West Island Industrial Real Estate in the Current Canadian Economy-Sept 2017

A brief by John Burrascano, Industrial Commissioner, September 20, 2017

Introduction

In my January, 2017 report, I stated that there were definite signs that the province of Québec and Montreal were poised to perform better in the near future. Now in September, it is confirmed that the overall Canadian and Québec economies have accelerated and Montreal's West Island region is very active and benefiting. There are, however, a few concerns posing potential problems for the overall Canadian economy in the short-to-medium-term.

In a very recent report, the economic performance of advanced countries for 2016 has been described as "dismal" by the National Bank of Canada (September, 2017). Based on the same report, it has become apparent, however, that these economies are currently performing quite well reaching moderate economic growth levels in GDP. This positive trend also extends to strengthening emerging economies. This certainly bodes well for global levels of growth in GDP. Expected, is similar economic performance for 2018. American, Canadian, Euro zone countries, Chinese, and Japanese economies have all experienced real gains in recent quarters across key economic indicators such as, international trade, consumption levels, investment, and employment. In fact, National Bank of Canada's forecasts call for an above average moderate performance of 3% Canadian GDP growth for 2017. This is the highest level of growth attained in the last six years. Canada's projected gain in annual GDP is higher than that of the United States, expected to post 2.2% for 2017.

The Province of Québec and Montreal and its West Island region is benefiting from higher levels of global economic vibrancy. According to Jones-Lang-LaSalle's Industrial Insight Report for Q2, 2017, the West Island submarket, excluding Lachine and Ville St-Laurent, experienced increased industrial leasing activity in Q2 in comparison to the first quarter. The same report states that the sale of industrial buildings also rose during the second quarter.

Colliers International's Industrial Market Report for Q2, 2017 indicates an industrial vacancy rate of 4.0% for the West Island region (excluding Lachine). This is a very good performance when considering that the Greater Montreal Metropolitan Area's industrial vacancy rate stood at 4.1% for the same period.

Immediate Threats to Continued Economic Growth

The world's major economies are growing for the first time since the financial crisis of 2008. However, this success is still not very strong and is delicately held together. There are a few key issues in the world economy that pose short-to-medium-term threats to continued prosperity and global economic growth:

First, Desjardins Bank's Economic and Financial Outlook report of August 24, 2017 says that the U.S.-North Korean conflict as well as the overall difficulties that the Trump administration is experiencing are causing concerns resulting in more limited stock market gains and continuance of lower bond yields. Investors want the U.S., the Euro zone, and Japan to continue providing enticing monetary policies.

Second, Appelbaum (August 27, 2017) says economic protectionism and resultant decline in overall international trade has been on the rise globally since the financial crisis of 2008. Brexit is a good example and America has not been shy in conveying her wish for a more protectionist policy. Protectionism aims at imposing restrictions on imports and diminishing the free-flow of goods between countries, posing a threat to higher levels of world economic activity.

Third, on September 8 of the present year, President Trump, in agreement with Congressional Democratic leaders signed a Bill increasing the debt ceiling to December 8, 2017. The debt now exceeds $20 billion for the first time in U.S. history. Appelbaum (August 27, 2017) says a pressing threat for the world economy is any deadline for the American congress to raise the federal "debt ceiling", allowing the government to borrow money to pay its bills. A default of these payments would cause major repercussions for the economy.

Fourth, Appelbaum (August 27, 2017) continues by stating that financial deregulation poses another threat to the current economy. Financial deregulation provides more freedom to financial companies to compete in the market place. Finance companies can now offer commercial and investment banking as well as act as an insurance company if they so desire. It is often said that the freedoms these financial entities have been given create great industry competitiveness and conflicts of interest. It has been said that lesser restrictions in how finance firms help clients caused or fuelled the financial crisis of 2008, such as the easy lending of money for many uses, including the purchase of real estate property-- to those who really could not afford it. The Trump administration leans toward more deregulation posing a threat to the stability of the economy.

Finally, closely related to the issue of financial deregulation is the question of household debt. According to Carmichael (August 28, 2017) some argue that the cause of the 2008 financial crisis was not the downfall of the banks but lack of consumer spending. Looser American monetary controls of the time allowed banks to more easily fund consumers such as in the purchase of homes that in a lot of instances, consumers could not afford. Interest rates were kept very low for a very long period of time in order to achieve some degree of economic momentum. The low interest rates caused consumers to spend. Much of the spending was financed by record breaking household debt, but wages were almost not keeping pace with inflation. Once households realized they were highly indebted, they stopped spending, causing a collapse in demand throughout the economy. Thus, household debt is a threat to economic performance and growth. It is feared that something similar could happen in Canada because Canada's recent economic success has been dependent, to a large extent, on consumer debt.

Conclusion

West Island industrial real estate is propelling along nicely, maintaining a very respectable average vacancy rate of 4% in a global climate of moderate economic activity. Higher levels of demand for industrial space has been confirmed. As always, the West Island economy is reliant upon strong Canadian and Provincial economic performance. There are, however, some threats to the rosier picture presented herein. American political uncertainties, her protectionist stance, debt ceiling levels, possible further monetary deregulation, and continued concern with North American household debt levels pose looming problems for the world economy. In order to maintain the good course toward higher levels of economic growth, governments will have to skillfully steer through these and other potentially dangerous economic obstacles.

Thus, the general economy is performing better than in recent history and the Montreal and West Island positive industrial real estate market is proof of this, but, I remain only cautiously optimistic at this time because of the mine field of potential economic problems facing all of us. We are still not working with an overall global economy that is in very high gear.

Bibliography

Appelbaum, Binyamin
Bankers and Economists Fear a Spate of Threats to Global Growth. The New York Times, August 27, 2017 (Retrieved online August 27, 2017).

Carmichael, Kevin
Canada's economy is riding a wave of consumer debt, But for how long? Canadian Business, August 28, 2017 (Retrieved online August 28, 2017).

Colliers International
Industrial Market Report (statistics), Q2, 2017.

Desjardins Bank
The Québec Economy is Surprisingly Strong. Economic & Financial Outlook report. By Desjardins Bank Economic Studies, August 24, 2017.

Jones-Lang-LaSalle
Industrial Insight Report-Greater Montreal Area. Q2, 2017. Published by Jones-Lang-LaSalle, 2017.

National Bank of Canada
Monthly Economic Monitor. Published by National Bank of Canada; Financial Markets--Economics and Strategy, September, 2017.