Rate cut good news for developers – but finding labour could be a ‘challenge’, Colonnade BridgePort CEO says

October 23, 2024

Colonnade BridgePort CEO Hugh Gorman said Wednesday that interest rates are “trending in the right direction” after the Bank of Canada cut its benchmark rate by half a percentage point to 3.75 per cent.

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The Bank of Canada’s latest supersized interest rate cut is good news for developers, a leading Ottawa real estate executive says – but he cautions that a looming labour shortage could dampen any momentum for new housing projects that cheaper financing costs might generate. Colonnade BridgePort CEO Hugh Gorman said Wednesday that interest rates are “trending in the right direction” after the Bank of Canada cut its benchmark rate by half a percentage point to 3.75 per cent. The central bank signalled its policy rate will likely continue falling in the coming months, which Gorman called a positive step for real estate developers because lower interest rates typically translate into lower capital borrowing costs for big construction projects. “If we didn’t start to see rate cuts, we would have been nervous, because we’ve kind of priced rate cuts coming in all of our financial forecasting and modelling. This is just validating what we anticipated we would see,” the head of Ottawa’s largest privately owned commercial property management firm explained in an interview with OBJ. “I was a little hopeful that we might have seen (a 75-basis-point cut) today. If you look at … economic growth, core inflation, housing, they’re all well below (the Bank of Canada’s) targets. I think they could afford to be more aggressive than they’ve been.” Analysts generally reacted positively to Wednesday’s rate reduction. Peter Norman, head of economic consulting at Toronto-based real estate consulting firm Altus Group, said the move should “serve as a boost in sentiment” for developers, although he added that further cuts are needed to trigger a “meaningful boost” in construction activity. “Developers have told us before that we will need to see cuts of 200 to 300 (basis points) to really move the needles on pro formas,” Norman said in a company blog post on Wednesday. “We are now 125 (basis points) into a cutting cycle so, once again, I think we can expect a surge in confidence sometime in 2025.” Gorman agreed that builders with projects that are “on the cusp” of going ahead might feel more confident about giving those projects the green light later this year or in 2025. At the same time, however, he contends that cheaper financing alone won’t be enough to kickstart the level of construction activity needed to fully address Ottawa’s housing shortage. “Our concern going into 2025, if rates continue to (fall), will be if a number of projects start to get going at the same time, does it mean we’re labour-constrained on the construction side?” Gorman said. “Will it slow down potential development? I fundamentally think that’s going to happen. I don’t think we’re going to see as many projects as we need … because I think we’ll run into (a shortage) of capability as it relates to the labour pool and being able to get enough (tradespeople) to get the work done. When that becomes scarce, prices go up.” Gorman noted that his company expects to break ground on three major developments over the next 12 months. He said that while Colonnade BridgePort isn’t experiencing any labour shortages right now, that could change quickly if other companies decide to launch their own multi-residential and mixed-use builds in the coming months. Meanwhile, construction activity is also expected to ramp up at sites such as The Ottawa Hospital’s new multibillion-dollar Civic campus, which will put even more pressure on firms looking for workers, Gorman added. “Once these big infrastructure projects start eating up the labour pool and then you start adding private-sector development to the mix, it doesn’t take long for the (labour) market to become really tight,” he said. “It’s not an issue right now, but if we end up with a bunch of new projects hitting the street, I anticipate it will become a challenge.” With margins already razor-thin on most multi-residential projects, he said a jump in labour costs could be enough to make some builders think twice about taking the plunge. “If construction costs end up spiking, it’ll make it difficult to get projects up out of the ground,” Gorman said. “The question is, from a market perspective, can we support a rush of new development?”