ECONOMICS

Commercial Leading Indicator

December 2023

COMMERCIAL LEADING INDICATOR RESUMES DECLINE IN THIRD QUARTER 2023

The BCREA Commercial Leading Indicator (CLI) fell 0.6 points to 145.5 in the third quarter of 2023, while the six-month moving average fell to 146.3 points. Compared to the same quarter in 2022, the index was down by 3.2 per cent.

It is important to note that the environment for commercial real estate remains highly abnormal
and uncertain. The CLI is designed to interpret economic and office employment growth as positive indicators for commercial real estate demand. The recent strong growth in these indicators may not translate as readily into improved commercial real estate market conditions due to structural changes in the economy caused by the COVID-19 pandemic.

The CLI rose in the employment category while declining in the economic and financial categories.
A 5 per cent increase in office employment (finance, insurance, and real estate) more than counteracted
a 2 per cent drop in manufacturing employment, causing a net increase in the index’s employment component from the second quarter. Meanwhile, modest declines in inflation-adjusted retail sales, wholesale trade, and manufacturing sales combined to pull the economic component into negative territory. Finally, rising spreads between corporate and government borrowing costs indicated growing borrowing costs for developers and pulled the financial component downwards. At the same time,
a drop in average prices of Real Estate Investment Trusts (REIT) further dragged the financial component into negative territory.

BCREA Commercial Leading Indicator December 2023

Commercial Leading Indicator Components

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

• The economic component of the CLI tracks the overall trend in the BC economy and reflects changes in economic variables that have been demonstrated 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 is an early warning indicator from financial markets that could signal turning points in the commercial real

  estate market.

Additional economics information is available on BCREA’s website at: bcrea.bc.ca.

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Q3 Highlights:

• The economic activity index fell in the third quarter. Inflation-adjusted retail trade, wholesale trade, and manufacturing sales each declined.

• Office employment (financial, insurance, real estate, and professional services) grew in the second quarter while manufacturing employment continued to drop. Overall, the employment component contributed positively to the index.

• The financial component of the index fell in the third quarter. Falling REIT prices drove the decline. Rising interest rate spreads, which indicate higher borrowing costs for companies relative to the government, further contributed to the decline in the financial component.

  
  

Commercial Leading Indicator is published quarterly by the British Columbia Real Estate Association. Real estate boards, real estate associations and REALTORS® may reprint this content, provided that credit is given to BCREA by including the following statement: “Copyright British Columbia Real Estate Association. Reprinted with permission.”

BCREA makes no guarantees as to the accuracy or completeness of this information.

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