By Dov Hertz
The commercial real estate (CRE) sector is closely following the announcement of tariffs by the new administration. While the ultimate fate of these tariffs is up in the air, and delays and negotiations are ongoing, there may well be ripple effects in CRE and in industrial logistics development. The measures, aimed initially at Canada, Mexico, and China, are raising concerns across industries, especially in sectors closely tied to construction and energy.
Understanding the Tariffs and Retaliatory Measures
The recently announced tariffs include a 25% levy on a broad range of imports from Canada and Mexico, initially set to take effect this week and now paused. In response, Canada has threatened a 25% tariff on $30 billion CAD of U.S. goods, with an additional C$125 billion in tariffs anticipated. Mexican President Claudia Sheinbaum has also vowed to retaliate. The retaliatory tariffs from Canada target products like orange juice, whiskey, and peanut butter—goods primarily sourced from states with Republican senators. Other items on Canada’s list include beer, wine, vegetables, clothing, and household appliances.
Energy markets, which are heavily integrated across North America, are also reacting. The administration has imposed a lower 10% tariff on Canadian energy exports to the U.S., acknowledging the sector’s sensitivity. However, this still impacts Midwestern refiners dependent on Canadian oil. Canada’s Trans Mountain pipeline, with its capacity to ship oil to Asia, could redirect resources away from U.S. markets, affecting refineries, especially in California.
Direct Effects on Commercial Real Estate and Industrial Logistics
For the CRE sector, these tariffs could yield mixed outcomes. On one hand, tariffs could spur onshoring of manufacturing, potentially boosting demand for industrial real estate. Warehousing and distribution centers may see increased activity as supply chains adjust to domestic sourcing.
Conversely, increased construction costs are a significant concern. The National Association of Home Builders has already voiced worries, highlighting that Mexico and Canada supply 25% of U.S. building materials. Mexico contributes concrete, cement, roofing materials, steel, glass, and windows, while Canada provides lumber, aggregates, steel, aluminum, and asphalt. Tariffs on these materials could inflate project costs, delay developments, and increase the cost of new construction.
Jay Timmons, CEO of the National Association of Manufacturers, warned that the tariffs threaten to disrupt critical supply chains. Small and medium-sized manufacturers, in particular, may struggle to find alternative suppliers or absorb higher energy costs. These pressures could slow down CRE projects, impacting timelines and budgets.
The Silver Lining for CRE
Despite the challenges, there are potential upsides for certain segments of the CRE market. Existing property owners may benefit from rising replacement costs, as new developments become more expensive and less feasible. This could drive up the value of existing assets, particularly in industrial and logistics sectors.
Ronald Rohde, a Dallas-based attorney specializing in industrial transactions, noted that while increased construction costs could hurt new developers, they might simultaneously benefit existing property owners. Higher replacement costs could lead to increased rents and property values, providing a cushion against the broader economic uncertainties.
Broader Economic Implications
While it is unlikely that these tariffs alone will push the U.S. economy toward a recession, they introduce new layers of economic uncertainty. The strength of the U.S. economy may buffer against immediate downturns, but Canada and Mexico, whose economies are more dependent on U.S. markets, might face more severe consequences.
Inflationary pressures are another concern. Though overall inflation is largely influenced by Federal Reserve monetary policy, prices for tariffed goods are expected to rise. This will directly impact construction materials and, by extension, the cost of commercial real estate projects.
Market Reactions and Future Outlook
The announcement of the tariffs has already roiled markets, jolting stocks by stoking fears of higher prices and retaliatory actions from key trading partners. The CRE market, in particular, faces a period of heightened policy risk and uncertainty. Developers and investors must navigate these challenges while considering the potential for long-term shifts in supply chains and sourcing strategies.
It cannot be clear at this point, but the administration has indicated that these tariffs are not just a negotiating tactic but a fundamental economic strategy. This perspective could lead trading partners to reassess their reliance on the U.S. market, potentially altering global trade dynamics in unpredictable ways.
Waiting to Determine the True Direction of the Current Turmoil
The full impact of the new tariffs remains to be seen. While they may serve as a lever in international negotiations, their immediate effects on commercial real estate could include increased construction costs, supply chain disruptions, and market volatility. Whether these measures will indeed usher in a more dominant American economy, or result in economic strain, will be answered in the next year.
