Market Intelligence

Industry Shift Restores CompetitionThe effects of the global financial downturn are shifting the construction industry from an abundance of activity with insufficient capacity to a reduction in activity with over capacity. The resulting increase in competition, in conjunction with declining costs of materials, will see a dramatic decline in escalation rates across Canada, with the usual regional variations.

As builders shift gears to cope with financing challenges stemming from the credit crisis, new residential construction activity has cooled. This moderating effect is, in turn, refocusing the industry on – and increasing competition for – institutional and infrastructure projects. The increased competition will help dampen previous strong upward pressure from subtrade contractor pricing, a major escalation driver in some markets, while the continuing sharp drop in commodity prices will assist in reducing material costs nationwide.

Governments are already acting upon the need to sustain healthy levels of activity through increased volume of infrastructure and institutional investment. This strategic spending is expected to moderate the effect of reduced residential construction, provided these projects can enter the construction stage quickly.

What’s Moderating Escalation Rates in Canada?Although each region has its own, unique set of factors determining local rates of escalation there are common moderators, including:• Oil prices expected to remain significantly lower than recent highs all

through 2009. • Prime lending rate expected to decrease with the annual rate near or

below 3.50% through 2010. • Projected 16% decrease in housing starts across Canada in 2009. • Reduction in construction materials costs expected to continue reflecting

the fall in global commodity prices. • Increased competition for infrastructure renewal and development, much

of it through Public/Private Partnerships.• Canadian economy expected to experience lower growth rates than

previously forecast.• Lower Canadian dollar increasing the cost of imported materials.• Built-in increases in some provinces due to union agreements.

2008

Build Now or Wait?As construction costs retreat from their historic highs, developers who balked at double-digit escalation costs and delayed their projects may be ready to return to the market. With early trade contractors on projects, including excavators and concrete formers, already lowering their prices, it is expected that those who follow (mechanical, electrical, drywall and finishing trades) will also be lowering theirs. Significantly lower labour and materials costs may make previously uneconomic projects more attractive.

While it is expected that lower costs and increased competition will continue to drive down the overall costs of construction, any delay in undertaking new projects must be weighed against carrying and lost opportunity costs. In this market, a tendering strategy that closely monitors construction cost changes, factors in inflation and opts for lump-sum contracts can serve to minimize uncertainty and maximize margins.

BTY’s market intelligence newsletters analyze and report on industry trends to provide our clients with insights about current and future building markets in British Columbia, Alberta, Saskatchewan, Ontario and Québec.

1

National Escalation Forecast - Selected Provinces

QUÉBECQuébec is well positioned to weather the recession because it did not experience ballooning real estate and construction costs as did many other provinces. Non-residential construction is expected to be the focus of the economy over the next few years, with 70% of expenditure by government. With much of the planning and design completed, many projects are ready to go. • Governmentinvestmentininfrastructure,including

hospitals, roads, bridges, etc. over the next five years is planned at $41 billion.

• Twomega-hospitalprojectsinassociationwithtwomajor Montréal universities scheduled for 2009 start-up. Overall, hospital and school building is expected to rise by 10%.

• $35billioninconstructionisplannedfortheenergysector, including hydro and windpower projects.

• Slightdropinresidentialconstructionto42,000unitsexpected.

• Québec’spopulationgrowthin2007/08wasthehighestsince1990/91.

ONTARIOAlthoughOntarioisfacedwithfurtherjoblossesitstill has a large population base and service sector. Toronto’seconomicengine,federalgovernmentactivityin Ottawa, knowledge-based expertise centred in academic communities and government commitments to infrastructure programs will offset some of the downturn in the construction industry.• Projectedoverallprovincialinvestmentof$7.5billion

ininfrastructurein2008/09.• Newhomestartswillcontinuetodeclinefromthe

elevatedlevelsof2008.• Continueddevelopmentofwindpowerprojectsand

expansion of nuclear power production.• InfrastructureexpenditureincludingtheCentre

for Mental Health Project, Waterloo Courthouse, BridgepointHospitalandWomen’sCollegeHospitalRedevelopment.

• Largercontractorandlabourpool,lowerconstruction costs.

• ThirdhighestimmigrationrateinCanadain2007/08.

