Toronto Market Conditions Report - Q4 2022

Managing inflation and the cost of capital remains the primary focus of governments and financial institutions around the world through the final quarter of 2022, with Canada’s annual inflation rate dropping slightly to 6.3% in December – down from the 39-year high of 8.1% in June. The Bank of Canada continues to combat rising prices with adjustments of its policy interest rate by 0.5% in October and another 0.5% in December to finish 2022 at 4.25%, and we know that 2023 has experienced an additional 0.25% jump to 4.50%.

Construction Demand

Labour availability in the ICI sector stabilized from the previous quarter as the new collective bargaining agreements were settled; however, the impact of significant cost of living adjustments continues to materialize in competitive bidding and the labour rates carried in the tendered offers. Construction spending increased across all sectors of non-residential construction, led by industrial and commercial projects with YoY of 25.9% and 13.1% respectively.?It was noted that building permits are down in Ontario, which points to a softening demand by Owners. The Architectural Billings Index (ABI), another leading indicator of construction spending, showed a decreased designer workload in October 2022 for the first time since February 2021 and is expected to continue to decline. The ABI typically anticipates short- and mid-term needs for skilled labour, materials, and equipment. Owners should remain cautious about trades that are extended beyond their capacity and vet carefully the supervision proposed for any new project.

Supply Chain

Supply chains in North America and globally continue to experience impacts to production and distribution coupled with steady demand and elevated energy costs; however, our supply chain forecast does acknowledge stabilizing trends as commodities and energy pricing have started to come down.?

Overall, the Industrial Product Price Index (IPPI) increased 0.6% in the fourth quarter of 2022 and is +7.6% since a year previous.?

The IPPI is led by Energy & Petroleum, Electrical & Telecommunications, Plastic & Rubber Products, Metal Products, and Machinery and Equipment, many of which have double-digit escalation in cost in the previous twelve months, with Wood Products continuing to show a correction. Energy & Petroleum continued to show a correction in the latest quarter but still leads the IPPI at 31.8% YoY. Lead times in manufactured steel items such as joists, metal panels, door frames, and HVAC & electrical equipment all remain elevated. Likewise, insulation, roofing membranes, and specialty coatings have experienced significant back logs as raw materials continue to be allocated to manufacturers on a restricted basis although recovery has been noted.

Project teams must still carefully plan their work to account for these impacts or face disrupted sequencing in the field. Owners should be aware of the conditions, demand a managed approach, and participate in contingency allocation to avoid rising prices.

Construction Employment

Construction employment through the end of December 2022 fell by 57,700 jobs nationally since the previous quarter but remains higher than pre-pandemic levels.

The industry has normalized the health & safety protocols associated with the pandemic, but worker productivity may become impacted by government response to variants and must be monitored as employers are primarily concerned about balancing their supply of skilled labour and experienced supervision with growth in customer demand, especially going into the flu season.?

In all, the cost index has demonstrated a significant climb through Q4 2022 and is showing clear signs of continued escalation due to high demand coupled with high commodity prices and scarcity of labour.?

Owners that are currently planning work in Ontario should consider escalation contingency in the order of 2.4 to 2.6% per quarter with lead-times trending 60 to 80% longer than normal.