Monday Market Minute | Apr 25, 2022

Construction costs surge 20%+ as supply chains and energy prices squeeze Canadian real estate development

What Moved

StatsCan's building construction price index showed year-over-year increases exceeding 20% in major Canadian markets — the steepest escalation on record. Lumber, steel, concrete, and labour costs all moved sharply higher, driven by the triple impact of lingering supply-chain disruptions, the Russia-Ukraine energy shock, and a tight domestic labour market. Private developers reported cost overruns on projects bid as recently as Q4 2021, with some pausing or renegotiating construction contracts entirely.

Why It Matters

The construction cost surge created a squeeze on private real estate development from both sides: rising costs above and falling end-unit prices below. For investors in development-stage real estate funds, return projections based on 2021 cost assumptions were no longer valid. Infrastructure funds focused on Canadian public-private partnerships faced similar repricing, though many had inflation-adjustment clauses that provided partial protection.

Signal to Watch

Building permit data from CMHC — a decline in new permits would signal that developers were pulling back, reducing future housing supply and setting up the next cycle's shortage.

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