Hear From Alex Carrick, Chief Economist at Construct Connect

What are some of the key economic uncertainties currently facing the construction industry in both the U.S. and Canada?

We're in a unique time. We're entering a period where some significant events are certain to occur. We know that there will be cuts in interest rates. In fact, they may come in Canada even before they happen in the United States because inflation has decreased and the Canadian economy isn't growing as fast as the U.S. economy. So, the Bank of Canada may act before the Federal Reserve.

Additionally, Canada is experiencing a remarkable increase in population. You have to go back almost a century to see similar numbers. Last year, the population increased by 3.2%, with the nation adding 1.2 million people, according to Statistics Canada. This growth is unprecedented in recent times.

Another significant change will come from the Trans Mountain pipeline and the LNG project in northwestern British Columbia. When products start to flow through these channels, it will have a major impact on trade statistics, most likely swinging us from a negative trade balance to a positive trade balance, and a positive foreign trade balance boosts GDP, which will benefit Canada.

Finally, there's the upcoming U.S. presidential election in November. While this is certain to happen, it introduces some uncertainties for Canada. The outcome and subsequent policies south of the border could either cause headaches or present opportunities for Canada, depending on the results of the early November vote.

How have lifestyle changes influenced by pandemic experiences impacted the construction sector, and what strategies can companies adopt to address these changes effectively?

One obvious change is the switch to hybrid work. Not everyone is going into the office and sitting in a cubicle like they used to. This shift has significantly impacted the office building sector so it's challenging to be optimistic about the demand for office buildings at the moment. This switch has broader implications because office buildings often anchor mixed-use developments, which are crucial for transit projects and other urban planning initiatives.

While there is still some office building work happening, much of it is related to data centers. This is a positive trend for construction, driven by the increasing reliance on online communication tools like Teams and Zoom as our lives are becoming more digital, with a growing move to the cloud, increased focus on cybersecurity, the rise of cryptocurrency, and advancements in artificial intelligence. Consequently, the outlook for data center construction appears almost unlimited which could bolster the rapid transit construction sector.

I would say these are the two biggest impacts: the shift to hybrid work and the booming demand for data centers. Despite the hybrid work trend, many rapid transit projects are still being proposed. Additionally, the period of confinement during the pandemic has made many people appreciate the benefits of travel, which is also a positive for the construction industry.

What are the anticipated labor shortages in the construction industry, and what innovative approaches can be taken to mitigate these challenges?

Well, it's a huge problem. Everyone is saying there are labor shortages. It's not just in construction; it's an issue in many sectors. It's difficult to understand and even harder to fix. The aging baby boomer population means skilled workers are retiring faster than before. However, whilst this is definitely an issue, it also presents an opportunity for employers to make it more appealing for older workers to stay on the job longer, which is already happening.

There's also the need to attract people who might not have previously been interested in construction. Resistance to modular construction exists in North America, but a quick look at modular construction innovations worldwide shows that it's a trend that can't be ignored. Eventually, these innovations will have to be adopted here.

Additionally, artificial intelligence could be very beneficial for construction. While AI is controversial in fields like the arts, in construction, it can help find ways to perform processes faster and better.

How have commodity and material costs affected construction projects in the Canadian marketplace, and what steps can be taken to manage these challenges?

Back in 2022, there was a significant supply shortage crisis. The price of lumber doubled, and many other commodities increased in price as well, creating a real problem for construction. These concerns about costs have persisted, making owners hesitant to move forward with projects causing the number of delayed or on-hold projects is higher than in the past.

Year-over-year price increases for many items, including construction materials, have moderated to around 0% to 5%, which is typical. However, over the last three years, there has been a cumulative increase in prices. While the year-over-year change is no longer alarming, construction materials have increased by about 30%, and general inflation (CPI) has increased by about 20%. This means that everything is roughly 20% higher than three years ago, and construction inputs are about 30% higher.

This impacts whether owners can afford to proceed with projects, especially since interest rates are higher than they've been in the past. One interesting offshoot is the tremendous increase in the number of "mega projects" (projects costing a billion dollars or more). In the United States, the number of mega projects has been unprecedented over the past few years. Canada has lagged in this area, but it is expected to see a similar trend.

Mega projects are both a blessing and a curse. They benefit the local economy but also cause distortions, such as increased property prices and labor shortages. These factors complicate the construction landscape, influencing various economic aspects.

Can you discuss the potential role of Canada’s forgotten resources sector in revitalizing the construction industry, and what opportunities does it offer for growth and development?

Oh well, this is a topic that I love. The research sector in Canada is crucially important to the overall economy and is often ignored. Worldwide, countries are engaged in an energy transition, aiming to cut back on fossil fuels. This implies that electrification will play a much bigger role in the economy. Historically, the world has been driven by fossil fuels since the Steam Age when

coal was used to generate steam. We've relied on fossil fuels for about 200 to 300 years, but there is now a consensus that this must change, and we must switch to mainly electricity by about 2050.

A significant component of this shift is the move from internal combustion engines to electric vehicles (EVs) and battery electric vehicles (BEVs). Consequently, much of the current construction activity, especially in mega projects, involves building new car plants and battery plants. Additionally, there will need to be substantial increases in electric power capacity, which will require various minerals and metals.

To generate and transmit more power, we'll need copper and aluminum, with copper being in higher demand. An example of this is in transmission lines, especially high-speed ones, which often use aluminum. Nickel, lithium, and cobalt are also essential for batteries. Canada is fortunate to have abundant resources of these critical minerals which positions them well to profit during this time of transition.

Whilst the fossil fuel industry will not disappear entirely because, despite the growth of electric vehicles, a large number of internal combustion engine cars will remain on the road for years due to the average lifespan of a car being about 12 years. However, there are also opportunities in carbon capture and storage, LNG facilities, and exporting LNG, ammonia, and hydrogen. Large projects planned across Canada that include ammonia plants, hydrogen plants, solar power, wind power, and potentially even nuclear power, with new technology such as small modular reactors are emerging which positions the construction industry well to benefit during this transitional phase.

It seems almost certain that there will be another commodity supercycle before 2030. However, the biggest problem is speeding up approvals for these projects whilst governments are eager for electrification to happen they are not taking the necessary steps to expedite the approval process for the creation new mines. I think they might be hoping that mining activity will take place in other countries, but this is a shortsighted approach due to the impact this will have on Canada’s foreign trade balance.

Canada's foreign trade includes 17 resource categories, and in all but one, Canada has a surplus of exports over imports. This is a crucial part of the country's economy and contributes significantly to our high standard of living. Over the past 20 years, the U.S. has grown at an annual GDP rate of 2.2%, while Canada's GDP growth has been 2.1%. This shows that Canada has kept pace with the strong U.S. economy, largely due to our resource exports.

Once we start shipping more oil to the West Coast and LNG to Pacific nations, it's even more likely that we will maintain a positive balance in foreign trade, which helps GDP's bottom line.