Commercial Leading Indicator Dips in Third Quarter 2021

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The BCREA Commercial Leading Indicator (CLI) fell from 155.4 to 150.9 in the third quarter of 2021, representing the first decline since the economy began recovering from the COVID-19-induced recession. Compared to the same time last year, the index was up by 9 per cent.

It is important to note that while the economy generally continues recovering strongly, we are still in a very abnormal and uncertain environment for commercial real estate. Therefore, the strong economic and employment growth we have seen in previous quarters may not translate directly to improved conditions in the commercial real estate market.

The CLI declined in the third quarter due to a drop in the economic activity component of the index, which was the result of lower manufacturing sales. That decline in manufacturing was primarily due to a reversal in lumber prices following their historic run-up in the first half of the year. The economic activity component of the CLI was also negatively impacted by an 8.3 per cent decrease in wholesale trade, while retail sales declined 1.5 per cent primarily due to a 5.5 per cent quarterly decline in motor vehicle sales as a result of the ongoing semiconductor chip supply shortage. These negative economic factors combined to drive the quarterly decline in the CLI.

Employment in key commercial real estate sectors such as finance, insurance, and real estate (FIRE) increased in the third quarter, rising by 2,000 across the province to a record high for the sector. As a result, for a fourth consecutive month the office employment component of the index hit an all-time high. However, the effect of this strong employment growth on the demand for office space remains unclear as many nominal “office workers” continue to work remotely. Manufacturing employment also remained essentially flat in the third quarter.

The CLI’s financial component made a positive contribution to the index for a fourth consecutive quarter, while REIT prices hit fresh records. Risk spreads between corporate and government debt remained very tight.