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The Trend of Canada's Construction Starts in 2009 will Reverse Somewhat in 2010

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Alex Carrick

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Alex Carrick is Chief Economist for Reed Construction Data. He specializes in economic forecasting and statistical services.

Economists

The trend in construction starts in 2009 became clear early on and stayed the same as the year unfolded. Commercial building starts in the nation as a whole, according to CanaData, ended 2009 down nearly 50% in square footage versus all of 2008. Industrial starts dropped by three-quarters or -75%. Those two categories mainly depend on private sector investment. On the public sector side, institutional starts were down only 8%. And engineering starts were lower by only a small degree, -2% in dollar volume. However, this fresh new year will see a reversal of some of the trends from 2009.

The trend in construction starts in 2009 became clear early on and stayed the same as the year unfolded. Commercial building starts in the nation as a whole, according to CanaData, ended 2009 down nearly 50% in square footage versus all of 2008. Industrial starts dropped by three-quarters or -75%. Those two categories mainly depend on private sector investment. On the public sector side, institutional starts were down only 8%. And engineering starts were lower by only a small degree, -2% in dollar volume. Engineering starts are only recorded in dollars, since it makes little sense to talk about the square footage of road, bridge or sewer construction.

Large project starts

The vast majority of the largest projects to start in 2009 were either institutional or engineering in nature. That’s where the financing was to be found. Government stimulus spending is primarily on hospital and school construction in the institutional category and on roads, highways, bridges and water treatment facilities in the engineering category. The strength from the government spending side was apparent right up to and including the latest month.

Furthermore, while three of the Top 10 project starts in December are categorized as commercial, the funding for each of them is coming from government – the City of Brantford (an addition and alterations to the Wayne Gretzky sports centre), Defence Construction Canada (vehicle maintenance in Trenton Ontario) and SAAQ of Quebec (government office building).

Re-appearance of private sector work

Nevertheless, there has been a re-appearance of some private sector work in the last couple of months. This has been primarily in high-rise residential construction and in oil and gas project investments. Resale housing markets have taken off since the spring. Exceptionally low mortgage rates have been the spur. The strength in the existing home market has caused some condo projects to be brought back on stream, after a brief period of lying on the shelf.

In the energy sector, the rise in the world price of oil to $80 USD has similarly resulted in some formerly halted projects being viewed as viable again. The largest project start in December was the $450 million Red Earth Section natural gas pipeline from the Peace River region of British Columbia to Fort McMurray, for TransCanada Corporation. The second and third largest project starts in December were two building projects – the Fort St. John hospital complex in B.C., valued at $268 million, and Union Station alterations in Toronto, estimated at $195 million.

Regional starts

Most of the regional ICI (industrial, commercial and institutional) square footage changes were between -25% and -33% year over year. The exceptions were Saskatchewan, only -5%, and Alberta, -75%. The former is marching to its own drummer these days thanks to the wide diversity of its resource assets. The latter suffered a huge hangover after an earlier capital spending binge that encompassed energy projects and new office towers in downtown Calgary. Then the price of oil collapsed, returning since to about halfway between peak and trough.

Engineering starts

A couple of outstanding projects in 2009 helped to keep the volume of engineering starts almost even with the year before. The most notable were the $2.5 billion Port Mann-Gateway bridge project in B.C., a November start, and groundbreakings on a couple of gold mines, the largest in Quebec for $1 billion and a smaller one in Nunavut. The price of gold has moved higher as the value of the U.S. dollar in world currency markets has come under selling pressure. Washington’s spending extravagance versus its tax-gathering abilities is under global scrutiny.

2010 outlook

This fresh new year will see a reversal of some of the trends from 2009. In 2010, government construction spending will be primarily on projects for which the money has already been committed. Given the size of deficits at almost all levels of government and in all regions of the country, the public sector will be shy about making new spending commitments. It bears saying, however, that Canada has been either lucky or wise when it comes to public sector profligacy. Government debt to GDP in this country is among the lowest in the industrialized world.

The private sector will pick up some of the investment load. The resurgence in stock markets has helped a number of firms to rebuild their finances, issue shares and fill their war chests. Mergers and acquisitions will be on the rise. Climbing profitability due to productivity gains will also mean better corporate balance sheets. But this will not quickly translate into on-site construction.

The revival in private sector construction activity can only be muted in most of 2010 by the large excess capacity that exists in manufacturing plants, as shown by record low capacity utilization rates, and in office buildings, as demonstrated by high and rising vacancy rates. On balance, 2010 will be a better year for non-residential construction starts. But the gains may be modest.

Alex Carrick

Find Canadian construction-related economic articles in Canadian Construction Market News and in the Economic Outlook section of Daily Commercial News. Mr. Carrick also has a lifestyle blog that can be reached by clicking here.

by Alex Carrick

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