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EYE Ontario Construction Secretariat

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ICI

NEWSLETTER

ECONOMIC UPDATE ISSUE

OCTOBER 2O12

INSIDE THIS ISSUE 1 ECONOMIC UPDATE:

Monitoring key indicators

4 ICI MARKET TRENDS: Examining the

Present and keeping an eye on the future

6 REGIONAL BUILDING PERMITS UPDATE

ECONOMIC UPDATE:

8 UPCOMING EVENTS

MONITORING KEY INDICATORS

n our July Eye on ICI newsletter, we noted key economic variables to monitor as they provided insight into near-term fluctuations in non-residential construction investment. This article expands upon that analysis, assessing trends in key variables and other sources of information. Figure 1: Manufacturing Sales and Industrial Investment, Ontario Annual Growth (%)

40 30

Industrial Investment

20 10 0 ‐10 ‐20 ‐30

Manufacturing Sales

‐40 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: Statistics Canada, Ontario Construction Secretariat

Manufacturing Sales s the above graph shows, manufacturers’ sales correlate with industrial investment. However, there are times (perhaps as we are experiencing now) when sales increase yet manufacturers are reluctant to invest. Nevertheless, manufacturing sales are generally a fairly

good indicator one can use to form an idea about the direction of industrial investment going forward. The intuition behind this relationship is fairly clear – as the revenue of manufacturers increase, they have more money which they can use to invest into factories and plants to grow their business. So with all that said, what has business been like for manufacturers in Ontario? In July, manufacturers’ sales were $22.3 billion, 32% above their recession low. Revenue has grown at a healthy 8% year-overyear pace, on average, since the beginning of 2010. From these figures, it appears that Ontario’s manufacturers are recovering from the onslaught brought upon by the recession of 2008-2009. Of course, manufacturers still have a little ways to go before they reach the roughly $25 billion monthly sales pace seen several years ago. Manufacturing sales can be broken down into two categories, those of durable manufactured goods (i.e. motor vehicles) and non-durable goods (i.e. food items). Sales of durable items have accounted for much of the increase in the overall total, as they are up 52% since the recession, compared to a mere 11% increase in sales of non-durable items. Within the durable goods industries, the automotive sector has been a shining star, with sales revving nearly 194% higher than their recession low as of May. The fortunes of the “Detroit 3” have turned around. In the first half of this year, GM recorded a Continued on Page 2 OCTOBER 2012

1


ECONOMIC UPDATE ISSUE Continued from Page 1

net income of $2.5 billion while Ford raked in a $4.1 billion profit, though profitability at these two companies has recently been challenged by the difficulties in Europe. Chrysler earned $436 million in the second quarter and expects to show a fullyear profit of $3 billion. Toyota earned a profit of $3.7 billion in the 2nd quarter and recently increased its full-year sales target.    Figure 2: Manufacturing Sales by Components, Ontario Index Value (Jan 2009 = 100)

Manufacturers’ Sales of Motor Vehicles and Parts

Sales of Durable Manufactured Goods

Overall Manufacturing Sales

Source: Statistics Canada, Ontario Construction Secretariat

The improved picture for manufacturers is echoed in the labour market as well. Since peaking at 14.7% during the recession, the unemployment rate in manufacturing has fallen all the way to 4.2% as of August. This coincides with 6% increase in employment over the same time period. While not completely out of the woods, the analysis above shows that economic situation has definitely improved for Ontario’s manufacturers. As such, these firms will have the

wherewithal to increase industrial investment once economic uncertainty lessens and they feel more confident about the outlook.