BRITISHCOLUMBIADespite a projected decline in residentialconstruction,BC’shealthy major projects inventory of$62.5billionandacommitmentby the provincial government to accelerate infrastructure spending promises to soften the blow.• Newresidentialconstruction

isforecasttofallby37%in2009, with a modest recovery in housing starts in 2010.

• Infrastructureprojectssuchas Evergreen transit line and GatewayProjects.

• Proposedwindpowerandgreenenergyprojectstotalling$3.78billion.

• Majornewinstitutionalprojects,includingChildren’s&Women’sHealth Centre, Fort St. John Hospital,PrinceGeorgeCancerCentre, expansion at Surrey Memorial Hospital, and the new UBC Brain Health Centre.

• Privatesectorinvestmentsincludingthe$250million,WallCentreinRichmond,development of the Oval lands and the $400 million Hotel Georgiaredevelopment.

• Governmentinitiativestoaccelerate infrastructure spending and development.

• In2007/08,BritishColumbiaposted the second highest populationgrowthafterAlberta.

SASKATCHEWANTodate,potashanduranium,twoofSaskatchewan’sexportleaders, have defied the general collapse of the commodities and energysectors.Theprovincehasled the nation in the growth of retail sales, wholesale trade and exportsin2008.Althoughsecondin housing starts, building permits and new vehicle sales, it faces a sharp pull back in new housing in 2009 as price escalation, reduced confidence, and lower in-migration take their toll on demand. • Netinter-provincialin-

migration of more than 10,000 people in 2007 reinforced 2006 gains and helped sustain housing demand. Cumulative population gain from 2006 to mid2008was24,650people.

• Majorconstructionprojectsvalued at $27.6 billion led by industrial, oil and gas and mining.

• Mostlarge-scalecapitalspending projects proposed by the mining and oil and gas sectors expected to proceed despite the downturn in commodity prices.

ALBERTAThesteepdropinoilpriceshasputthebrakesonAlberta’spositionasCanada’sgrowthleaderandhas seen a hold being placed on some proposed oil sands expansion projects. Economic growth forecasts have dropped to 2.2% from estimatesof3.1%earlierintheyear.Royaltychargeshavealsodecreasedindustry investment.• Residentialsalesandaverage

selling price have dropped, building permits have declined.

• Constructionemploymentgrowth is decelerating rapidly.

• Canada’sstrongestpopulationgrowthin2007/08,witha2.1%rise.In-migrationof56,000in2008willdropto51,000in2009.

• Growthingovernmentcapitalexpenditures for highways ($1.4 billionforAnthonyHendayDriveand $1.4 billion for ongoing highway twinning), airports ($1.1 billion announced for expansion atEdmontonand$1.3billionfora proposed new concourse in Calgary), hospitals and schools expected to offset the decline in residential and resource development.

2

3% in 2009 3% in 20105% in 2011

6% in 2009 5% in 20107% in 2011

6% in 2009 6% in 20108% in 2011

2% in 2009 3% in 20104% in 2011

3% in 2009 4% in 20105% in 2011

2288ManitobaStreet 204-301MainStreet Suite100,10426-81AvenueNW 740-6408thStreetSW 63ChurchStreet,Suite305 119SpadinaAvenue,Suite305 4001,rueSt-AntoineOuestVancouver,BCV5Y4B5 Penticton,BCV2A5B7 Edmonton,ABT6E1X5 Calgary,ABT2P1G7 St.Catharines,ONL2R3C4 Toronto,ONM5V2L1 Montréal, PQ H4C 1B9

+T:604.734.3126 +T:250.493.3153 +T:780.439.0056 +T:403.269.5155 +T:905.680.2344 +T:416.596.9339 +T:519.933.3838+F:604.734.3136 +F:250.493.3173 +F:780.433.2458 +F:403.269.1046 +F:905.680.2432 +F:416.596.1093 +F:519.933.2668

OUROFFICES:

3

Shift from Residential to Infrastructure and Institutional Across CanadaRetrenched demand, a poor sales climate and tight credit environment are driving CMHC’s forecast of an almost 16% decline in housing starts (from 212,000 to 178,000) across Canada in 2009. Canadian housing starts on an annualized basis had already fallen by 10% from October 2007 to October 2008. By comparison, annualized starts in the same period fell 38% in the US and 48% in the UK.

