to add new offices quickly. The average vacancy rate in Canada was between six and 6.5 per cent in the years preceding the recession and as economic activity continues to gradually improve, healthy demand should build again for new office buildings.
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