Trade tensions – What could tariffs mean for Canada’s construction market?

Navigating uncertainty: The impact of the US-Canada tariff debate on CRE

There are significant uncertainties swirling around the ongoing US vs. Canada tariff debate, and the commercial real estate industry is already bracing for potential impact.

“A trade war, if it escalates, will without a doubt have an inflationary impact on Canada as a whole,” says Peter Norman, Vice President and Economic Strategist at Altus Group. If the US follows through on proposed tariffs on Canadian imports, the Canadian government will very likely respond with its own retaliatory tariffs, which will inevitably flow through and contribute to higher inflation. Additionally, a trade war would put downward pressure on the value of the Canadian dollar, making imports even more expensive for Canadians.

Sifting through the latest headlines on trade tensions between Canada and the US is no easy task. From a policy analysis perspective, proposed tariffs remain a moving target. It remains to be seen what the outcome will be on both sides. Tariff amounts, timing, potential carve-outs and how long tariffs could remain in place are all issues that are still very much up in the air.

Such uncertainty is contributing to some hesitation among commercial real estate market participants. “We are seeing delays and a bit of a pause as people try to understand what tariffs are likely to take place and what the impacts are likely to be over the next six months,” says Ray Wong, Vice President, Data Solutions at Altus Group. However, the tariff debate has not stopped transactions and investors remain active. “There’s still demand for good real estate, and investors are focusing on core assets with good returns that will be able to weather the storm, with or without tariffs,” adds Wong.

Clearly, there are a lot of unknowns still to play out. However, digging into different scenarios provides some insight into potential impacts ahead for Canada’s economy, the real estate market and the outlook for construction costs in particular.

Tariff proposals currently on the table:

• The US government has said that it will apply new 25% tariffs on Canadian imports of steel and aluminum products, which are defined similar to the 2018 tariffs. Those tariffs could be in place by March 12th.

• President Trump also has said that the US plans to put a 25% tariff on all Canadian goods, with lesser tariffs for energy. As of February 3rd, that proposal has been paused for 30 days, and it is unknown whether that it will reemerge in its existing format or see changes.

• Canada has responded with its own retaliatory tariffs with 25% tariffs on $155 billion worth of US imported goods. That tariff package also is on hold pending ongoing negotiations with the US.

• On top of all of this, there has been recent communication from the US administration of additional tariffs or other retaliatory measures against Canada and other countries.

Compounding effect. If both of the proposed tariffs were to go into effect, there would be a compounding effect. A 25% tariff would be applied on steel and aluminum going out of Canada. If those materials are used to manufacture products that are then imported back into Canada, they would face an additional 25% tariff. Specific to real estate, that could double the impact and result in higher costs on things such as boilers, chillers and prefabricated steel components.

Inflation would be transitory. Importantly, any inflationary effects directly from the tariffs would be mostly transitory. What that means is that on day one that tariffs go into place, the additional taxes will flow through, and prices will adjust. Unlike systemic inflation, tariffs are generally a one-time hit. They don’t continuously rise year after year.

Gauging the CRE impact

There are multiple implications from the trade tensions with the US. Real estate industry risks are heightened not just by elevated materials costs, but also by negative ripple effects from the macro economy. Slower economic growth could impact demand for space, operating costs and revenue growth. Industrial and retail space users in particular are taking a wait-and-see approach on how tariff threats might impact consumer spending. The industry is also concerned with the exacerbating impact tariffs will have on already sky-high construction costs and government taxes related to new development.

In terms of the broader economic impact, the US is Canada’s most important trading partner. In 2024, the combined value of Canada's imports and exports of goods traded with the United States surpassed the $1 trillion mark (CAD) for a third consecutive year. According to Statistics Canada, the US was the destination for 76% of Canada's total exports and origin for 62% of total imports.

Specific to real estate, Canada is generally not significantly reliant on US imports for its construction materials. According to an analysis by Altus Group, US import intensity for construction costs (materials and labour) is roughly 8.1% of total cost of construction. “Canada’s construction sector, by and large, is a domestic sector,” says Norman. One of the big exposure areas is mechanical equipment, with over 40% of HVAC and mechanical equipment imported from the US.

Outlook for construction costs

The concern for the construction industry is that tariffs are layering on top of already high construction costs and government taxes related to new construction. Although inflationary pressure on construction costs has stabilized over the past year, costs remain significantly higher than they were pre-pandemic. For example, the cost of building low-rise housing in the Greater Toronto Area is double the cost it was five years ago, while the cost of building a high-rise apartment is about 75% higher.

Elevated construction costs, including significant government taxes and fees, are already making it challenging for developers to move forward with new projects.

“The result is probably a little bit more re-evaluation of pro forma numbers, and the expected returns needed to justify these projects, which could hamper new construction going forward,” says Wong.

Another important point to highlight regarding tariffs is that people don’t just automatically absorb the higher costs. They substitute away from imported goods that carry high tariffs, notes Norman. The question for Canada’s domestic construction sector, even with a relatively small percentage of materials coming from the US is how many of those materials can be sourced outside of the US?

For example, Canada imports a lot of gypsum (drywall) from the US but is also a larger domestic producer of gypsum. Similarly with HVAC and mechanical equipment, there is a high import ratio from the US on this equipment, but other sources include Germany, China and other countries. So, while tariffs are concerning, there also are some mitigating factors that can potentially come into play to lessen the impact on costs.

Uncertainty fuels hesitation

Hesitation will likely remain in the market until there is more clarity on trade policy on both sides. However, most real estate owners and investors are looking at real estate through the lens of medium and long-term strategies. “At this stage, it’s unclear how long tariffs could be in place. So, the overall duration is another aspect that decision-makers are trying to weigh out as they consider any adjustments to portfolios or new plans,” says Wong.

In the midst of the uncertainty around potential tariffs, what is clear is that there are elevated tensions right now between the US and Canada with the real possibility of tariffs on both sides. There's a good possibility that these tariffs are going to affect the real estate sector in general, and the construction sector more specifically related to building materials and equipment.

Despite the limited exposure to US imports for the construction industry, the trade environment does have important economic consequences for Canada which poses additional risk to the broader commercial real estate market. Real estate is sensitive to macro conditions that could very well impact operating and construction costs, as well as real estate fundamentals.

“We’re dealing with a lot of uncertainty. I would caution companies not to overreact based on speculation until we know what policies will actually be put in place,” adds Wong. “Real estate fundamentals, with the exception of office, are still good. So, the key right now is to stay focused on market fundamentals, managing efficiencies and doing the necessary homework to make sure that numbers are sound going forward without overly speculating on the market.”

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