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March 4, 2005

SPECIAL REPORT

Strongest prospects in 4 years

Signs looking good for industrial sector

This is the third in a series of three articles on an annual economic outlook produced by Reed Construction Data.

The outlook for industrial construction is bright for at least the next two years, according to an annual forecast released recently by Reed Construction Data.

However, spending on institutional and commercial construction projects probably won’t be as generous.

“In general, the prospects for private industrial construction are stronger now, at the beginning of 2005, than they have been for the past four years because total industrial capacity utilization in all goods-producing industries is at its highest level since late 1999,” the forecast says.

“In addition, in the second quarter of 2004, undistributed corporate profits increased by 40 per cent year over year, the largest year-over-year increase since the first quarter of 2003.”

The forecast was prepared by Alex Carrick, chief economist at CanaData, Reed’s Canadian economic forecasting and statistical service.

Alex Carrick

In the report, he says the combination of an increased operating rate, higher profits, stronger confidence and relatively low interest rates indicates the climate for new industrial investment is very positive.

He says three provinces — Ontario, Quebec and British Columbia — appear likely to account for the bulk of the new industrial construction activity in 2005.

In Ontario, the province saw significant growth of construction starts of manufacturing plants, agricultural buildings and miscellaneous industrial buildings in 2004, he notes.

“As a result, this category of nonresidential construction should expand by a healthy 15 per cent to 20 per cent in 2005, and by over 10 per cent in 2006.”

Carrick says the combination of high rates of capacity utilization, strong growth of profits and improved investor confidence have created a very positive climate for industrial construction spending over at least the next two years.

For commercial construction, Carrick says the near-term outlook is relatively weak for a number of reasons.

First, he says, given the rather sluggish pace of office-based employment, it will take a couple of quarters to shrink the inventory of vacant commercial and office space.

While Carrick says there are clear signs that the demand for commercial office space has been on an upward trend through the second half of 2004, the vacancy rate is still well above its most recent low point of 6.6 per cent in the final quarter of 2000.

Secondly, Carrick says, impediments to international travel are likely to continue to depress hotel/motel occupancy rates and, except in special situations, tend to keep a lid on new construction in the sector.

Although the devastating impact of SARS on hotel occupancy appears to have dissipated, the appreciation of the Loonie has reduced Canada’s appeal as an economical tourist destination and heightened concerns about lengthy delays at border crossings has also caused problems, he says.

As a result, Carrick says the outlook for new hotel and motel construction across the country is limited over the next several quarters.

Meanwhile, after booming for the past couple of years, the retail sector also appears to be well supplied with new space, Carrick says.

Following strong growth in 2003, retail construction slowed sharply in 2004, and on a year-to-date basis, it is up by just five per cent.

For institutional construction, Carrick says the “to-do list” of backlogged projects was much shorter by 2003 and governments had smaller surpluses to spend on new projects.

In 2003, institutional spending declined by 6.1 per cent and in 2004, with many provinces running a deficit, the situation has resulted in a slowing in the pace of government spending in general.

Looking forward, Carrick says institutional spending, particularly on discretionary projects such as new administration buildings, will probably remain in check.

However, politically sensitive health care and education projects will receive favourable treatment by governments.

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