Published On: Thursday, 30 November 2017

Strong Economy Drives Growth in Commercial Real Estate

Strong Economy Drives Growth in Commercial Real Estate
Strong employment leading to increased demand for office space is one factor in continued growth of the commercial real estate sector.

B.C. - The B.C. Real Estate Association's Commercial Leading Indicator (CLI) increased for the ninth consecutive quarter, rising 2 points to 135.3 in the third quarter of 2017. That increase represents a 1.7 per cent rise over the second quarter and a 7.3 per cent increase from one year ago.

The sustained rise in the CLI has been driven by several years of strong growth in the B.C. economy, particularly in sectors beneficial to commercial real estate activity. Relevant growth factors included strong retail and wholesale sales and increased demand for office space.

Economic activity included the following gains:

  • Retail sales rose 1.6 per cent on a quarterly basis in the third quarter and were up 11 per cent compared to the third quarter of 2016;
  • Wholesale trade was up 4 per cent quarterly and 14.5 per cent year-over-year; and
  • Manufacturing followed up nearly 5 per cent growth in the second quarter with a further 1 per cent increase in the third quarter. Year-over-year, manufacturing shipments were 7 per cent higher in the third quarter.

The CLI measure of office employment rose by almost 7,100 jobs in the third quarter of 2017, largely due to a surge of new jobs in the professional services sector, driving demand for office space. Hiring has also picked up significantly in the B.C. manufacturing sector, with employment hitting a nearly 10-year high after adding 8,400 jobs on average through the third quarter.

Retail sales are on pace to grow more than 9 per cent this year, the highest growth since 1994 and the fourth consecutive year that retail sales have risen more than 6 per cent. 

Employment growth in the provincial economy is at a more than a two-decade high, approaching 4 per cent through the first nine months of the year. Key commercial real estate sectors have been prominent among those industries posting job growth. The CLI’s measure of office employment rose by 7,100 jobs in the third quarter, while manufacturing payrolls expanded by 8,400 jobs to their highest level since 2008.

While the economic activity and employment components have propelled the CLI higher, the financial component has been a modest drag on the index. Rising interest rates, widening credit spreads, and a slight decline in the benchmark REIT index translated to slightly less favourable financial conditions for commercial real estate in the third quarter.

Although growth in the B.C. economy is expected to slow next year, the overall economic environment remains very supportive of growth in investment, leasing, and other commercial real estate activity over the next two to four quarters. The B.C. Real Estate Association Commercial Leading Indicator forecasts changes in broad commercial real estate activity. Our research shows that the variables that compose the CLI reliably forecast B.C. commercial real estate activity with a lag of two to four quarters. The index is revised each quarter to reflect changes in the underlying data.