2024: More Turbulence Ahead for Development in Canada?

In recent years, the commercial real estate (CRE) sector in Canada has been grappling with a range of challenges, particularly in construction costs. The pandemic’s aftermath, coupled with supply chain disruptions and economic uncertainty, has made cost escalation a ubiquitous concern for those involved in the industry. Now, as we approach 2024, there’s a palpable tension in the air as developers, builders, and investors navigate the landscape of high-interest rates and fluctuating demand, especially in residential development.

The Landscape at a Glance: Short-term Considerations for 2024

As we look to the immediate future—specifically the next 12 months—we see some encouraging signs in certain Canadian cities. Notably, high and low-rise residential construction costs are projected to decrease by as much as 5% in regions like Toronto, Montreal, and Vancouver. However, places like Halifax and Calgary may not experience these trends; in fact, upward pressures on costs may persist in these markets.

This cost correction is primarily due to recent interest rate hikes, which have especially affected condominium and low-rise housing sectors in Canada’s most expensive cities. Sales have significantly dropped and construction starts have slowed, creating a paradoxical situation: while demand for housing appears to be high, the industry’s ability to meet that demand is faltering. This is particularly concerning in the Greater Toronto Area (GTA), which is already grappling with a severe housing crisis.

According to data from BuildForce Canada, the residential sector may witness a workforce drop of over 11,000 workers, equating to about 5% of the total workforce as of 2021. While there are opportunities in non-residential sectors, the mismatch between skills and location may exacerbate the issue.

How Can Construction Costs Come Down?

As developers contemplate strategies to manage construction costs, several factors come into play:

• Labour Costs: Despite potential market corrections, labour costs are unlikely to decrease owing to fixed union agreements and high living expenses, which limit flexibility.
• Material Costs: While some material prices have stabilized and even shown minor reductions, they remain elevated compared to pre-pandemic levels.
• Operational Efficiency: Construction companies may resort to lean operational models, optimizing overhead and profit margins. Some trades may reduce labor forces to bolster productivity in anticipation of an eventual rebound in residential construction.

While the housing market may slow in areas outside Calgary and Halifax, infrastructure and institutional investments—especially in Ontario and Alberta—are projected to remain robust, indicating that opportunities persist in other sectors.

Mid-term Projections: 2025-2026

As we transition to the mid-term outlook from 2025 to 2026, the environment promises a shift. Interest rates are anticipated to decline, offering a glimmer of hope for condominium sales recovery and an uptick in purpose-built rental developments, fueled by government incentives and increased infrastructure spending.

A surge in development projects may flood the market, particularly in Toronto, where approximately 90,000 condominium units and 30,000 rental units could come online. This could propel the construction industry from a slow crawl to high velocity in a short span, possibly shifting gears from second to eighth in just six to nine months.

In this dynamic market, relationships will be paramount. Developers focusing on collaboration rather than just competitive bidding will likely fare better. This approach underscores the importance of selecting partners who can deliver quality results on time, especially in a high-interest environment where project efficiency becomes critical.

However, challenges loom in this mid-term landscape. Labour shortages may exceed demand, particularly in Ontario, British Columbia, and Nova Scotia, heightening competitive pressures.

Long-term Outlook: Navigating Uncertainty

Looking further ahead, the long-term scenario presents a mixed bag of potential outcomes. In a worst-case situation, we could witness double-digit cost escalations, spurred by unresolved housing shortages and infrastructure issues. Even in a best-case scenario, the ongoing lack of skilled labor will pose significant hurdles to overcoming these challenges.

The documented housing shortage in cities like Toronto is troublesome, as the limitations of municipal planning and approval systems continue to stymie development efforts. Conversely, markets like Calgary exhibit more favorable momentum, showcasing the stark contrasts across regions.

The overarching challenge remains a critical shortage of skilled labor. As construction activity resumes, the industry may struggle to retain talent, which can only exacerbate delays and reduce the quality of developments.

Ultimately, without systemic changes to address these market inefficiencies, the cost of developing new projects—whether residential or commercial—could escalate dramatically. A national housing plan focusing on tangible outcomes and the reduction of bureaucracy would be a significant step toward ensuring that future generations have access to affordable housing.

Conclusion: A Call for Innovation

In summary, the future of development in Canada through 2024 and beyond is steeped in uncertainty. The industry must confront these challenges with innovative solutions. Embracing technology—such as modularization and building information modelling (BIM)—and leveraging artificial intelligence (AI) can play a critical role in overcoming existing barriers.

Additionally, attracting and retaining skilled labor should be at the forefront of the industry’s priorities. The workers who build homes are integral to fostering communities, making it imperative that their contributions are recognized and celebrated.

As we navigate these turbulent times, proactive measures and strategic thinking will be essential to ensure a sustainable construction landscape in Canada. The call for concerted efforts has never been clearer—now is the time to innovate, adapt, and build for a better future.