A host of factors have contributed to a turbulent environment in construction financing – particularly out West
For brokers and lenders specializing in the realms of commercial and construction financing, the COVID-19 pandemic has thrown up a unique challenge: supply chain snarls that have seen the cost of materials spiral upwards and disrupted the building process across Canada.
The acuteness of the problem is shown in Altus Group’s recently released Canadian Cost Guide 2022, a measure of construction costs across the country, which revealed that 2021 had witnessed a spike in the cost of building compared with the previous year.
Total construction spending in Canada nearly shattered the $300 billion mark last year, the guide said, with the residential side accounting for $126 billion, ICI (industrial, commercial, institutional) totalling $73 billion, and $100 billion shelled out on infrastructure.
In Vancouver, ballooning construction costs were particularly striking. For custom-built, wood-framed single-family residential construction, the price per square foot racked up at a high of $1,135, compared with $895 in both the Edmonton and Calgary markets.
That established the city as comfortably the most expensive in Canada for new-home construction costs, a development that Mike Saba (pictured top), vice president of mortgage origination for real estate finance and mortgage fund management company Bancorp, said was partly due to the ongoing pandemic.
“I think it’s definitely been exacerbated by the pandemic,” he told Canadian Mortgage Professional. “The input costs and time delays ultimately have put pressures on budgets.”
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That’s driven up pressures on builders and developers now forced to reckon with higher costs for construction and an unpredictable, ever-changing price landscape. Still, rising property prices and the ability to sell for higher than before have helped offset some of those problems.
“Labour’s stretched and the market’s so busy that there are labour issues in general – it’s probably been a stressful time to be building. But on the positive side, what was selling for $400,000 is now selling for $450,000,” Saba said.
“The last few years there have been so many different things working against people who are trying to build cost-effectively and timely, but I guess the saving grace is that the price increases have kept projects profitable.”
Activity in the market remains robust, though, with Bancorp having posted record-breaking years in recent times. Saba described it as a “very strong” market with multiple projects having recently launched successful pre-sales programs that had been sidelined for various reasons over the previous two years.
“With the market picking up for end product, we’ve seen more activity on the land side as well,” he said. “Maybe there’s a little more confidence now and there is more liquidity with lenders.”
The rollercoaster ride embarked upon by lumber prices during the pandemic hasn’t helped stabilize construction costs in Canada, either. Those prices surged in 2021 before plummeting in equally dramatic fashion: after registering a 90% year-over-year increase in May 2021, they promptly fell by 40% the following month, marking their largest recorded monthly drop.
The start of this year saw lumber prices spike by more than 25%, with the average price per thousand board feet still significantly costlier than before the outbreak of the pandemic.
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In Canada, that saga has been further complicated by recent flooding in BC, which helped push lumber futures steadily higher thanks to supply-chain blockages and inability to meet soaring demand.
That disaster only compounded existing price growth caused by inflation, which has been ballooning in Canada in recent months and is now rising at its highest annual rate for more than 30 years.
Meanwhile, another prominent consideration for builders in BC is the so-called “Step Code” introduced in recent years by the provincial government.
That regulatory change introduced the option for stricter criteria for minimum building energy performance with the goal of ultimately making all new buildings in the province net-zero energy ready by 2032.
Local governments may use the compliance path to incentivize or mandate energy efficiency levels in new construction that are higher than those required in the BC Building Code.
Saba said that meant builders often had to account for higher costs than they otherwise might have anticipated.
“BC building code requires new buildings to be built to higher efficiency standards – which are the highest in Canada,” he said. “[That has], of course, added another layer of cost.”
