Construction Forecasts

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Brighter employment picture points to increased commercial office construction

04/27/2012 by John Clinkard

Midway through the first half of 2012 there are some clear signals that prospects for commercial office construction are taking on a rosier hue despite the lingering concern about the potential impact of the European sovereign debt crisis on global financial markets.

Turning first to the outlook for the economy in general, the sustained improvement in the health of the U.S. economy, the market for approximately 20% of Canada’s gross domestic product, should continue to make a significant contribution to growth in Canada through the remainder of 2012 and into 2013.

Second, according to the Bank of Canada’s most recent Business Outlook Survey, the net percentage of firms reporting an improvement in their expectations for future sales rose from -4% to +35%, its highest level since the first quarter of 2010.

Third, according to the Conference Board of Canada’s most recent survey of on-line help wanted advertising, hiring plans in Canada have increased significantly in the first quarter and, based on the most recent Business Outlook Survey, they are higher than they have been in all but two of the past 26 quarters.

Turning to the fundamental drivers of office demand, over the past two months office-based employment in Canada has increased by 100,000, the strongest two month gain in more than twenty years.

Significant gains have occurred in financial services, management and administrative services as well as in information, culture and recreation. Across the country, office-based employment exhibited particularly solid upticks in Ottawa, Halifax, St. John’s, Montreal, Calgary and Vancouver.

This gain in employment has been accompanied by very solid gains in the operating profits within banking and finance; insurance; professional, scientific and technical services; management services; and information and cultural industries.

Although the national office vacancy rate for all classes of office space was unchanged at 7.3% in the first quarter, vis à vis the final quarter of 2011, the vacancy rate for Class A office space declined from 6.7% to 6.5%. That was its lowest value since the second quarter of 2009.

According to Cushman and Wakefield, Calgary’s vacancy rate for class A space at 2.9% was the lowest in the country followed by Moncton, 4.3%, Winnipeg at 5% and Saint John, NB at 6.5%.

In Toronto, which has 37% of Canada’s office space, the class A vacancy rate slipped from 6.8% to 6.7%, a two-and-a-half year low.

Looking forward, the recent easing in business lending conditions, the relative strength of corporate profits in office-using service industries and the significant improvement in business confidence reflected by the latest Bank of Canada Business Outlook Survey are quite positive for office construction.

Also add in the very solid gain in office-based employment and the steady decline in office vacancy rates since mid-2010 and there is the suggestion that commercial office construction will probably pick up strength in the second half of 2012 and that this uptrend will extend through 2013.

Canada: Office Based Employment vs. Office Vacancy Rate

Canada: Office Based Employment vs. Office Vacancy Rate
Data Source: Cushman-Wakefield, LePage, Bank of Canada /Chart: Reed Construction Data, CanaData.

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