Climate Resilience in Canada’s Construction Industry
In recent years, Canada’s construction industry has made strides toward enhancing sustainability in response to climate change. The sector is increasingly adopting renewable energy sources, green building standards, and innovative technologies to reduce environmental impact. Collaboration among governments, industry associations, and other stakeholders has intensified, focusing on reducing carbon footprints and improving infrastructure resilience.The Canadian Construction Association is emphasizing the need for strategic partnerships and policy reforms to meet Canada’s emissions targets for 2030 and 2050, as part of efforts towards resilience and sustainability. The CCA released a report this September, Climate Resilience in Construction: Building for a Sustainable Future, which outlines the interplay between climate risks and infrastructure decisions, and highlights the urgent need for investments in resilient infrastructure.Industry Impact and PotentialThe construction industry is a major component of Canada’s economy, employing over 1.6 million people and contributing approximately $165 billion annually, representing 7.5% of the GDP. Buildings account for nearly 40% of global greenhouse gas (GHG) emissions, placing a significant emphasis on sustainability in the sector.The CCA links investment in sustainable infrastructure to reduced GHG emissions. In Q4 2023:Slowed Emissions Growth: Emissions per million dollars invested in infrastructure decreased from 230 tonnes in 2010 to 140.9 tonnes in 2022.Increased Investment: Infrastructure investment grew by 31% from 2009 to 2023, while GHG emissions increased by only 22%.Rise in Clean Inputs: The ratio of clean input investments in construction nearly doubled from 2.3% in 2009 to 4.3% in 2023.Policy LandscapeSince October 2020, the Canadian government has committed substantial funds to green infrastructure through various initiatives, including:$5 Billion in loan guarantees for Indigenous communities.$7.2 Billion for the Clean Electricity Investment Tax Credit starting in 2024-25.$776.3 Million to extend the Clean Fuels Fund until 2029-30.$800 Million over five years for the Canada Greener Homes Affordability Program starting in 2025-26.These investments complement a broader policy framework aimed at reducing emissions and achieving a net-zero economy by 2050. However, the CCA indicates that more is necessary.Key regulations to support sustainability include:2030 Emissions Reduction Plan (ERP): Targets a 40% reduction in emissions from 2005 levels by 2030.Clean Fuel Regulations: Promote the use of clean fuels.Oil and Gas Methane Regulations: Aim to cut methane emissions by 75% by 2030.Net-Zero Emissions Accountability Act: Ensures transparency in meeting climate targets.Clean Electricity Regulation: Focuses on achieving net-zero emissions in electricity generation by 2035.Innovation and AdaptationThe construction sector is working towards innovations to enhance climate resilience. Enhancing Building ResilienceAdaptation strategies for buildings involve:Structural Improvements: Upgrades to ventilation systems, window shades, and protective structures.Climate-Informed Planning: Utilizing climate risk assessments and modelling tools to guide building design.Emerging Technologies: Incorporating Building Information Modelling (BIM) and smart city systems for better decision-making.Driving Energy EfficiencyWith buildings contributing significantly to GHG emissions, energy efficiency is critical. Strategies include:Certification Programs: Ensuring new buildings meet energy efficiency standards.Energy Benchmarking: Assessing and improving a building’s energy consumption.Recommissioning: Re-optimizing existing buildings to save energy.Integrating Sustainable MaterialsMaterial selection plays a crucial role in reducing environmental impact. Innovations include:Mass Timber: A sustainable material offering carbon sequestration benefits.Greener Concrete Production: Exploring methods to reduce the environmental footprint of concrete.Life Cycle Assessments (LCA): Evaluating the environmental impacts of materials throughout their life cycle.Managing Costs Through CollaborationAddressing climate resilience involves higher costs. Effective management requires:Collaborative Procurement: Encouraging early contractor engagement and moving away from lowest bid models.Partnerships: Collaborating with governments, academia, and industry to share knowledge and resources.Financial Strategies: Adapting federal procurement to support innovation and sustainability.Implementation ChallengesSeveral challenges to more sustainable construction need addressing:Modernizing ProcurementThe CCA suggests that the current federal procurement process should be updated to support fair competition and innovation. Engaging contractors early and focusing on long-term value can promote the use of new practices and sustainable materials.Sustainable Procurement GuidelinesThe Canada Green Buildings Strategy includes initiatives like the Buy-Clean Strategy, which mandates GHG emissions disclosure and reduction targets for major projects. However, broader implementation is pending, affecting full industry participation.Alignment and ConsultationEffective policy requires alignment across federal, provincial, and municipal levels. Improved consultation with the construction industry can lead to better-informed policies and standards, fostering innovation and efficiency.Canada’s construction industry is making efforts towards climate resilience through policy support, innovation, and strategic investment. However, continued government support, collaboration, and adaptation will be essential to achieving long-term sustainability and reducing the sector’s environmental impact.