Retail Sales etail sales can be a useful indicator of commercial investment intentions. In addition to the obvious ties to retail investment, increased retail spending is linked with employment growth. If retail spending is advancing at a healthy clip, that means employment is expanding which suggests that businesses are relatively confident. A higher degree of confidence by businesses is conducive to them increasing investment. Finally, spending on retail goods represents approximately 25% of the overall economy, thus being a large driver of overall economic trends. Unfortunately, retail sales have been softening. As of July they were up a paltry 1.7% versus their year-ago level. Shorter-term momentum is weak, with the three and six month spending trends showing only modest growth and an outright decline, respectively. These trends have been evident across most stores, with sales at furniture and home furnishing stores and electronics and appliances stores particularly low. On the opposite end of the spectrum, sales at motor vehicles and parts dealers have been robust, mirroring the sales increase seen in this sector at the manufacturing level. What explains the modest pace of retail sales growth? Chiefly, employment growth in Ontario has moderated. Additionally, consumers have started to reduce the amount of debt they take on (and thus the amount of credit assisted spending) against a backdrop of historically elevated debt levels. Finally, consumer

“Ontario’s manufacturers are recovering from the onslaught brought upon by the recession of 2008-2009”

2

OCTOBER 2012


ECONOMIC UPDATE ISSUE

confidence appears to be sagging, with the Conference Board reporting that its Index of Consumer Confidence has remained at a relatively low level recently. Figure 3: Retail Sales and Commercial Investment, Ontario $ billions

$ billions

2.8

43

2.6

41

Commercial Investment

2.4

Perhaps the most interesting part of IO’s information is their discussion of the upcoming projects. With roughly 30 projects in the pipeline, the estimated value of upcoming projects is lower than what is currently under construction. This would be consistent with a decline in institutional investment.

39

(Left Hand Scale)

2.2

has increased at an average annual rate of 12.8% since 2008. The pace has since tapered off in 2012, but the level of investment remains strong (see ICI Market Trends article).

37

2.0

Figure 4: Infrastructure Ontario Project Breakdown, by Project Value

35

1.8

33

Retail Sales

1.6

31

(Right Hand Scale)

1.4

29

1.2

Substantial  Completion Achieved Under Construction

27

1.0

25 2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Upcoming Projects*

2011

Source: Statistics Canada, Ontario Construction Secretariat

Infrastructure Ontario nfrastructure Ontario (IO) is a crown corporation charged with delivering provincial and other public sector construction projects. IO’s website, www.infrastructureontario.ca, provides a good overview of the major institutional projects going on in the province. They divide their projects by those which have achieved “substantial completion”, those which are “under construction” and those which are in the pipeline. Projects in the pipeline include those which have a winning bidder selected, are in the RFP and RFQ stages, and those which are even earlier in their development. According to IO, 24 projects, representing a value of approximately $4 billion, have achieved “substantial completion”, meaning that work is winding down on the jobsites. The list is highlighted by the $551 million North Bay Regional Health Centre and the $408 million Sault Area Hospital. There are 25 projects which are classed as being “under construction”. These projects represent a massive value of over $13 billion dollars. The largest projects under construction are the $2 billion Oakville Hospital and the $1.75 billion Humber River Regional Hospital in Toronto. This information points to robust institutional investment and indeed, full-year public sector investment

* The value of upcoming projects is the mid-way point between low and high estimates provided by Infrastructure Ontario Source: Infrastructure Ontario, Ontario Construction Secretariat

HIGHLIGHTS In Ontario, manufacturers have been recovering from the onslaught of the recession as sales have grown at a healthy 8% year-over-year pace, on average, since the beginning of 2010 Retail sales, which can be a useful indicator of commercial investment intentions, have been weakening. In July, they were up a paltry 1.7% as employment growth has softened, creditfuelled spending has been pared back and consumer confidence has sagged. Infrastructure Ontario (IO) currently has 25 projects “under construction” and 30 projects in the pipeline. Based on current information, it appears that the estimated value of future projects is lower than what has taken place over the past few years.

