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Construction cost hikes eased in 2023, trend might continue: Altus

But scenario differs in each Canadian city, from St. John's to Vancouver

David Schoonjans, senior director of development advisory at Altus Group. (Courtesy Altus Group)
David Schoonjans, senior director of development advisory at Altus Group

Construction costs loosened their tight squeeze on the Canadian development sector in 2023 and may ease up further over the next 12 months, according to the 2024 Canadian Cost Guide released Wednesday by Altus Group

The year 2023 featured “an increase (in costs) but not nearly at the pace that there has been for the past several years,” David Schoonjans, senior director of development advisory at Altus Group, told RENX. 

Sharp interest rate hikes, softening inflation rates and a fall in commodity prices at the tail end of 2023 put downward pressure on construction costs last year, the study concludes. 

Those factors were counterbalanced, however, by higher expenses in other areas. Schoonjans said some of those expenses were driven by the adoption of new technologies such as IoT systems in some buildings, or by the rising preference of buyers and occupants for more expensive interior finishes.

Sustainability regulations also played a major role in escalating costs, he said. 

“Probably the biggest (factor) over the past several years is regulatory change. Green mandates in particular are adding costs to buildings. The Toronto Green Standard is an example of that,” he noted, referencing the City of Toronto’s environmental specifications for all new builds. 

Due to those counterbalancing costs, the overall cost of Canadian construction increased in 2023, but at a slower rate than in recent years.

Key cost trends 

One trend Schoonjans singled out is the significant cooling of construction costs during 2023 in the Greater Toronto Area (GTA). 

“The most surprising thing is Toronto, which has been kind of the epicentre for cost escalation in major centres over the past several years,” he said.

"But it probably had, for most categories, the least cost increases. It’s settled down, at least temporarily, as far as cost escalation. The residential high-rise market is really stagnating (in the GTA) and that’s kind of freeing up some capacity.”

Another standout trend for Schoonjans during 2023 was a steep rise in the cost of building schools. He attributed it to post-pandemic design changes and environmental sustainability efforts.

“Things like COVID highlighted the need for better ventilation in schools. There’s also definitely a reconsideration of design and building specifications because of green standards,” Schoonjans said. 

Drilling into the data 

The Cost Guide provides an overall analysis of cost trends rather than exact percentage figures for cost fluctuations during the year. The findings are based on 5,773 development projects involving 1.4 million square feet worth more than $440 billion.

Nine major urban Canadian markets were studied: Vancouver, Montreal, Ottawa-Gatineau, Halifax, Winnipeg, Calgary, Edmonton, St. John’s and the GTA.

Four asset types were analyzed:

  • Private sector residential - condos, apartments, seniors’ housing, wood-framed dwellings.
  • Private sector commercial - office buildings, retail, hotels, parking, industrial.
  • Public sector civic - government buildings, transportation buildings, recreation/entertainment buildings.
  • Public sector institutional and infrastructure category (ICI) - health-care buildings, schools, light rail, highways.

Here’s a selection of the highest and lowest average construction costs per square foot in various asset categories.

Private sector condos and apartments (13 to 39 storeys):

  1. Vancouver - $350 to $440.
  2. GTA - $295 to $380.
  3. Ottawa-Gatineau - $325 to $355.

The lowest was Montreal - at $290 to $310 (St. John’s did not qualify for inclusion in this category).

Private sector single-family residential home with unfinished basement:

  1. Montreal - $190 to $320.
  2. GTA - $210 to $285.
  3. Calgary and Edmonton (tie) - $175 to $255.

The lowest was Halifax at $120 to $180.

Private sector class-A commercial office building (five to 30 storeys):

  1. GTA - $310 to $455
  2. Vancouver - $335 to $420
  3. Ottawa–Gatineau - $290 to $380

The lowest again was Halifax at $210 to $300.

Cost forecast for 2024

Looking ahead, Schoonjans believes construction costs in 2024 will be less influenced by global events and economic trends than they have been over the last few tumultuous years.

Instead, he thinks local economic conditions and local market demand will have a larger impact on construction costs in Canada this year. 

The Altus report suggests “the scales are tilting toward more moderation of construction costs” in 2024.

Providing further clarity in an interview, Schoonjans predicted the combination of falling interest rates, massive population growth and huge demand for housing will eventually push construction costs higher (see correction note below). 

“We’re at this very strange standoff where people need houses and developers would like to build them, but they can’t make the numbers work,” he said. “At some point, if interest rates come down, (property) prices go up.

"Although that would be very, very hard to get to, construction costs would also come down at that point. If that kind of trend continues, developers can actually start projects because they can make a profit again.”

Casting a glance at specific Canadian markets, Schoonjans expects the following to play out in 2024:

  • GTA - a net decrease in costs “but it’s not going to be drastic”;
  • Vancouver - costs will be fairly flat, with less of a dip than in the GTA;
  • Ottawa and Montreal - costs will be flat to slightly lower than in 2023;
  • Calgary and Halifax - costs will continue to increase.

The full Altus report can be obtained here

EDITOR'S NOTE: This article was edited to correct a reference to the future trajectory of construction prices. In discussing the 2024 forecast, Schoonjans said falling interest rates, massive population growth and huge demand for housing would combine to push construction costs higher. The original article incorrectly stated the costs would be pushed lower. RENX apologizes for the error. 

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