Canadian Construction Sector Insights: Resilience Despite Challenges and Residential Downturns
Canada’s construction small and medium enterprises have shown resilience amid economic challenges in 2024, with stable employment, growth in non-residential construction, and eased construction costs despite higher borrowing rates and a residential downturn. The Canadian Construction Association (CCA) released a quarterly report in August, providing a comprehensive analysis of Canada’s construction sector and insights into the challenges faced and successes within the industry. Economic Context and Monetary PolicyIn Q1 2024, Canada’s economy posted modest growth of 0.6%. Despite this, the country’s per-capita GDP remains 3% below pre-pandemic 2019 levels and has largely stagnated over the past decade. In contrast, the U.S. saw per-capita GDP rise by 7%, thanks to a robust services sector, highlighting a significant gap between the two economies.This slower economic growth in Canada has reduced inflationary pressures, which has allowed the Bank of Canada to implement its first interest rate cuts in four years. In June and July 2024, the overnight rate was lowered to 4.50%, aligning with actions by central banks in Switzerland, Sweden, and the European Union. However, the Canadian rate remains higher than the Bank’s estimated neutral range of 2.25% to 3.25%.Construction Sector PerformanceThe Canadian construction industry had subdued activity in Q1 2024, with overall growth of just 0.1%. This modest figure hides a more severe contraction in the residential sector, where activity fell by 1.1%, a significant drag on overall performance. This decline in residential construction reflects the ongoing challenges the housing market faces, particularly due to high interest rates and cooling demand.Non-residential construction, on the other hand, grew by 0.6%, extending its growth streak to nine consecutive quarters. This sector’s growth was driven by modest increases in industrial and institutional investments.Repair and engineering activities also made positive contributions, with the latter rebounding by 1% after two quarters of contraction in 2023. This recovery is significant for the broader construction sector as these areas play a critical role in sustaining overall industry growth.Investment Trends Investment in the construction sector presented a mixed picture. The building construction sector saw a 0.6% decline in overall investments, mainly due to a 3.6% drop in multi-residential construction. Conversely, the non-residential sector maintained its growth trajectory for the ninth straight quarter, though at a slower pace. Investments rose by 0.2%, adding $152 million to the sector. The most notable gains were in industrial construction, up 1.2% ($57 million), and institutional construction, which saw a robust 4.6% increase, adding $165 million. The rebound in institutional construction is especially noteworthy, as it follows five quarters of decline, potentially signalling new opportunities in public infrastructure and institutional projects.Commercial construction, however, did not follow this positive trend. It experienced its sixth consecutive quarterly contraction, with a 2.5% decline in investments, totalling $71 million. This disparity between residential and non-residential performance underscores the varying impacts of economic conditions across different segments of the market.Business Dynamics and Sector ResilienceThe Canadian construction industry is dominated by small and medium-sized enterprises (SMEs), with about 396,000 businesses active in 2023. Of these, small firms with fewer than 100 employees represent a significant portion, while micro businesses with one to four employees make up 68% of the total. Medium-sized firms account for just 0.8%, and large firms with more than 500 employees comprise less than 1%.SMEs face greater vulnerability to economic downturns due to their limited financial reserves. However, the sector has shown resilience, with the number of active businesses increasing in 2023. Moreover, business exits have stabilized, with fewer firms leaving the market compared to the historic lows recorded in Q2 2020.Material Costs and Price TrendsMaterial costs in Q1 2024 showed a range of trends. The Building Construction Price Index (BCPI) rose by 0.77%, continuing its deceleration for the fifth consecutive quarter. This moderation in construction costs is favourable for stakeholders in the industry, including investors, as it signals a slowdown in price pressures.The Industrial Product Price Index (IPPI) declined slightly by 0.21%, although this masked considerable variations across product categories. The chemicals and chemical products group saw a 0.63% increase, while cement and other non-metallic mineral products rose by 2.93%. The energy products group saw a notable 4.25% decrease, with refined petroleum, motor gasoline, and diesel prices falling sharply. Conversely, lumber and wood products saw a 2.42% increase, driven by higher softwood lumber prices, which could affect construction project costs, particularly in residential and commercial buildings.Capacity UtilizationThe construction sector’s Capacity Utilization Rate (CUR) rose to 86.7% in Q1 2024, marking a stabilization and modest recovery from previous declines. This increase suggests a rise in demand and improved operational efficiency, which is a positive sign for future construction activity.Future OutlookLooking ahead, the outlook for the construction industry is cautiously optimistic. Interest rate cuts could further improve the financial environment, particularly for SMEs that have shown resilience despite economic pressures. However, potential policy shifts, international tariffs, and global oil price fluctuations continue to pose risks. Labour shortages remain a significant concern, with many construction businesses expecting ongoing difficulties in securing skilled workers.
