The Quick Take: April 10, 2018
Non-Residential Building Permits Decline as Trend Levels Off
“The value of non-residential building permits issued in February fell significantly from January. We are typically more interested in longer-term trends than in monthly numbers on this indicator, but investment in non-residential buildings does appear to have levelled off at the end of last year. Growth will now be driven by the fundamentals rather than pent-up demand from the recssion. Industrial vacancy rates remain very low and investment in industrial buildings will continue to be the primary driver of non-residential building investment.”
Non-residential building permits issued in February increased 11.6 per cent year-on-year. Following the recent recession, non-residential building permits reached the bottom of a trough in the final quarter of 2016 before turning upwards again. However, this trend peaked in the middle of 2017 and has plateaued since then. This has translated to the data on actual construction investment, which began growing sharply in early 2017, and exceeded its pre-recession peak in the second half of the year.
All three subcomponents of building permits (industrial, commercial, institutional) contributed to the trend growth over the past year. The largest contributor has been the industrial sector, where very low vacancy rates are driving new construction. Industrial building permits are up by an astonishing 48.1 per cent year-on-year (although that figure is inflated by the fact that last February was an unusually weak month).
The commercial sector has also been trending upward since 2016, but at a much slower rate. This sector is facing headwinds to growth in the medium term thanks to record-high office vacancy rates, especially in Alberta. Commercial building permits are up just 2.9 per cent year-on-year.
Despite the solid performance over the last year, new industrial and commercial building permits have levelled off and are now well below their October 2017 peaks. This may reflect the fact that enough new projects are already in the pipeline to satisfy pent-up demand and growth will be driven by fundamentals going forward.
Overall, even though the level of investment has leveled off, year-over-year growth points to a continued expansion in non-residential building investment relative to 2017. This is consistent with our latest Canadian Outlook which forecasts that businesses will increase their real spending on non-residential buildings by 2.9 per cent in 2018.