Article from Volume 8, Issue Number 3, 2021

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A Replacement Cost Challenge - Summer 2021

By Pamela Pyke, Marsh Canada Ltd. | Other articles by Pamela Pyke, Marsh Canada Ltd. | Feature

According to Statistics Canada, the year over year increase in construction costs in a single-family home was an average of 14.6%. In Winnipeg, the quarterly increase was 3.5%.

It is no secret to anyone in the development or construction business that multi-family residential construction costs are rising due to the global pandemic’s impact on labour and material costs.  Labour costs are impacted by the requirements of social distancing which has resulted in reduced productivity.  Material costs for lumber have increased due to plant shutdowns and increased product demand as homeowners divert their planned travel dollars into home reno dollars.  

A recent report by RE/MAX revealed that more than half of Canadians renovated their homes in 2020.  Anyone who has built a fence or a deck will confirm that lumber costs have skyrocketed. And while the cost of lumber is coming down, (the cost of 8 foot-long two by fours dropped from a record cost of $2,100 per thousand board feet in late April 2020 to $1,300 per thousand board feet in June of 2021), construction costs are not expected to return to pre-pandemic levels for quite some time. Certainly not in 2022 according to experts.  Further, it is not only lumber pricing that has been impacted, costs for other materials such as sheet metal and concrete, have also seen significant increases.

While this may be of interest, how does this relate to our condominium community?  As everyone who has taken the Condo 101 course knows, it is a requirement of Section 185 (3) of the Manitoba Condominium Act for the Board to place insurance on the condominium property on a ‘replacement cost’ basis. As you can imagine, it is challenging given these factors for the Board to insure the condominium property at replacement cost.

One solution to ensure you are meeting your obligation as a director in these challenging times is to have your building appraisal updated now.  Section 185(9) of the Manitoba Condominium Act requires that an appraisal be obtained before the first unit is occupied and every five years thereafter.   However, given the current volatility in costs it certainly seems prudent to revisit your appraisal now.

In the recent past, it was quite common to increase building values by 3% per year or some such other nominal factor. It is obvious that in the current situation this would not be prudent.  Statistics Canada data indicates that residential construction costs in Winnipeg have increased 7.69% in the last year.  This is of course an average and would vary depending upon the type of building (townhomes vs apartment-style condominiums for example) and type of construction (wood frame vs concrete).

Of course, another thing we are seeing is significant increases in insurance rates.  So, it is a ‘double whammy’ – not only is your rate going up but your values need to be increased significantly as well.  That being said, insurers do look more favourably on risks with current building valuations.

There are important conversations to be had as Boards do their due diligence when it comes to ensuring obligations are met with respect to property valuation and insurance.  

Pamela Pyke, BPA, CIP
Marsh Canada Ltd.

1 Manitoba Condominium Act https://web2.gov.mb.ca/laws/statutes/2011/c03011e.php#A185