Occupancy Costs vs. Closing Costs: Understanding Financial Commitments in Pre-Construction Properties
Investing in pre-construction condos can be a valuable addition to your portfolio, but in Ontario, there are unique financial commitments tied to this type of property investment that need to be understood—particularly the distinction between occupancy costs and closing costs. These two phases of ownership come with separate financial obligations that can have a significant impact on the profitability of the investment.What Is the Interim Occupancy Period?When a condo unit is completed, there are situations where it can be occupied while the rest of the building is being finished.The interim occupancy phase occurs between the time when you take possession of your condo and the actual closing date when the property title is transferred to you. This period exists because, in Ontario, pre-construction projects are often completed in stages. While you can take possession and live in or rent out the unit once it’s ready, you don’t officially own it until the building is fully registered, which can take months, sometimes even a year or more.During the interim occupancy period, buyers are required to pay what is known as “occupancy fees.” These fees cover the developer’s costs until final registration, but they don’t reduce the principal balance on your mortgage.Breakdown of Occupancy CostsOccupancy fees are essentially a form of rent paid to the developer, calculated as follows:Interest on the Unpaid Balance: This is the interest on the outstanding balance of the purchase price that has yet to be paid at closing. If you’ve put down a deposit, the unpaid balance is the remaining portion of the total purchase price.Estimated Maintenance Fees: This covers the estimated cost of maintaining the building, including amenities, security, and repairs, similar to regular condo maintenance fees. However, these can be speculative before the actual costs are known.Property Taxes: Even though you don’t own the unit yet, you are still responsible for property taxes from the time you take occupancy. These are based on an estimated value, which can differ from the final assessed value after registration.The problem many investors face is that these interim costs don’t contribute to building equity. Essentially, you’re paying for the privilege of occupying the space without reducing the amount you owe. For investors, this period can be particularly costly if rental income during this phase doesn’t cover the fees.The Transition to Closing CostsClosing costs occur once the building is registered and the title to the unit is transferred to the buyer. These costs include legal fees, land transfer taxes, development levies, and other associated expenses. At this stage, you’ll also begin your mortgage payments.Key closing costs include:Land Transfer Tax: In Ontario, this tax is applied based on the purchase price of the property. If you’re buying in Toronto, you’ll also need to account for an additional municipal land transfer tax.Development Levies and Tarion Warranty Fees: Developers often pass on the cost of municipal development charges and the cost of the Tarion Warranty Program, which insures your unit against structural defects.Legal Fees and Title Insurance: Legal fees are essential to finalize the transaction, and title insurance is necessary to protect you against potential ownership disputes or other claims against the property.Impact of Rising Interest RatesInterest rates play a crucial role in determining the financial burden of both occupancy and closing costs. During the occupancy phase, the interest portion of the occupancy fee is determined based on the prevailing interest rate on the unpaid balance. As rates rise, this portion can become significantly higher than expected, eating into the profitability of the investment.The Importance of Proper Financial PlanningTo maximize the profitability of a pre-construction condo investment, you need to plan for both occupancy and closing costs, as well as potential shifts in interest rates. You also need to be aware that occupancy fees don’t build equity.Additionally, preparing for closing costs, which can range from 1.5% to 4% of the purchase price, is essential to avoid being caught off guard. Investors need to budget accordingly, factoring in the possibility that rental income may not cover all interim costs, especially if interest rates rise. Proper financial planning ensures that the transition from the occupancy phase to the final closing is as smooth as possible.
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