Tariff chill pervades the investment climate throughout Canada’s economy this winter, but commercial real estate insiders are tallying some reasons to be optimistic if the United States government pulls back from its current aggressive posturing. Newly released 2024 results from the MSCI/REALPAC Canada Property Index peg the total annual investment return across participants’ portfolios at 3.21 per cent — an improvement from a flat return in 2023.

Although last year was the third consecutive year of negative capital growth for the index — which represents 54 institutional portfolios with 2,255 individual assets in Canada, collectively valued at CAD $165.4 billion — the 1.63 per cent slip in value was more muted than the declines of the previous two years. Meanwhile, a 4.91 per cent income return continued a steady uptick from 2022 (4.35 per cent) and 2023 (4.6 per cent).

“We can see an improvement in the capital growth in that things are getting less worse. So that does start to signify that maybe there’s a market recovery,” Peter Koitsopoulos, vice president with the index producer, MSCI, told a gathering in Toronto earlier this week. “We also have to consider that fundamentally we do not see the incomes in Canada deteriorating. The fundamentals of Canadian commercial real estate and where (index) participants are investing is fundamentally sound, and I think that’s an important distinction to make.”

Many index participants were likewise hailing recovery signs and readying for more deal activity in 2025 prior to the surprise onslaught of the new U.S. administration’s destabilizing tactics. Now, like contemporaries in most other economic sectors, they’re waiting to see what unfolds at the U.S. White House in early March when the 30-day deferral period for a threatened 25 per cent tariff on most Canadian imports comes to an end.

A discussion of industry dynamics, held in conjunction with the release of the 2024 investment results, highlighted sector-specific and economy-wide uncertainties now clouding the investment outlook. Hesitant lenders, the Canadian dollar’s diminished buying power and foreign investors holding off due to perceived risk or anticipated better bargains in the future could all impede activity. As well, there’s concern about tenants’ ability to absorb another economic shock following the COVID-19 pandemic and a double-whammy of inflation and rising interest rates.

New sources of hesitation

“Things were loosening up. The debt was finally priced at a point where, if you were in one of the major sectors, you had positive leverage,” observed Michael Fraidakis, chief investment officer with LaSalle Investment Management in Canada, where the firm has more than $4 billion in assets under management (AUM). “My fear is that, in real estate, it’s going to introduce investment and pricing uncertainty again and that will be another round of just more capital on the sidelines.”

Liz Murphy, chief financial officer with Oxford Properties Group, concurred that the turnaround may not to be as quick as was envisioned a few months ago. As the real estate arm of the OMERS pension fund, Oxford holds roughly $85 billion in AUM globally with about 75 per cent of that located in North America.

“Our teams were ready. We were seeing pricing at the right level and space for income returns at the right level, but, with this uncertainty, I think we will slow down unless it’s a really, really good opportunity,” she said. “There’s also the volatility around the Canadian dollar. If we’re paying Canadian dollars that are 50 cents in U.S. dollars, that really limits the amount we can invest in the U.S.”

Looking at possible scenarios beyond March 4, Jim Costello, chief economist with MSCI, cited examples of economies adjusting to or remaining largely unscathed from the sudden imposition of taxes. Notably, he characterized Australia’s introduction of a 10 per cent valued-added tax (VAT) in 2000 as a one-time, relatively short-term upheaval preceding adaptation to a new status quo.

“Inflation spiked, GDP fell for a bit, supply chains were disrupted, people changed their consumption patterns and then it all just kind of stabilized after that,” Costello recounted. “If it was something like that, it wouldn’t be as much to worry about, but we’ve got this situation where we may end up with some sort of trade war back-and-forth on tariffing”

His second example comes from 2018 when the first Trump administration invoked tariffs on Canadian imports of steel (25 per cent) and aluminum (10 per cent), prompting counter-tariffs on nearly 130 U.S. products in-bound to Canada. Consumers were largely insulated during that roughly one-year period before tariffs were lifted because importers absorbed much of the new cost.

“This time, we just don’t know what’s going to happen,” Costello acknowledged. “Is it going to continue into an ongoing fight, and are firms too tapped out at this point and will they have to pass costs on to consumers?”

Cathal O’Connor, chief executive officer of Salthill Capital, outlined the potential implications for his company’s portfolio, which is heavily weighted to retail.

“A lot of retailers buy merchandise from the U.S.. That’s going to cause some uncertainty on the leasing side and slow down commitments by tenants to lease space,” he said. “Their product is going to be more expensive, and that’s going to come at the expense of their margins or sales.”

Canadian fundamentals remain strong

Yet, he also expects resilient consumer demand for groceries and others staples will serve some segments of the sector well. So, too, should other favourable fundamentals such as Canada’s shrinking per capita retail space ratio, resulting from a growing population and relative a dearth of new development.

Given the source of the current crisis, there’s perhaps some solace in what’s seen as Canada’s generally stronger fundamentals compared to the U.S. in all four major property sectors. (MSCI’s Canada Property Index also outperformed its U.S. equivalent in 2024.) Fraidakis noted that Vancouver, Toronto and Montreal continue to boast lower vacancy rates than major U.S. markets and that foreign investors are tending to look more at Canada-specific allocations rather than lumping it together with the U.S.

“The fundamentals and our currency being where it is helps on the buyer side,” he said.

“The pricing of real estate right now is good. You can buy real estate and you can earn a good income return. That will really help to push through all this uncertainty,” Murphy submitted. “Hopefully, we get an opportunity where interest rates are low for a period of time.”

For now, though, there’s no expectation for a surge of deals in the near term. “There’s going to be a slowdown in investment in Canada until we get some clarity,” O’Connor reiterated.

“When you don’t know what the rules of the game are, you’re going to be cautious,” Costello agreed. “Absent all that, the property market is recovering; investors are becoming more accepting of the sector again; there’s some stabilization of pricing; and things are looking good. This is a shock that might unsettle that.”