Building anything in Canada costs more than it did five years ago. A lot more.
Let’s talk about construction costs, why they’re elevated, and what it means for real estate development and financing.
The Cost Increase Reality
Start with the numbers. Construction costs in Canada have increased 25% to 40% since 2019 depending on project type and location.
A multi-family residential building that cost $250 per square foot to build in 2019 might cost $325 to $350 per square foot today. Industrial buildings went from $120 per square foot to $160 per square foot. Commercial office from $300 per square foot to $400+ per square foot.
These aren’t small adjustments. They’re fundamental cost increases that change development economics.
What’s driving this? Several factors that have compounded.
Labor Costs and Shortages
The construction industry faces significant labor challenges.
Skilled trades shortages across most of Canada. Carpenters, electricians, plumbers, we don’t have enough of them. Demographics are part of the issue: older tradespeople retiring, not enough young people entering trades.
Immigration helps somewhat, but it takes time for newcomers to get credentialed and experienced in Canadian building practices.
The result is wage inflation. Construction wages have increased 15% to 25% over the past five years in most markets. When you can’t find workers, you pay more for the ones you can find.
Labor productivity hasn’t kept pace with wage increases. So labor cost per unit of output has risen significantly.
For developers and lenders, labor costs are now a much larger portion of total construction costs than they were five years ago.
Material Cost Inflation
Building materials costs have been volatile but elevated.
Lumber prices spiked dramatically during the pandemic, then crashed, then recovered to levels well above historical norms. They’re not at pandemic peaks but still elevated.
Steel and concrete prices have increased steadily. Rebar, structural steel, ready-mix concrete, all cost notably more than five years ago.
Drywall, insulation, roofing, electrical components, plumbing fixtures, the list goes on. Almost every material input costs more.
Some of this was supply chain disruption during pandemic. Some is continued demand pressure. Some is input cost inflation (energy, transportation, labor in manufacturing).
Material costs have stabilized compared to 2022 but haven’t come back down to pre-pandemic levels.
Supply Chain Considerations
Supply chains have improved since pandemic disruptions but aren’t back to pre-2020 function.
Lead times for many materials and equipment remain longer than they were. Something that used to take four weeks might take eight weeks now.
This affects construction schedules and creates carrying costs for developers. Delayed material deliveries mean construction takes longer, which means more interest costs on construction loans.
Some materials have ongoing supply constraints. Certain types of specialized equipment, electrical transformers, specific building components can have months-long lead times.
Developers need to plan for these delays, order materials earlier, and budget for schedule slippage.
Lenders are scrutinizing construction schedules more carefully because delays can blow up project economics.
Regulatory Costs
Government fees, permits, and requirements have increased significantly.
Development charges that municipalities impose on new residential units have increased 40% to 60% in many Ontario cities over five years. These can be $50,000 to $100,000+ per unit in some areas.
Building code requirements continue to become more stringent. Energy efficiency, accessibility, fire safety, seismic resistance, each new code cycle adds cost.
Environmental approvals take longer and cost more. Environmental site assessments, remediation, wetland assessments, species habitat studies.
Parkland dedication or cash-in-lieu requirements take more value from development projects.
The cumulative effect is that “soft costs” (fees, permits, professional services, financing during approvals) represent much larger portions of total development costs than historically.
Impact on Development Economics
Higher construction costs fundamentally change development math.
A residential project that would have generated 18% to 22% return on cost five years ago might generate 10% to 14% today with the same unit prices. The cost increases haven’t been fully recovered through price increases.
This is making marginal projects uneconomic. Developments that would have penciled out at $300 per square foot construction cost don’t work at $375 per square foot.
The result is that less development is happening. Projects are being deferred, redesigned to reduce costs, or cancelled entirely.
The supply response to housing demand that we need isn’t happening as much as it should because economics don’t work for many potential projects.
What Developers Are Doing
Developers are adapting in several ways.
Value engineering: Reducing costs through design changes, material substitutions, scope reductions. Cheaper finishes, simpler layouts, fewer amenities.
Phasing: Breaking large projects into smaller phases to manage risk and respond to market changes.
Alternative materials: Considering mass timber, prefabrication, modular construction to reduce costs or speed construction.
Site selection: Choosing sites with lower land costs or simpler approvals to offset higher construction costs.
Negotiating harder: Competitive bidding for all trades and materials, negotiating fixed-price contracts, value engineering in collaboration with contractors.
Seeking subsidies: Government programs offering grants or low-cost financing for certain project types (rental housing, affordable housing).
These strategies help but don’t fully offset cost increases.
Lender Responses
Construction lenders have adapted their underwriting to higher cost environment.
More conservative cost assumptions. Lenders are using higher cost per square foot estimates in their underwriting and building in larger contingencies.
Shorter budget timeframes. Cost escalation means budgets from a year ago are outdated. Lenders want recent cost estimates.
Scrutiny of contractor capability. Can the general contractor actually deliver at the quoted price? Or will there be change orders and overruns?
Monitoring construction progress more closely. Site inspections to ensure work is progressing and budget is being managed.
Holding larger contingency reserves. Rather than releasing all funds, lenders hold back more for potential cost overruns.
Requiring more developer equity. Instead of 25% equity, lenders might want 30% to 35% because cost overrun risk is higher.
All of this makes construction financing harder to get and more expensive.
Cost Overrun Risk
The biggest lender fear in construction financing is cost overruns.