OCTOBER 2012

3


ICI MARKET TRENDS:

Examining the present and keeping an eye on the future

ith the release of Statistics Canada’s 2nd quarter investment and building permit data, we have an opportunity to assess trends in Ontario’s industrial, commercial and institutional (ICI) construction market. Before digging in to the data, there are a couple of items which must be noted. Firstly, Statistics Canada’s investment data estimates investment values in the current quarter. This is somewhat different from building permit data. Building permits issued for the construction of new buildings and improvements are one of the first steps in the construction process, thus are widely used as a leading indicator of building activity. Secondly, the investment information used in this article is “constant dollar” data. Using the “constant dollar” series ensures that the inflationary impact of materials and labour is eliminated. Finally, the data used in this article excludes engineering construction as well as maintenance work. Now with those important caveats out of the way, we can explore current investment trends and use building permit data to assess what the near-term future will look like.

The softening trend has gone on despite solid growth in manufacturers’ revenues since the recession and steady, if sometimes slow, economic growth in Ontario and the U.S. This suggests that a lack of business confidence is hampering investment activity. Indeed, modest readings on industry confidence surveys support this notion. One important caveat about the industrial investment data is that it doesn’t capture the full value of projects which could be reasonably considered “industrial”, such as work being done in the mining sector. This is important as the mining sector in Ontario is booming, but the level of activity in this sector is being somewhat understated by the data. Future View The industrial building permit data is pointing to a steady pace of industrial investment in the coming quarters, meaning that the level will remain low. Over the first six months of 2012, the value of building permits issued was a little over $1 billion – or roughly the same amount as last year. Building intentions for factories/plants and mining/agricultural buildings were higher, but this was offset by a decline in permits issued for transportation and utilities buildings.

ICI Investment

otal ICI investment clocked in at $2.9 billion in the 2nd quarter of 2012, up 1% from the first quarter. This marked the first such increase in over a year as investment has declined steadily from its 2011Q1 peak. It is of some comfort to note that the level of investment in the second quarter remained above its long-term average, despite its moderating trend.

Industrial

Current Trends he good news is that industrial investment jumped 6% to $295 million in the 2nd quarter. The bad news is that this increase followed five-straight quarterly declines, leaving the level of industrial investment 3% lower than its year-ago value. Over the long-term, industrial investment has been on a downtrend as it has gone from accounting for roughly 30% of ICI investment in 1997 all the way down to 10% in 2012. 4

OCTOBER 2012

Commercial

Current Trends ommercial investment has been weak since the middle of 2011, averaging a 2% quarterly decline. In the 2nd quarter, investment totalled $1.6 billion, sagging 7% versus it’s year ago level. This is consistent with only modest growth in retail sales, dropping business confidence, and higher office vacancy rates in all regions but Toronto. Regionally, large year-over-year declines were registered in Sudbury, Thunder Bay, London, St. Catharines, Hamilton, Kitchener-Waterloo-Cambridge, Brantford and Windsor. Future View The value of commercial building permits leapt 32% higher in the first half of the year, versus the same period in 2011. As such, the building permit data is indicating increased commercial investment in coming quarters and suggests that it will outperform the other investment categories. Growth was lead by retail buildings, with solid gains in issuance related to recreational buildings and warehouses.


ICI MARKET TRENDS: Examining the present and keeping an eye on the future

Institutional

Current Trends

Metropolitan Areas either up modestly year-over-year as of the second quarter, or suffering a decline.

nstitutional investment has been the bright spot in Ontario’s ICI landscape, registering a solid increase in 2011 while accounting for nearly 40% of ICI investment. Expenditures have since cooled from their torrid pace, averaging a 1.0% drop in the first half of 2012. This is consistent with governments at all levels starting to reign in the purse strings. Still, investment in the second quarter was a solid $1 billion, only about $550 million lower than commercial investment (the normal gap is closer to $800 million). Regionally, the institutional strength has really been a tale of two cities – London and Toronto, with all major Census

Future View The institutional building permit data suggests that the recent decline in institutional investment may continue and even intensify going forward. Institutional permit values were down 36% over January-June 2012, versus the same period in 2011. This was expected, as the record amount of building permits issued in 2011 was going to be difficult to maintain. The level of permits issued for hospitals dropped 73% while building intentions for schools fell 44%. Conversely, permit issuance for welfare homes (i.e. long-term care facilities) increased substantially.

