The British Columbia Real Estate Association (BCREA) Economics Commercial Leading Indicator (CLI) update was released on May 29, 2024.
In the first quarter of 2024, the BCREA’s Commercial Leading Indicator (CLI) experienced a decline, falling by 3.2 points to a level of 145.5. This drop brought the six-month moving average of the CLI down to 146.5. When compared to the same quarter in the previous year, the index registered a 1% decrease. These metrics are significant for corporate real estate investors and other stakeholders, as the CLI is designed to forecast changes in broad commercial real estate activity across British Columbia.
The BCREA reports that the variables tracked by the CLI can reliably predict changes in commercial real estate activity, with a lag of two to four quarters, so current readings can suggest potential shifts in the commercial real estate market later in the year. The index itself undergoes quarterly revisions to incorporate updates to the underlying data, ensuring its accuracy and relevance.
The CLI is structured around three primary components, each capturing different aspects of the commercial real estate environment in British Columbia. An economic component, an employment component, and a financial component combine together to determine the CLI.
Highlights from Q1 2024
Economic Component
This tracks broad economic trends. Changes in these variables often precede shifts in commercial real estate activity, providing a gauge of the economic environment that commercial real estate depends on.
This segment of the CLI saw a decline in the first quarter. Specifically, there was a reduction in inflation-adjusted retail trade by 1.7%, wholesale trade by 2.5%, and manufacturing sales by 5.3% from the previous quarter. These declines collectively drove down the economic component of the CLI, signalling a potential slowdown in the broader economy.
Employment Component
This reflects employment trends within the commercial real estate sectors. Changes in employment, following shifts in overall business cycles, serve as a barometer for the overall health of the business sector, which can influence demand for commercial spaces.
Employment in office-related sectors, including financial services, insurance, real estate, and professional services, fell by 0.4% in the first quarter. Additionally, employment in the manufacturing sector decreased by 1.3%. These declines in employment contributed negatively to the overall CLI, reflecting a weaker business cycle.
Financial Component
The financial component tracks financial market signals that are associated with turning points in the commercial real estate market, to act as an early warning indicator.
The financial aspect of the CLI also saw a downturn. Prices for Real Estate Investment Trusts (REITs) dropped significantly by 8.5%, which negatively impacted this component of the index. However, this negative impact was partially offset by lowered interest rate spreads for the second consecutive month. Lower spreads indicate reduced borrowing costs for companies relative to the government, amidst expectations of future interest rate cuts. While this easing in borrowing costs mitigated some of the adverse effects due to falling REIT prices, the financial component still ended slightly negative for the quarter overall.