Office Building Construction Markets in Toronto and Calgary

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office building construction markets in toronto and calgary

June 16, 2009 - Alex Carrick

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The most recent peak for office building starts in Canada occurred two years ago, in 2007. At that time, 16.0 million square feet of work was initiated across the country. This is a category of construction that can be highly cyclical. The figure this year is expected to be only 4.4 million square feet. While this is quite a drop in activity levels, the recovery phase in this market is likely to be shorter than during previous times in history.

The focus is on Calgary and Toronto because those were the only two cities that really accounted for the strength in office building construction in the latest peak period. Office investment in other major cities was restrained. This was not a bad thing. Overbuilding of office space in previous cycles has often resulted in subsequent long dry spells.

Toronto – Boom and Bust

Toronto has been a prime example. During the boom years of the late 1980s, office building starts in Toronto rose as high as 14.2 million square feet. That was when Olympia and York was at its expansionary prime. But then the bust took hold, major developers went under, and starts remained relatively moribund for the next 15 years, with the exceptions of 1998 (4.3 million square feet) and 1999 (3.9 million).

Toronto can thank Ottawa for its present relatively tight office building market in the downtown core. Canada’s financial system has become the envy of the world in the midst of the credit crunch. Tighter regulatory supervision and a more conservative lending and investing culture have kept capitalization at Canada’s banks under better control.

Toronto’s Financial and Banking Sector

Decisions were taken to prohibit mergers and acquisitions among the nation’s biggest banks. Various politicians have taken credit for this as the reason that Canada’s banking sector has stayed so strong. This is a questionable proposition given that Canadian banking leadership may well have stayed solid even if it had become a bigger player on the world stage. The counter argument would be that acquisition of a major U.S. investment bank might have led a Canadian bank astray and this may have some validity.

Mergers are a means for companies to realize economies of scale. One method is through eliminating staff duplications. The fact that this has not happened in Canada’s banking sector has kept office space demand artificially high in Toronto. It should also be pointed out that by not allowing Canada’s banks to grow bigger, some investment opportunities may be slipping away at this time of asset-purchase bargains. Finally, while Canada’s banking sector is respected internationally, Canadian banks are still not mentioned whenever there is discussion about the world’s premier and biggest financial institutions.

Calgary Looks to China for Oil Price Leadership

As for Calgary, its prominence as a head office centre began in the late 1970s, after OPEC multiplied the price of oil and major energy companies ramped up their presence in the Stampede City. 1981 was the all-time peak for Calgary office building starts, at 9.4 million square feet. The next highest level of office building starts since then occurred two years ago at 5.1 million. Office vacancy rates were at an all-time low in 2007.

Calgary is looking to China for a revival in this construction category. The global price of oil has doubled from $35 USD per barrel in February 2009 to over $70 USD at present. The reasons for this price climb have been as follows: (1) an improvement in China’s domestic economy, causing higher oil imports; (2) stockpiling by China to take advantage of low prices; and (3) speculators anticipating a pickup in the U.S. economy.

Energy Sector Spending Announcements

The higher price for oil is bringing forward spending announcements by major oil companies. For example, Imperial Oil has said that it will be proceeding with its Kearl project after a one-year delay. Nor is this just limited to Alberta. The Newfoundland and Labrador government has announced a deal with the owners of the South Hibernia project to see it move ahead with estimated expenditures of billions of dollars.

Toronto Office Building Starts – Long-term History

Calgary Office Building Starts – Long-term History

The above charts are a subset of commercial. They combine the categories "private office buildings" and "government office buildings".
2009 figures are estimates.

Data source and charts: Reed Construction Data - CanaData.