ICI Constant dollar investment, by CMA

First six months of 2012

CMA

Value (000s)

% change versus a year ago -26.9

Barrie

$85,672

Brantford

$39,699

-23.2

Greater Sudbury

$68,381

-25.2

Guelph

$78,606

-11.9

Hamilton

$243,566

-17.8

Kingston

$65,265

2.0

Kitchener-Cambridge-Waterloo

$320,407

-25.2 20.7

London

$305,259

Oshawa

$106,923

-6.4

Ottawa

$427,127

-3.6

Peterborough

$22,559

-14.4

St. Catharines

$181,600

-34.8

Thunder Bay

$36,361

-24.7

Toronto

$2,877,826

5.4

Windsor

$101,246

-31.9

Building permit values, by major building type

First six months of 2012, Ontario

Building Type

Value (000s)

Change versus a year ago

Industrial - Factories

$437,278

15%

Industrial - Transportation & Utilities/Power

$230,682

-41%

Industrial - Mining and Agriculture

$182,099

14%

Commercial - Retail & Services

$1,067,626

118%

Commercial - Offices

$758,576

13% 59%

Commercial - Recreation

$335,284

Commercial - Warehouses

$278,390

66%

Commercial - Hotels & Restaurants

$203,726

-32%

Institutional -Government Buildings

$537,620

-19%

Institutional - Schools & Education

$518,809

-44%

Institutional - Welfare Homes

$222,379

82%

Institutional - Hospitals and Medical

$199,996

-73%

Source: Statistics Canada, Ontario Construction Secretariat

OCTOBER 2012

5


ONTARIO REGIONAL PERMITS UPDATE

NORTHERN ONTARIO Industrial permit issuance picked up smartly in the 2nd quarter after a very weak Q1, driven by a gain in Northwestern Ontario. Still, permit issuance was lower in the first half of 2012, compared to 2011. Importantly, the building permit data does not pick up the full value of mining-related work. Despite a relatively low value of permits issued, our northern stakeholders report being very busy in this sector. Institutional building intentions soared 70% higher in the first half of the year versus the same period a year ago, thanks to permitting for a large courthouse in Thunder Bay. The permit for the courthouse accounted for nearly all of the value of permits issued.

Permit Values - January to June - 2012 Sector

Value (in 000s)

% Change

Industrial

$62,464

-6.5%

Commercial

$70,944

-20.5%

Institutional

$159,109

70.2%

Total ICI

$292,517

17.2% Source: StatsCan

Declines in both Northeastern and Northwestern Ontario drove a drop in commercial permit issuance in the first half of 2012. Construction intentions were at their lowest level in over five years.

EASTERN ONTARIO

Permit Values - January to June - 2012 Sector

Industrial permit values continued to recover from their dismal 2011, posting a strong gain in the first six months of the year. Building intentions in Ottawa advanced 120% in the first half of 2012, buoyed by a permit issued for a new industrial building at the Trail Road Waste Facility.

Value (in 000s)

% Change

Industrial

$108,330

119.8%

Commercial

$506,554

39.1%

$175,257

17.1%

$790,141

40.3%

Institutional Gains in both Ottawa and Kingston-Pembroke drove an increase in Total ICI commercial building intentions in the first half of the year, versus the same period a year ago. Issuance related to new office buildings for the government’s Long-Term Accommodation Project accounted for much of the increase in Ottawa. In Kingston-Pembroke, the main permit issued was for a new movie theatre.

Source: StatsCan

The Kingston-Pembroke region recorded solid growth in institutional permit issuance in the first half of 2012, thanks to a permit for a new materials testing laboratory at Queens University. In Ottawa, permits were up a modest 9%.

GTA ONTARIO

Permit Values - January to June - 2012

The pace of industrial permit issuance cooled in the 2nd quarter, leading to a decline in building intentions in the first half of the year. One dominant trend which has driven industrial construction in the GTA is the demand for large warehouse facilities. However, this demand cooled considerably in the second quarter.

