Altus Group: Construction cost relief could be coming

Key Takeaways:

• Canada is seeing rapid reductions (potentially up to 5%) in both high and low-rise residential construction costs, with much larger reductions anticipated in Toronto, followed by Montreal and Vancouver.
• Interest rates are expected to begin their decline in 2024, at which point condominium sales will likely recover. By this time, we should also see increased momentum in purpose-built rental development, with credit to government-led incentives and an increase in infrastructure spending.
• Mid-term (2025-2026) success will hinge on timing the market and beating the rush, taking a deal, and hitting the ground running.
• In the long term, we are likely to find ourselves losing the demand versus supply fight, and costs may continue to escalate while the housing crisis intensifies. 

The Whole Story:

Builders could be seeing some relief from high construction costs, however in the long term, the industry will continue to face significant challenges . 

The latest construction costs forecast from Altus group shows that Canada is seeing rapid reductions (potentially up to 5%) in both high and low-rise residential construction costs, with much larger reductions anticipated in Toronto, followed by Montreal and Vancouver.

Marlon Bray, Altus Group’s senior director of cost consulting & project management, wrote that as the industry heads into 2024, development demand is ripe (particularly in the case of residential development), but investors, builders, and developers are wary in this high-interest rate environment. 

“While escalation projections are, in essence, a well-educated guess – especially in the current, more volatile landscape – it remains important to highlight the anticipated impact of cost escalation over the short term, midterm, and longer term,” said Bray.

Across Canada, Altus is seeing rapid reductions (potentially up to 5%) in both high and low-rise residential construction costs, with much larger reductions expected for Toronto, followed by Montreal and Vancouver. However, in the Atlantic (Halifax, in particular) and the Prairies (Calgary, in particular), cost reductions are not expected. Bray noted that instead, these regions could see a continued upward trajectory.

“This cost correction can largely be attributed to interest rate hikes, which have impacted the condominium and low-rise markets in the most expensive cities, by the largest degree,” said Bray. “In the current environment, sales have plummeted, and construction starts are slowing (if not coming to a near halt). The ongoing housing crisis is expected to worsen as a result, with regions like the Greater Toronto Area (GTA) expected to be hit the hardest.”

According to Build Force Canada, employment in the residential sector is forecasted to decline by more than 11,000 workers – or approximately 5% of the 2021 workforce – as demand for new home construction recedes. The non-residential sector helps to offset this; however, the skills need to be transferable, and location plays a key role. Quebec and B.C. will also see large drops in workforce, with a significant decline in Quebec non-residential expected as well.

Even in the best-case scenario, housing needs, infrastructure challenges, and the lack of skilled labour in the market are on a collision course to create a massive construction cost headache – or hangover.

Marlon Bray, senior director of cost consulting & project management, Altus Group

Labour costs are not expected to decrease; union agreements in addition to the increased cost of living mean there is little wiggle room. Material costs have stabilized (albeit higher than pre-pandemic) with some reductions, but nothing significant on an overall project scale.

Bray said the industry will likely see a reduction of overhead and profit as companies adopt lean operational models. To insulate profit margins, some construction trades will reduce their labour force and focus on recreating productivity for the inevitable resurgence in residential construction.

Housing development is expected to slow outside of Calgary and Halifax in 2024. However, the infrastructure/institutional market (including transit and social investments) will remain robust for the foreseeable future in Ontario, Atlantic, and Alberta regions – and to a lesser degree in B.C.

Mid-term: 2025-2026

Interest rates are expected to begin their decline in 2024, at which point condominium sales will likely recover. By this time, we should also see increased momentum in purpose-built rental development, with credit to government-led incentives and an increase in infrastructure spending.

As sales increase, the construction market could become flooded with development projects, especially in regions like Toronto. There are potentially 90,000 condominiums on deck, ready to go out for sale over the next few years in the GTA, along with 30,000 rentals that should be approved and ready to go (with even more moving through the system). 

“In simpler terms, we may see the construction industry shift from 2nd gear to 8th gear in the span of 6 to 9 months,” said Bray.

He explained that success in this mid-term period will hinge on timing the market and beating the rush, taking a deal, and hitting the ground running. This kind of environment is all about relationships, rather than competitive tendering. 

“The lowest bid is not always the best choice; rather, it’s about selecting the right person who can get the project finished,” said Bray. “This sentiment applies to trades as well – pick the right owner, because getting paid should be the priority in a high-interest environment.”

He added that when considering private sector construction costs, it’s also important to recognize that time is an exceedingly important factor in the overall cost of any project. Slow construction timelines (and delays) translate to higher trade, interest, and overhead costs, as well as the loss of opportunity. Within a construction site, “too many white hats” is often a bad sign for coordination and efficiency. 

Bray says the most efficient construction sites are typically those that have leaders and decision-makers in more limited quantities. The presence of too many “cooks in the kitchen”, so to speak, can become more of a productivity bottleneck than an asset. 

“In the world of development, the speed at which decisions are made is a key determinator of profit potential, and if you have the right people, they know how to get things done,” said Bray.

Altus expects the mid-term to endure some serious turbulence. Labour demand is likely going to exceed available supply in 2026; most acutely in Ontario, B.C., and Nova Scotia.

The long-term outlook

In the worst-case scenario, the “wheels may come off the hypothetical development freight train” and we could see double-digit escalation over the long-term, predicted Bray. 

“Even in the best-case scenario, housing needs, infrastructure challenges, and the lack of skilled labour in the market are on a collision course to create a massive construction cost headache – or hangover,” he said. 

When it comes to the housing crisis, Bray said the biggest challenge won’t be policy, it’s the shortage of skilled labour. 

He explained that in the long term, we are likely to find ourselves losing the demand versus supply fight, and costs may continue to escalate while the housing crisis intensifies. 

“The fix? It’s a complicated issue, but the development of a national housing plan that is focused on tangible outcomes and the continued removal of red tape and bureaucracy would be a step in the right direction,” he said. 

Bray believes that if we don’t make major changes to the market now, it’s going to become expensive to build anything, anywhere. He noted that innovation is required; modulization, building information modelling (BIM), and artificial intelligence (AI) need to be applied across the industry. Moreover, we need to find a way to better attract and retain skilled labour. 

“Trade workers build homes that house families and foster communities – this is critical and honourable work that should not be minimized, but celebrated and propped up, now more than ever,” said Bray.