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Although building activity is booming in Canada’s construction sectors, the industry continues to struggle with supply chain difficulties and volatile material costs. Whilst price stabilization could take effect in 2022, rising construction expenses could hurt both builders and buyers by slowing the supply of new housing.
In its Q4-2021 Canadian Construction Outlook report, Jones Lang LaSalle (JLL) stated that 2021 brought about welcome recovery for the industry following construction shutdowns and social distancing restrictions. However, this year presented new challenges as the country deals with historic building activity.
Low interest rates, the desire for more space and increased savings have prompted a building boom in Canada and many other countries around the world. After an initial decline during the early months of the COVID-19 pandemic, the value of new building permits came rushing back, hitting a peak of over $11 billion in Q2-2021.
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In addition to industrial and office building, residential construction played a role in fueling this growth as activity ramped up for all housing types. Even the rental apartment sector has experienced “significant” new supply to accommodate growing urban populations. Altogether, housing starts across Canada have “never been higher.”
“All this construction activity has created a spike in demand for building materials at a time when global supply chains are struggling to keep up,” said the report.
As winter approaches, JLL says that it expects construction input prices to “moderate somewhat” as the industry enters its down period. The winter is anticipated to deliver higher energy costs as some gas and oil wells stay offline from the pandemic. Although these expenses may be lamented by builders, JLL pointed out that Canada’s exports of lumber, oil and hydroelectric power have boosted the value of the Canadian dollar and our purchasing power of imported goods. Yet, rising building costs could have a negative impact on the future of the residential building industry and its consumers.
“[Rising] construction costs will create headaches not just for Canadian developers and builders, but for aspiring homeowners and renters, and for consumers,” said the quarterly report. “Cost escalation in the multifamily apartment and industrial sectors has far exceeded other sectors. If this is exacerbated, it will likely lead to a slowdown in new housing supply and warehouse development.”
Some builders estimate that there has been an additional cost escalation between 20 per cent to 40 per cent on similar new construction, renovation and tenant fit-out projects that may have started five years ago, according to JLL. Canadian cities with the greatest demand in residential and industrial sectors are seeing the most pressure for construction materials. Ottawa, Montreal and Toronto have seen their three-year change in average costs grow the most, climbing by 22.2 per cent, 18.5 per cent and 18.4 per cent, respectively.
Vancouver — having been able to save costs thanks to its mining and forestry industries — has seen its three-year average for construction costs increase by 9.2 per cent.
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The COVID-19 Delta variant has hindered suppliers this year, particularly in countries where vaccination is not at critical mass. Global supply chains are so connected that a disruption in one region can ripple to other areas, JLL explained. Today, a shipping container may take 73 days to journey across the Pacific Ocean as opposed to the pre-pandemic timeline of 20 to 30 days.
Combined with the rising costs to transport shipping containers, supply chain disruptions have caused cost spikes across all sectors, with overall project expenses rising 20.3 per cent for residential construction from Q3-2020 to Q3-2021 according to data from Statistic Canada’s Canadian Construction Cost Index.
“Contractors are increasingly stretched between many projects and relying on a less experienced workforce,” said the report. “As these costs are typically passed down to the end user, they contribute to rental escalation that is becoming a growing issue for households and companies.”
Out of nine major types of construction materials, steel, lumber and copper are among the highest volatility sectors in Canada. Demand for global scrap metal and automobiles has pushed the price of steel close to $2,000 per ton, triple its value compared to early 2020. By mid-2021, lumber prices soared to $1,600 USD per thousand board feet before falling again in September, and copper costs have heightened nearly 40 per cent compared to a year ago.
Available labour also remains a challenge in the construction industry. In Q3-2021, StatsCan reported that Canada’s construction industry had a 5.8 per cent vacancy rate, one of the highest rates amongst the economic sectors.
Whether or not there will be a normalization of price fluctuations is still under debate. Although volatility may exist in the industry for a while, there is reason to believe relief on supply chains is coming next year, JLL suggests.
“Much of the volatility we are seeing is a consequence of supply chain operators transitioning from a low demand context to a high demand context in a short period of time as consumers binge on goods and services after a year of lockdown measures,” said the report. “By 2022 this is expected to largely stabilize, resulting in more normal price variations.”