Each quarter, the Canadian Real Estate Association (CREA) publishes a summary of key economic indicators for commercial real estate in Canada. Housing starts, non-residential building permits, gross domestic product (GDP) and the labour market are routinely monitored by CREA’s economic team as predictors for the commercial real estate market. For residential market information, visit CREA Stats.
Looking at commercial real estate data for the second quarter of 2024, the Canadian Real Estate Association (CREA) continues to see evidence of a slowdown in commercial real estate markets across the country: a decline in the number of non-residential building permits issued, challenges in developing new housing, and a weakening employment market.
Notably, the value of non-residential building permits issued fell by more than 5% compared to the second quarter of 2023.
While housing starts were up compared to this time last year, they’re still coming in well below levels seen in 2021 and 2022. There are many challenges facing the housing sector, such as: higher interest rates, material and labour costs, high land values, and permitting/regulatory hurdles.
The labour market continues to show signs of weakening. There are more people in Canada entering the labour force than there are getting jobs, and many younger Canadians and newcomers are finding it difficult to secure employment. Some companies are looking to decrease their headcount amidst slower sales and a weakening economy.
For the commercial real estate market, 2024 continues to be challenging as borrowing and construction costs remain high, and transactions remain at below average levels. If interest rates continue to decrease in the second half of 2024, market activity could potentially pick up moving into 2025.
Here’s a deeper dive into some of the data CREA is monitoring on the commercial side of real estate.
Non-residential building permits:
Source: Statistics Canada
- Approximately $12.42 billion in non-residential building permits were issued from April to June 2024. This was down more than 5% from the same three-month period a year ago, and down more than 5.6% from the three months prior, with larger declines seen in the commercial and industrial subsectors.
- Multi-year regulatory delays, rising construction costs, and skilled labour shortages continue to challenge investment in non-residential buildings in Canada.
- The Bank of Canada has also noted investment spending plans remain below average due to weak demand, elevated interest rates, and uncertainty about the business environment.
- A weaker Canadian economy may continue to keep demand for new industrial and commercial space slow in 2024, with larger institutional and governmental projects expected to make up for some of the shortfall seen in the private sector.
Labour market dynamics:
Source: Statistics Canada
- The national unemployment rate in Canada came in at 6.4% in July 2024, trending back to levels seen in early 2022, underscoring a weakening labour market amidst a slowing economy.
- Near record-levels of population growth in Canada continue to influence the labour market, with employment growing more slowly than the labour force in recent months and job seekers taking longer to find work. Younger Canadians and newcomers to Canada are having the most difficulty finding work.
- According to the Bank of Canada’s Second Quarter of 2024 Business Outlook Survey, the share of companies reporting labour shortages is near survey lows, and a small number of firms may be planning to reduce their headcount. Expected future wage increases over the next year have also declined sharply.
- A cooling labour market could further dampen consumption and economic growth in the country.
- A report by the Conference Board of Canada, produced in conjunction with CREA, the Ontario Real Estate Association (OREA), and British Columbia Real Estate Association (BCREA), highlighted Canada needs to fill 12,000 skilled labour vacancies per year in the residential construction industry over the next decade to meet our country’s housing needs, and non-traditional sources of construction labour will play a crucial role in filling those vacancies.
Housing starts*:
Source: CMHC
- Canadian housing starts rose by about 7% from January to July 2024, compared to the same period in 2023, but came in weaker than levels seen in 2021 and 2022.
- Constraints on new housing construction such as the availability of land, zoning and regulatory restrictions, and a lack of skilled labour nationwide, continue to make it challenging for homebuilders to bring on new supply at a quick pace. Delays in permitting processes and rising costs in borrowing and construction continue to impact the cost of housing, resulting in more expensive new supply.
- A report by the Canadian Mortgage and Housing Corporation (CMHC) highlights the impact government fees and permits add to new supply, often resulting in fees that potentially increase the cost of new home construction by as much as 24% in some markets.
* Housing starts are an economic indicator of the number of residential projects that have been started during a specific time period.
Gross Domestic Product (GDP) growth:
Source: Statistics Canada
- In its July 2024 Monetary Policy Report, the Bank of Canada noted GDP has picked up in recent months but remains weak, relative to population growth. The Canadian economy is estimated to rebound in the second half of 2024. Economic growth is expected to strengthen further in 2025 as borrowing costs ease.
- On a per capita basis, GDP contracted for the fourth consecutive quarter, as inflation-adjusted growth in the economy has not kept pace with population growth. Real GDP per capita is expected to continue to trend lower in the near future. Senior leadership at the Bank of Canada have described this as a national emergency.
- Consumer Price Index (CPI) inflation continues to trend towards its 2% target and is no longer as broad-based as it was in past months. Despite CPI coming down, prices for service-related activities (such as restaurants and personal care) continues to prop up overall inflation. Housing market imbalances and labour costs are expected to continue to put upward pressure on service price inflation.
- As households adapt to higher borrowing costs and the higher cost of living, they’re allocating a larger share of income to servicing debt and spending less on discretionary items such as consumer goods, eating out, and travelling. With the Bank of Canada cutting rates at two meetings in a row and forecasted to cut at every meeting for the remainder of the year, future borrowing costs may ease for some households heading into 2025, which could lead to an increase in spending again.
The next CREA commercial snapshot will be available later this year and cover economic activity for Q3 2024.
