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CLI Points to Flattening Commercial Real Estate Activity in 2019

The BCREA Commercial Leading Indicator (CLI) declined by 1.8 points to an index level of 134.5 from the third to the fourth quarter of 2018. Compared to this time one year ago, the index is about 1 per cent lower.

Slowing provincial economic activity continued in the fourth quarter, led by weak retail sales and a fourth quarter drop in manufacturing shipments in the forestry sector. Adding to those declines were falling manufacturing employment and a jump in short-term credit spreads. As a result, each component of the CLI posted a decline in the fourth quarter. Recent volatility in the CLI has left the underlying trend in the CLI flat over the past two quarters, signalling a slower growth environment for commercial real estate activity.

Following several years of robust growth, the BC economy slowed in 2018. The economic activity component of the CLI reflected that slowdown, posting declines in three out of four quarters in 2018. A major deceleration of retail sales growth, from over 9 per cent in 2017 to just 2 per cent in 2018, and stalled growth in the wholesale trade and manufacturing sectors were the main drivers of the lower economic activity component in the fourth quarter.

Employment in key commercial real estate sectors was mixed in the fourth quarter. Average employment in the office sector was up by 2,200 jobs from the third to the fourth quarter with gains concentrated in the professional, scientific and technical services industries. The CLI measure of office employment now sits at an all time high, which signals strong future demand for office space. Manufacturing employment, however, declined by 4,500 jobs and is now at its lowest level since the first quarter of 2017.

The CLI’s financial component was also lower as short-term borrowing costs jumped and the benchmark for Canadian REIT prices fell along with the wider equity markets at the end of 2018.

Q4 Highlights:

Economic Activity: Retail sales increased 0.7 per cent after adjusting for inflation in the fourth quarter but were just 2 per cent higher in nominal terms for all of 2018. Wholesale trade fell for a second consecutive quarter, declining 2.1 per cent in real terms in the fourth quarter. Sales in the manufacturing sector also fell for a second straight quarter, down 2.6 per cent.

Employment: The benchmark index for Canadian REITs declined 2.5 per cent to end the year, dragged lower by the correction in global equities that occurred at the end of 2018. Heightened credit risk towards the end of the year also caused short-term credit spreads to widen to their highest level since 2009.

Financial: The CLI employment component was dragged into negative territory as falling manufacturing employment offset rising job growth in the office sector, particularly for professional, technical and scientific services.

About the CLI

The BCREA Commercial Leading Indicator was designed to forecast changes in broad commercial real estate activity. Research shows that the variables that compose the CLI reliably forecast BC commercial real estate activity at a lag of two to four quarters. The index is revised each quarter due to revisions to the underlying data.

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 BC’s 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.

(Source: BCREA. Reprinted with permission.)