2015 Economic Outlook
Preparing for the Unknown
By Bo Mocherniak
With 2014 officially in our rear view mirror, it's time to close the book on the Canadian construction industry's record-breaking year-a year that saw investment in the sector surpass the $300 billion mark, according to the Canadian Construction Agency -and turn our attention to the future. A future that, at least in these early days of 2015, appears uncertain.
Several economic factors make it difficult to determine whether the industry will be cracking champagne or licking its wounds at the end of this year. Between plummeting oil prices, a falling Canadian dollar and global economic uncertainty, there's no telling where the Canadian economy-or the construction industry-will end up.
That said, an ability to adapt, meet the needs of consumers and make the most of infrastructure projects in the pipeline will be the construction industry's secret to weathering the storm, should it materialize.
Finding the Silver Lining
While eroding affordability is already a reality in many housing markets across the country, the average annual growth rate of the construction sector is expected to sit between three and five percent in 2015, according to the Canadian Construction Agency. This growth is due, in part, to the industry's ability to adapt to the evolving marketplace. This is true despite the low mortgage rates that are driving up housing demand, and rising construction costs that are making it difficult for builders to sell homes at a lower price point.
To counter these concerns, builders are offering buyers more affordable options by means of apartments and condominiums. This segment of the construction industry is expected to experience stronger growth in 2015 as developers continue to focus on high-density housing offerings, according to the IBISWorld Industry Report. Although the report predicts that price-based competition in this area will further shrink builder profit margins, many will prevail by turning to more niche housing developments, such as retirement residences and communities.
Segments outside of the residential construction market will also help the industry reach its growth target in 2015. Natural Resources Canada says 600 resource projects are already scheduled to be completed across the country over the next decade. These projects, combined with the federal government's decision to earmark $5.8 billion over three years for the construction and renovation of federally-owned infrastructure projects, will allow industrial, commercial and institutional construction (ICI) segments to experience moderate growth in 2015 and beyond. Engineering construction is also expected to remain strong, according to BuildForce Canada's Preliminary Investment Trends Report Ontario.
For their part, oil prices-specifically, how low they fall and for how long-will be a central trend in 2015 and likely through 2016, as demand is expected to drop to its lowest levels in 12 years, according to OPEC. While it makes sense that this economic shift would affect construction in a city like Calgary, which is so closely intertwined with the oil and gas industry and already saw housing starts decline at the end of 2014, the rest of the country isn't immune to oil-related effects.
The price of oil will also directly affect inflation-a major contributing factor to the Bank of Canada's decision to raise and lower interest rates. Until recently, the anticipated date for interest rate increases was in the second half of 2015 but, depending on how low oil sinks and how long it remains down, the Bank of Canada could delay that decision as it would bring inflation below its 2% target. This could be good news for builders as more Canadians apply for low-interest mortgages.
In addition to economic conditions, the construction industry also faces a significant labour shortage that it will have to work to remedy in 2015 if it hopes to avoid a catastrophic shortfall. Approximately 300,000 new construction workers will be required by 2023, according to BuildForce Canada. While 167,000 of these workers will come from traditional training sources, the rest will have to come from other industries, provinces and countries.
Although external factors make it more difficult to predict the outcome of 2015, it's important to remember that, even during the most stable economic conditions, no one knows what the future may hold. While a softening of the market due to decreased affordability is a possibility, we could also reap the benefits of another strong housing market. Either way, one thing is certain-it will be the construction industry's ability to adapt to change, whether predictable or otherwise, which will dictate its success for 2015 and beyond.
With over 30 years experience with audit, acquisitions, divestitures and valuations, Bo Mocherniak, CA, CBV, provides services to both public and private companies in Canada and the United States. Bo is National Sector Leader for the Real Estate and Construction Group of Grant Thornton Canada, a member of the Grant Thornton International Real Estate Sector Group and past Chair of Grant Thornton LLP. He can be reached at email@example.com.