Toronto Market Conditions Report- Q1 2023

Managing inflation and the cost of capital remains the primary focus of governments and financial institutions around the world through the first quarter of 2023, with Canada’s annual inflation rate dropping to 4.3% in March – down from the 39-year high of 8.1% in June 2022 and the lowest year-on-year rate (YoY) since August 2021. The Bank of Canada continues to combat rising prices with an adjustment of its policy interest rate by 0.25% in January that was held in March to finish Q1 at 4.50%, and we know that Q2 has experienced an additional 0.25% jump to 4.75%.

Construction Spending

Construction spending increased across all sectors of non-residential construction, led by industrial and commercial projects with YoY of 25.7% and 8.7% respectively.?It was noted that the value of building permits was up sharply in Ontario during March 2023 and more than 86% YoY, which points to an increase in demand by Owners.

The Architectural Billings Index (ABI), another leading indicator of construction spending, showed an increased designer workload in March 2023 from December 2022 and is expected to rise slightly to keep up with demand in the industrial sector. The ABI typically anticipates short- and mid-term needs for skilled labour, materials, and equipment. Owners should exercise caution when considering trades that exceed their capacity and diligently assess the proposed supervision 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) decreased by 0.7% in the first quarter of 2023 and is -2.2% since a year previous.

The IPPI is led by Cement, Glass, and Non-Metallic products, Machinery and Equipment, Electrical and Telecommunications products, Plastic and Rubber products, and Furniture and Fixtures, some of which have a double-digit escalation in cost in the previous twelve months, with Wood Products and Energy & Petroleum continuing to show a correction. Lead times have stabilized for materials across almost all disciplines, however, selected parts for manufactured mechanical and electrical equipment continue to impact reliable deliveries, particularly with emergency power, elevator controls, and electrical distribution.?

Project teams must continue to 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

In Ontario, ICI construction employment through the end of March 2023 dipped by 24,600 jobs since the previous quarter driven substantially by the residential sector and the impact of rising interest rates.

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 continued climb through Q1 2023 but is showing clear signs of returning to pre-pandemic norms in the mid-term.?

Owners that are currently planning work in Ontario should consider escalation contingency in the order of 2.2 to 2.4% per quarter with lead-times trending similar to pre-pandemic levels.