The ‘If' in Tariffs - A Call for Patience | CBRE Canada | Face aux tarifs douaniers : Prendre le temps d'analyser

In this email:
Current State of Affairs | Economic Consequences | CRE Implications

Executive Summary

Tariff negotiations remain unpredictable, and impacts and outcomes are variable.
For now, Canada has negotiated a delay on the U.S. tariffs of at least 30 days which effectively resets the deadline to early March 2025.
If enacted and sustained, tariffs and retaliatory measures would weaken Canada’s already low-growth economic outlook, resulting in a recession and job losses, followed by contraction in demand for commercial real estate space.
Patience is called for, given the uncertain and evolving environment.
Uncertainty risks hindering business decisions over the near term, which could impact leasing and investment velocity.

Current State of Affairs

The U.S. is threatening to enact 25% tariffs on all Canadian goods and 10% on Canadian energy and critical minerals starting in early March 2025.
The 30-day pause comes as a result of several Canadian commitments, including the previously announced $1.3 billion Canada’s Border Plan, assurances on border security personnel, appointing a “fentanyl czar”, as well as launching a joint strike force to combat organized crime, fentanyl and money laundering.
Canada had planned to retaliate with 25% tariffs targeting C$30 billion of American goods; however, this has been delayed alongside the pause in U.S. tariffs. This first tranche was to include products such as beverages, cosmetics and paper products. If U.S. tariffs persisted, Canada had planned to broaden its retaliatory tariffs with a second tranche covering an additional C$125 billion in American imports of passenger vehicles, steel and aluminum, and fresh produce and meats.
The U.S. administration had also threatened to raise tariffs further against any retaliatory measures and/or if insufficient action has been made to address U.S. demands.
Goods that cross borders multiple times, such as with North America’s highly integrated autos sector, could potentially see multiple hits of tariffs before the final finished product.

Economic Consequences

Economists project Canada’s economic growth will fall to zero or potentially contract in a recession if a trade war, as it currently stands, persists for a prolonged period of time.
- The Bank of Canada’s scenario analysis suggests in the case of permanent U.S. tariffs and reciprocal Canadian retaliation, GDP growth expectations could contract by 2.5% in the first year and by 1.5% in the second year. Given the base case forecast of 1.8% growth in the absence of tariffs, this would imply a recession and 0.7% economic contraction in 2025.
- Canadian Chamber of Commerce’s Business Data Lab estimates GDP could shrink by 2.6% in 2025 and cost Canadians approximately $1,900 per person annually.
- RBC Economics estimates tariffs and counter tariffs could “wipe out Canadian growth for up to three years.” The unemployment rate could rise to as high as 9.7% if the trade war drags on.
- National Bank expects tariffs to eventually be reduced but not eliminated, settling at 10%. As a result, GDP growth will fall to 0.4% in 2025 (vs. 1.4% previously) and the unemployment rate will average 7.4% in 2025 (vs. 7.0%).
- BMO Economics, assuming tariffs remain in place for one year, expects the Canadian economy would face a modest recession in 2025. Real GDP growth would fall by 2% to roughly 0% in 2025 and the unemployment rate will rise to 8%.

However, given the uncertainty on the ultimate magnitude and, most importantly, duration of the current trade dispute, any projections are subject to significant revisions with each new development.
The path for interest rates in Canada remains highly uncertain, as the Bank of Canada awaits more clarity on the impacts and characteristics of the potential trade war. General economist expectations in a protracted trade dispute are that the Bank of Canada would opt to lower interest rates deeper and faster in order to stimulate the economy – despite likely rising inflation.
U.S. tariffs and Canada’s counter tariffs would have an inflationary impact on consumer goods, with some items such as groceries likely seeing an immediate increase while prices in other goods start to rise once manufacturers and retailers are no longer able to absorb the tariff costs.
The greatest immediate impact to the Canadian economy is the uncertainty caused by the threat of escalating tariffs. Business planning for the near to long term future has been made particularly challenging. Already, consumer confidence has been impacted and business investment decisions are being paralyzed.
Financial markets will remain volatile as the market digests potentially depressed corporate earnings amid policy uncertainty.
The Canadian dollar, having already fallen amid the growing interest rate divergence between Canada and U.S., now faces further downward pressure from the threat of a trade war. The Canadian dollar currently hovers around US$0.70.

Hypothetical Commercial Real Estate Implications

The situation is so fluid that no outcomes or impacts are certain. It is possible that none ever occur, and it is far too soon for businesses to jump to negative conclusions. That said, here are some preliminary thoughts on how a prolonged and broad trade war could impact Canadian commercial real estate:

2025 was poised to be a year of stabilization and recovery for the Canadian commercial real estate market, however tariffs put this into jeopardy and instead increased volatility and uncertainty are now the expectations over the year ahead.
With business decisions being complicated by heightened uncertainty, the largest near-term impact on the Canadian commercial real estate market would be a likely material reduction in new leasing activity as planned real estate transactions are postponed. This said, savvy tenants with certain requirements could exploit this uncertainty to gain favourable terms.
In a prolonged trade war scenario, Canada’s already weak economic growth outlook would be worsened, a recession and job losses would be likely, and this would result in dampened or contracting commercial real estate demand levels.
Mitigating factors limiting the negative effects on the sector include the following:
- New construction starts had already been declining across all property types;
- Further heightened construction costs will discourage new construction, concentrating demand into the existing stock;
- A potentially more accommodative monetary policy would help reduce mortgage costs; and
- The long-term nature of leases will see most leasing decisions take place at a time in the future when uncertainty will hopefully have abated.

Industrial

Manufacturing demand would be most acutely affected – this segment has accounted for 14.9% of all notable new leasing transactions over 2021-2024.
Canada’s auto manufacturing sector is particularly vulnerable to tariffs given the highly integrated North American supply chain. Every job in the motor vehicle manufacturing industry is estimated to lead to more than 4.5x additional employment in the economy according to the Trillium Network For Advanced Manufacturing.
As trade slows across both sides of the border, firms would likely start reducing inventories and third-party logistics activity would slow even further amid a recession and weaker consumer spending.

Retail

Consumer confidence will turn negative and spending would slow as a recession begins to affect household incomes.
Grocery prices would likely see a near-immediate increase as a result of the trade war.
The F&B industry is highly vulnerable to rising costs as a $120 billion sector and the fourth-largest employer in Canada.
51% of Canadian small businesses are involved with trade with the U.S. and operate on thin margins that would require higher prices and result in weaker consumer demand according to the CFIB.
“Buy Canadian” campaigns have already started cross-country and while U.S. products remain on the shelves, consumer habits could shift in an enduring trade dispute.

Office

Hiring would likely stall, with potential layoffs to come, were the economic damage to become too great.
The long-term nature of leases would limit occupiers’ ability to rapidly shed office space amid cost cutting and headcount reductions, though recently-plateaued sublease levels would once again begin rising as they did in the onset of the pandemic.

Multifamily

Construction costs could escalate further and impact the financial viability of many future development projects.

Capital Markets

Amid heightened uncertainty, the investment market recovery would likely take longer and result in weaker than expected volumes in 2025.
Bond yields have fallen amid weaker growth expectations and capital seeking shelter from the higher risk environment – which would provide some offset to the above point.
The Canadian dollar has fallen substantially and represents potentially more attractive acquisition costs for opportunistic foreign capital.

For more information, contact:

Marc Meehan
Managing Director, Research
marc.meehan@cbre.com