CLI Points to Stable Commercial Real Estate Activity Next Year

Thursday, November 26th, 2015


The BCREA Commercial Leading Indicator (CLI) declined for a second consecutive quarter, falling 0.2 index points in the third quarter to 120.0. The index was still 1.2 per cent higher year-over-year, due to strong momentum from 2014 that carried into the early months of this year. 

Consecutive negative quarters registered in the CLI index means that the three quarter trend in the CLI has flattened out. In the past, this has signaled zero to minimally positive growth in commercial real estate activity over the next two to four quarters. The CLI trend smooths often noisy economic data and is herefore a more reliable indicator of future growth in investment, leasing and other commercial real estate activity. 

While the CLI has turned negative over the past six months, economic growth in BC remains very strong, particularly in the retail sector. Provincial retail sales are up 7 per cent year-to-date, the strongest growth since 2007. Meanwhile, a recovering Canadian economy and continued strength in the US economy has provided a boost to the manufacturing and trade sector in the second half of 2015. Indeed, as measured by the economic activity component of the CLI, the economic climate for commercial real estate remains very attractive for the foreseeable future. 

Employment in BC has picked up recently, but job growth in sectors that tend to lead commercial real estate activity was essentially flat in the third quarter. Average office employment declined by 3,400 jobs over the third quarter and is now at its lowest point since 2013. That decline was partially offset by second consecutive quarter of rising manufacturing employment. The manufacturing sector added about 2,400 jobs over the third quarter and is now up four per cent compared to 2014. 

Finally, falling appetite for Canadian Real Estate Investment Trusts (REITs) and an overall downturn in financial markets in the third quarter led to a decline in the CLI financial component. Overall, weakness in financial markets and modest employment losses overwhelmed strong gains in provincial economic activity to pull the CLI down in the third quarter. A flat underlying trend in the CLI points to stability in commercial real estate activity on the horizon, though a very strong economic climate in the province should continue to support modest growth. 

Variation in the Commercial Leading Indicator can be broken out into three distinct components: 

»The economic activity component of the CLI follows the overall trend in the BC economy and reflects    changes in economic variables shown to lead commercial real estate activity.

»The employment component reflects changes in the commercial real estate environment due to changes  in the overall business cycle.

»The financial component acts as an early warning indicator from financial markets that could signal turning points in the commercial real estate market.

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