The Real Economy, Canada

Real estate and construction are hot in British Columbia, but for how long?

Feb 23, 2022
Economics The Real Economy Real estate Construction

Canada's white-hot housing market gave the real estate and construction sectors plenty to celebrate last year, as skyrocketing demand for residential properties from prospective homeowners and investors, and low interest rates resulted in double-digit house price inflation.

Rising demand has left the industry scrambling to create enough housing supply in expanding urban centres, which continue to attract and retain a highly educated workforce, international business and new immigrants. British Columbia is a prime example of these real estate trends, thanks to a growing population and deep talent pool in business hubs. The Greater Vancouver Area, for example, is seeing an influx of heavy hitters in technology, including Google and Amazon, which are setting up shop in new office spaces.

As part of RSM Canada's recent expansion into the Vancouver market, we surveyed about 600 C-suite decision-makers in British Columbia at companies with more than $50 million in annual revenues to understand their thoughts on how their industries performed last year, and to gauge their outlook for this year.

Optimism high for year ahead

Ongoing growth of Canada's real estate and construction sectors makes it easy to understand why the industry maintains a more positive economic outlook than some others; 86 per cent of real estate and construction executives surveyed were optimistic about the state of the British Columbia economy moving forward, and 68 per cent were bullish on the broader Canadian economy. Respondents in that industry were also the most optimistic about the growth of their businesses revenues (89 per cent) and profit (81 per cent) in 2022.

Even so, there's clearly some caution in their outlook results acknowledge that 2021 wasn't all positive, and 2022 won't be without challenges. The real estate and construction respondents cited rising costs as their biggest growth hurdle this year's 11 per cent more than any other sector. Rising inflation and supply constraints signal that the trend is unlikely to subside any time soon.

The survey, which was fielded from Oct. 5 to Oct. 10, 2021, also reflects the industry's lack of prioritization when it comes to digital transformation despite its many benefits, with decision-makers still deeming investment in that area to be less of a priority. On the other hand, 83 per cent of real estate and construction firms said the green economy was important to their business, more so than any other sectors surveyed.

Bumps in the road

While the optimistic economic outlook is warranted, given that the real estate sector continues to ride the wave of low interest rates and speculation, business leaders should temper their expectations for the year ahead. Higher lending rates on the horizon will likely put a damper on housing transactions and growth in the broader economy.

The construction sector, meanwhile, is facing a different set of longer-term circumstances than real estate, largely due to the growing gap in the supply of labour - especially in the trades. Over time, it's likely that gap will become more pronounced, calling into question how the sector can better attract and retain skilled workers.

Despite the survey results, there has recently been a concentrated push for investment in digital transformation in the Canadian construction industry, which has historically lagged behind its peers. Greater financial commitment in the industry's digital infrastructure would give businesses in the space a strong recruitment tool for new hires with an IT background and would allow current workers to focus on more value-added work.

Time to focus on ESG

As companies across many industries increasingly focus on minimizing their carbon footprints, evaluating building materials for sustainability will be a huge part of the development and construction process. Although real estate and construction decision-makers said in the RSM survey that the green economy was important to them, specific processes to measure environmental, social and governance investing issues will take on greater importance with decision-makers in the construction sector if they wish to secure long-term financing and ongoing growth.

ESG programs foster the ability to identify and assess risks in asset acquisition projects, as well as across broader investment decisions and strategies. ESG criteria are increasingly considered by asset managers and investors, and sustainable investing preferences will be crucial considerations in what will continue to be a highly competitive market.

Millennials, for example, are on track to inherit trillions in assets over the next few decades, and they've emphasized social responsibility and climate change issues more than previous generations. It will be important for real estate and construction businesses to have the correct ESG policies and procedures in place in order to attract that capital.

Based on these industry trends, we can expect to see a rampant escalation of ESG policies among real estate and construction firms moving forward, as well as greater investment in digital transformation to help propel the industry forward and give it the upper hand in the current battle for talent.

RSM contributors

The Real Economy blog

The Real Economy Blog was developed to provide timely economic insights about the middle market economy. It is offered as a complement to RSM’s macroeconomic thought leadership, including the quarterly The Real Economy Canada.

The voice of the middle market

Middle market organizations, which make up the “real economy,” are too big to be small and too small to be big. They have distinct challenges and opportunities around resources, labour, technology, innovation, regulation and more.