Commercial construction outlook

Yes, there are some uncertainties, but the sector looks strong going into 2008

Raise your hand if you're a member of Alberta's commercial construction industry and you're not exhausted.

Preliminary figures from Statistics Canada indicate that there are very few paws in the air. The amount of commercial construction in Alberta continues to climb with investment increasing by 7.8 per cent in the third quarter from the second quarter of 2007, from $1.5 billion to $1.6 billion. Third-quarter investment in 2006 was $1 billion, 59.3 per cent lower than 2007.

The bulk of that investment, $928 million, occurred in Calgary. If you've recently driven through the city's core, you know why. Office towers are popping up everywhere as developers respond to high demand.

Although the vacancy rate in the core rose somewhat throughout the past year due to the completed construction of several towers, it remains low at 3.1 per cent at the end of the third quarter; there's still plenty of room for the more than 5.6 million sq. ft of office space expected to open up in the core over the next few years.

The factors behind the continued growth of the sector are no secret: A soaring loonie and rising oil prices combined with a tight labour market and low vacancy rates form the foundation for solid growth.

Although provincial economic growth fell from 6.8 per cent in 2006 to a projected rate of 5 per cent in 2007, Alberta remains among the fastest growing provinces in the nation.


Forward momentum

"At this point, the fundamentals are very supportive in Alberta," says Amy Goldbloom, an economist with RBC Financial Group. "So long as we continue to see commodity prices remaining elevated, which will help keep job markets tight and support the consumer, these are all very supportive to a strong commercial construction sector going forward."

So what's in store for 2008?

"That's a great question," says Paul Verhesen, director, Edmonton Construction Association. "There are all sorts of odd clouds on the horizon and there hasn't been a cloud for a long time."

Verhesen says that 2007 was the best year ever for Edmonton's commercial construction sector: building permits at the end of the first eight months had risen by 55.7 per cent over 2006 figures.

Goldbloom acknowledges that a few clouds are blowing into the province. RBC forecasts a growth rate of 4.5 per cent for the province in 2008. "Overall, we're fairly bullish on the outlook, but certainly there are a few risks which are presenting some modest downside to our forecast," she says.

A slowdown in consumer spending is one of those risks. Retail spending in the province hit a high in 2006, partially due to the government's gift of cold, hard, prosperity dollars.

"Those have worked their way through, so some of the excitement has started to cool off a little," Goldbloom explains.

Another important economic indicator with bearing on the commercial construction sector is the housing market. It too is showing signs of cooling off after an extended period in the red-hot zone.

"House prices, which were growing at an annual rate of about 50 per cent a year ago in Calgary, for example, have now moderated down to the 10 to 15 per cent annual range," Goldbloom says, adding that a 10 to 15 per cent growth rate in house prices is still healthy and certainly more sustainable in the longer-term.

Alberta Premier Ed Stelmach's controversial royalty decision is another factor sending ripples through the province's economic foundation. When giant companies threaten to curtail spending in the upcoming year, people take note, even if they don't take immediate action. But Goldbloom says the news is not necessarily bad.

"The royalty announcement certainly presents a modest downside risk to our growth forecast, but we do believe over the longer term that it's going to help sow the seeds for more sustainable growth rather than just pumping up the near-term story," she says.

Welcome breather?

Talking to members of the construction industry, you get the sense that a bit of a slowdown might be welcome. It's not that people don't want the work. The problem is finding enough labour to get it all done.

Government and post-secondary institutions are doing all they can to create more skilled labour, but the results aren't being seen yet.

"Securing adequate supply of skilled labour will be a continuing challenge in 2008 and beyond," says Ken Gibson, executive director of the Alberta Construction Association. "While government and industry have worked well to develop new tradespeople from Alberta, recruitment from outside of Alberta will continue to be necessary."

A recent trade mission meeting between the World Trade Centre in Montreal and Calgary's construction industry was a starting point for developing innovative ways to meet demand.

"They're looking at possibly building units in Quebec and then shipping them to Alberta, if that's feasible," explains Dave Smith, executive vice-president of the Calgary Construction Association.

Other Quebec companies are interested in starting up in Calgary but looking for partners to help secure housing for employees. While the housing market appears to have peaked, rents are still high and rental units hard to come by.

"It's difficult for an individual or a business to move into town and set up shop without some form of assistance," Smith points out.

Companies at all levels of commercial construction are feeling the shortage.

"Every aspect of our business is challenged in a human resource sense," says Verhesen, who is also the president of Clark Builders. "Every part of the system is challenged, whether you're a supplier, sub-contractors, general contractors, design firms, [or] the municipalities."

Projects in Edmonton that may have taken a year in the past are taking 14 or 15 months to complete. Smith confirms the same problem is occurring in Calgary, with schedules being delayed by as much as 35 per cent.

"[Contractors are] doing what they can to meet the demands being placed on a city that's growing at an unprecedented rate," he says. But he adds, "The statistics coming off the spreadsheets are unrealistic and everybody's working in overdrive."

Companies are addressing the problem with a variety of initiatives, including sourcing employees from other countries and from previously untapped local populations. Younger employees are being trained and promoted at a quicker pace as well.

Ron Claxton, vice-president and operations manager of Professional Excavators in Calgary, says that a big reason for his company's investment in new equipment is to attract drivers and operators. As one of the first to be on site, the excavation company feels the pressure to stay on schedule.

The company has at least a dozen projects in Calgary's downtown, including The Bow, which, at 440,000 cu. m, is reportedly the largest downhole excavation in the city's history.

Through careful planning and scheduling, as well as selective bidding, the company is able to stay on track, but finding enough labour is a constant challenge.

Purchasing 10 new trucks equipped with state-of-the-art electronic tarps and more comfortable cabs has helped with attraction and retention. Encouraged by that, the company is making a further investment into five more new trucks.

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