Sector

Commercial building intentions increased in the first half of 2012, compared to the same period last year. This is consistent with generally strong retail sales growth in Toronto and lower vacancy rates. In the 2nd quarter, space under construction quadrupled and will be lifted going forward by projects such as the Bay Adelaide Centre East, RBC WaterPark Place and Bremner Tower 2.

Industrial

Value (in 000s)

% Change

$353,783

-20.8%

Commercial

$1,661,369

34.4%

Institutional

$827,300

-47.7%

$2,842,452

-12.9%

Total ICI

Source: StatsCan

In the 2nd quarter, institutional permit issuance continued to unwind from its record 2011. Still the level of permit issuance was a solid $827 million in the first half of 2012. Institutional work has been boosted by large projects such as the Forensic and Coroner’s Services Complex, the new Oakville Hospital and the Humber River Regional Hospital. 6

OCTOBER 2012


ONTARIO REGIONAL PERMITS UPDATE Permit Values - January to June - 2012 Sector

Value (in 000s)

% Change

Industrial

$263,705

-14.1%

Commercial

$545,106

15.9%

Institutional

$290,694

-18.7%

$1,099,505

-3.1%

Total ICI

Source: StatsCan

CENTRAL ONTARIO The first half decline in industrial construction intentions was driven by Kitchener-Waterloo-Barrie (KWB). KWB continues to be challenged by economic uncertainty. Conversely, permit issuance was strong in Hamilton-Niagara, driven by the Maple Leaf Foods processing plant and work at McMaster Innovation Park. Hamilton-Niagara accounted for most of the first half increase in commercial permit issuance, abetted by modest gains in Muskoka-Kawartha and KWB. Permits for a new Walmart and major arena were the largest issued in Hamilton-Niagara. Commercial activity in KWB continues to struggle, reflected in sky-high vacancy rates.

In the first half of the year, institutional building intentions in KWB declined as they continued to unwind from their stimulus- related gains in 2010 and 2011. Issuance was up in Hamilton-Niagara, thanks in part to a new catholic high school. Construction intentions were up modestly in Muskoka-Kawartha.

Permit Values - January to June - 2012 Sector

Value (in 000s)

% Change

Industrial

$221,105

17.1%

Commercial

$289,627

66.8%

Institutional

$194,429

-48.5%

Total ICI

$705,161

-4.7%

SOUTHWESTERN ONTARIO A healthy 2nd quarter was enough to send industrial building permits higher in the first half of the year. The gain was fuelled by the Stratford-Bruce region, with an assist coming from London. Permit issuance was down 25% in WindsorSarnia in the first half of the year, compared to the same period a year ago. A large permit was issued for a new BioAmber warehouse in July, which will boost 3rd quarter values in Sarnia.

Gains in both London and Windsor-Sarnia drove an increase in commercial permits in the first half of the year. This is good news, particularly for Windsor, where the commercial market has generally been in decline though a new aquatics centre (classed as commercial by Statistics Canada even though it is government owned) will help. Source: StatsCan

In London, institutional permits moderated from their record 2011 pace, thereby offsetting increases in Windsor-Sarnia and Stratford-Bruce. Within Windsor-Sarnia, there was a large permit issued related to the South-West Detention Centre.

TOP CONSTRUCTION PROJECTS STARTED - APRIL TO JUNE 2012 PROJECT

CITY

VALUE

Air Rail Link - Union Station to Pearson Airport

Toronto

$515M

Pan Am Games Athletes' Village

Toronto

$514M

Maple Leaf Foods Meat Processing Plant

Hamilton

$394M

East Lake St. Clair Windfarm

Wallaceburg

$290M

Phase 2b - Rapid Transit System

York R.M.

$100M

Solar Power Station

Belmont

$80M

Solar Power Station

Hagersville

$80M

Richmond Hill

$70M

Phosphine Plant Expansion - Phase 1

Niagara

$65M

Belleville North Solar Energy Park

Picton

$60M

Mon Sheong Retirement Home

Source: Reed Construction Data, Industrial Info Resources

OCTOBER 2012

7


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Eye On ICI - Newsletter - October 2012