In response, industry focus is expected to shift from residential to infrastructure and institutional sectors to absorb excess capacity. Many analysts predict that absorption of residential inventory across the country will take from 12 to 24 months. They see a modest recovery in 2010 following a sales turnaround supported by improved credit availability and interest rate reductions.

The decline in residential demand and cancellation of major oil sands development will spur increased capacity and competition. These factors, combined with lower materials costs, are expected to lower the national rate of escalation. Provincial escalation rates will vary by region, but in general will mirror the national rate.

Downturn Generates New Opportunities for P3sGovernments have often turned to infrastructure investment to bolster the economy when markets falter. When the UK focused on infrastructure development during its 1990’s downturn, the mechanisms developed in collaboration with builders gave rise to the Private Finance Initiative (PFI) market, which has worked successfully there.

Canada has since adopted the Public Private Partnership (PPP, or P3) model, a cousin to the PFI, and appears to be applying it in much the same way for infrastructure projects in the current downturn. Infrastructure Ontario, for example, continues to release new social infrastructure offerings to the market. Partnerships BC is also indicating that it remains committed to advancing PPPs for social and transport infrastructure in the coming year.

Another positive factor for Canadian infrastructure development is that investors facing financial turmoil will favor predictable investments and stable cash flows. Both factors are fundamentals of the PPP market and may attract candidate PPP proponents, such as pension funds.

However, 2009 will not be without its difficulties and the debt markets will remain challenging for the foreseeable future. The number of lenders available to PPP proponents will diminish and the remaining lenders will seek to limit their exposure to long-term debt and construction risk, which may require increased equity contributions from proponents and increased security from contractors.

The opinions expressed in this newsletter are those of BTY Group and are provided as information only. Readers are cautioned on the use of the data provided. BTY Group strongly recommends that readers retain the services of a Professional Quantity Surveyor prior to establishing budgets for their projects.

2009 Construction Unit RatesProject Type British Columbia Alberta Saskatchewan Ontario Québec

Residential Care Facilities $/m2

$/sq.ft2600 - 3000

242 - 2792600 - 3100

242 - 2882300 - 2800

214 - 2602400 - 2800

223 - 2601900 - 2400

177 - 223

Hospitals$/m2

$/sq.ft5200 - 6500

483 - 6045500 - 6500

511 - 6045000 - 5500

465 - 5115100 - 5600

474 - 5205200 - 6500

483 - 604

Research Laboratories$/m2

$/sq.ft5500 - 6500

511 - 6045900 - 6900

548 - 6415300 - 6300

492 - 5855500 - 6500

511 - 6045300 - 6400

492 - 595

Teaching Laboratories $/m2

$/sq.ft4800 - 5600

446 - 5204900 - 5600

455 - 5204600 - 5500

427 - 5114800 - 5500

446 - 5114600 - 5500

427 - 511

High-rise Residential $/m2

$/sq.ft2800 - 3500

260 - 3252700 - 3400

250 - 3162700 - 3500

251 - 3251900 - 2600

177 - 2421900 - 2600

177 - 242

Low-rise Condominiums $/m2

$/sq.ft1500 - 1800

139 - 1671500 - 1800

139 - 1671400 - 1700

130 - 1581300 - 1600

121 - 1491400 - 1700

130 - 158

Townhouses (Wood Frame) $/m2

$/sq.ft1500 - 1900

139 - 1771200 - 1500

111 - 1391200 - 1500

111 - 1391200 - 1500

111 - 1391200 - 1600

111 - 149

Shopping Centres $/m2

$/sq.ft1900 - 2300

177 - 2142000 - 2500

186 - 2321900 - 2400

177 - 2231500 - 1900

139 - 1771400 - 1800

130 - 167

Office (High-rise)$/m2

$/sq.ft2200 - 3000

204 - 2792800 - 3500

260 - 3252100 - 2700

195 - 2511800 - 2400

167 - 2231800 - 2500

167 - 232

Vancouver•Penticton•Edmonton•Calgary•St.Catharines•Toronto•Montréal (in association with Groupe TEQ)

4