If a $10 million project ends up costing $11.5 million, someone has to fund that extra $1.5 million. Lenders typically won’t increase their loan, so it falls on the developer.
Developers who don’t have reserves to cover overruns face serious problems. The project might stop mid-construction. The lender might need to step in. The outcome is usually bad for everyone.
This risk has increased with construction cost volatility. It’s harder to estimate final costs accurately, which means overruns are more likely.
Lenders protect themselves by lending conservatively, requiring equity cushion, and closely monitoring progress.
Different Project Types
Construction costs affect different project types differently.
Multi-family residential: Very sensitive to cost increases because unit sale prices or rents haven’t increased proportionately. Many projects that were viable at 2019 costs aren’t viable today.
Industrial warehouses: Less sensitive because industrial space is in high demand and rents have increased substantially. Higher construction costs can be absorbed through higher rents.
Office buildings: Almost no new office construction because demand is weak. Cost increases are somewhat irrelevant if you’re not building anyway.
Retail: Very little new retail construction due to sector challenges. Cost increases matter for renovations and retrofits.
Institutional (schools, hospitals, government): These get built despite costs because they’re needed, but budgets are stressed and projects are scaled back.
From a financing perspective, industrial development is still active despite cost increases. Multi-family is selective. Other sectors are mostly quiet.
Regional Variations
Construction costs vary by market.
Toronto and GTA: Highest construction costs in Canada. Labor is expensive, regulation is intensive, and land costs are extreme. But demand supports development.
Vancouver: Similar to Toronto in terms of high costs and regulatory challenges. Limited land makes development expensive.
Calgary and Edmonton: Lower construction costs than Toronto or Vancouver but still elevated from historical levels. More land availability helps.
Montreal: Moderate construction costs relative to Toronto. Different building traditions and lower labor costs.
Smaller markets: Lower construction costs but also lower end-unit values. Economics might not be better proportionally.
Understanding regional cost structures is essential for development financing.
Prefabrication and Modular
One potential solution to cost issues is offsite construction.
Prefabrication of building components in factories rather than on site can improve quality, reduce waste, and potentially lower costs.
Modular construction where entire room modules are built in factories and assembled on site is being used for multi-family and hotels.
Mass timber construction using engineered wood products is growing, particularly in BC.
These approaches have promise but aren’t yet dominant. Adoption is increasing but faces obstacles: financing unfamiliarity, code approval challenges, limited supply chain.
Lenders are learning to finance alternative construction methods but remain more comfortable with conventional construction.
The Approval Timeline Factor
One underappreciated cost driver is long approval timelines.
In many Canadian cities, getting development approvals takes two to four years from application to permit. That’s holding costs, professional fees, and uncertainty that add significantly to project costs.
Even after approval, building permits can take months to issue if there are backups at building departments.
Every month of delay costs developers money in carrying costs, which needs to be recovered through higher unit prices or rents.
Faster approvals would reduce costs even if construction costs themselves don’t decline. But approval processes are largely getting slower, not faster.
Government Incentives
Governments recognize that construction costs are constraining housing supply and have created incentives.
CMHC MLI Select: Favorable financing for rental housing construction. 90% LTV at favorable rates.
Provincial housing programs: Various provinces offer grants, low-cost loans, or tax incentives for rental housing development.
Municipal incentives: Some cities offer development charge deferrals, permit fee waivers, or expedited approvals for certain project types.
Federal Accelerator Fund: Funding to municipalities that improve approval processes and incentivize housing construction.
These help but don’t fully offset cost increases. For developers who can access incentives, they improve project economics significantly.
Looking Forward: Will Costs Come Down?
The question everyone asks: will construction costs decline?
Material costs might moderate somewhat if commodity prices ease. But they’re unlikely to fall back to 2019 levels.
Labor costs are sticky downward. Wages don’t typically decline. Best case is that wage growth slows but wages don’t fall.
Regulatory costs only go one direction: up. Building codes get more stringent, development charges increase.
The realistic outlook is that construction costs stay in roughly current ranges, perhaps growing modestly with inflation. We’re not going back to 2019 costs.
What might help: productivity improvements through technology, increased prefabrication and modular construction, regulatory streamlining (unlikely), improved supply chains.
For developers and lenders, planning assumption should be that costs stay elevated.
Financing Strategies
If you’re seeking development financing in 2026, here’s what helps.
Bring more equity. Lenders want 30% to 40% in many cases. More equity improves your approval chances.
Have detailed cost estimates. Professional quantity surveyor or cost consultant estimates, not back-of-envelope numbers. Lenders need confidence in budgets.
Lock in pricing where possible. Fixed-price construction contracts or locked-in material pricing reduce risk.
Build realistic contingencies. 8% to 12% contingency depending on project type and complexity. Don’t underbudget.
Demonstrate contractor capability. Use experienced contractors with track records completing similar projects on budget.
Show market demand. Pre-sales for condos, pre-leasing for commercial, market studies showing demand. Lenders need confidence projects will sell or lease.
Work With Development Finance Specialists
Construction and development financing in the current cost environment requires expertise.
At Creek Road Financial Inc., we work with developers across project types and regions. We understand construction costs, lender requirements, and how to structure development financing for approval.
Whether you’re planning residential development, commercial construction, or industrial projects, we can help you navigate the financing landscape and secure competitive terms.
Let’s discuss your development financing needs and explore solutions that work in today’s cost environment.