Introduction

The Canadian commercial real estate market is undergoing significant shifts in 2025, largely driven by global economic factors. Among the most pressing issues is the impact of US tariffs on key construction materials. With rising costs for steel, aluminum, and lumber, commercial developers and investors are facing higher project expenses, delayed timelines, and shifting market dynamics.

In this article, we’ll analyze how these tariffs are reshaping the commercial real estate landscape, the specific challenges facing developers, and strategic approaches to mitigate financial risks.

Understanding US Tariffs and Their Effect on Canadian Commercial Real Estate

The US government has intensified its trade policies in 2025, implementing tariff increases on Canadian exports, particularly those crucial to construction.

Key Tariff Changes in 2025:

• Steel & Aluminum Tariffs: The US has raised aluminum tariffs from 10% to 25%, while steel remains at 25%, significantly increasing costs for structural components, HVAC systems, and electrical wiring.
• Softwood Lumber Tariffs: Tariffs on Canadian softwood lumber have surged to over 50%, up from 14.5% in 2024, driving up costs for commercial framing and interior finishes.
• Building Material Tariffs: Import duties now apply to downstream steel and aluminum products such as beams, rebar, and glass window frames, further increasing expenses for developers.

How These Tariffs Impact Commercial Real Estate:

• Rising Development Costs: The cost of raw materials for office buildings, retail spaces, and industrial facilities is escalating.
• Supply Chain Disruptions: Delays in material imports are slowing down project timelines and increasing labor costs.
• Increased Lease Rates: Higher construction costs are translating to increased commercial lease prices, impacting businesses and tenants.
• Reduced Investor Returns: Lower profit margins due to inflated project costs may cause some investors to reconsider large-scale developments.

U.S. Tariffs Impact on Canada’s Commercial Real Estate (CRE) Market:

Key Observations:

1. Steel and Aluminum Tariffs: The 25% tariffs imposed by the U.S. on Canadian steel and aluminum have significantly increased construction costs. These materials are critical for many CRE projects, including office towers and industrial facilities 5.
2. Lumber: Softwood lumber faces ongoing tariff pressures, with rates between 20-25%, further inflating costs for residential and commercial projects reliant on timber 6.
3. HVAC & Mechanical Equipment: Heavy reliance on U.S. imports (over 40%) makes HVAC systems particularly vulnerable to tariff-related cost increases, affecting large-scale commercial developments 3.
4. Prefabricated Components: Steel-based prefabricated materials face compounded tariffs when exported to the U.S. and re-imported into Canada, leading to doubled cost impacts for certain projects 3.

These tariffs are creating ripple effects across Canada’s CRE market by driving up material costs, delaying projects, and reducing developer margins.

Regional Impact: How Different Markets Are Affected

The effects of tariffs on commercial real estate vary by province, with some markets more vulnerable than others.

Ontario & British Columbia:

• Major construction hubs for commercial and industrial real estate.
• High reliance on US-imported materials makes these provinces particularly susceptible to cost increases.
• Rising lease rates may slow demand in the office and retail sectors.

Quebec & Atlantic Canada:

• Strong reliance on the lumber sector means potential economic downturns due to reduced US demand.
• Commercial real estate developers may shift toward local material sourcing to offset costs.

Alberta, Saskatchewan & Manitoba:

• With strong industrial and logistics sectors, these provinces are experiencing higher costs for warehouse and distribution center construction.
• Alternative suppliers from Europe and Asia may become more attractive for developers.

Investment and Development Strategies to Mitigate Tariff Risks

Despite cost challenges, developers can adopt strategic measures to maintain profitability and project feasibility.

1. Explore Alternative Material Sources
   • Increase reliance on domestic steel and aluminum suppliers to bypass US tariffs.
   • Source prefabricated building materials from non-US markets such as Europe and Asia.
2. Lock in Material Prices with Suppliers
   • Bulk purchase agreements can secure fixed pricing before further tariff hikes.
   • Strategic vendor partnerships can help developers gain priority access to scarce materials.
3. Optimize Project Timelines and Costs
   • Phased construction strategies allow projects to adapt to fluctuating material costs.
   • Value engineering techniques can reduce reliance on tariffed materials while maintaining structural integrity.
4. Pass Costs Strategically Through Lease Structures

• Triple-net leases (NNN) can shift tax, maintenance, and insurance expenses onto tenants, helping landlords recover higher development costs.
• Longer lease terms can provide financial stability and hedge against rising expenses.

How Smart Capital Can Help

Smart Capital specializes in providing customized financial debt solutions to help developers and investors overcome rising construction costs and shifting market conditions.

Our expert team offers:

• Designs tailored investment strategies to uncover high-yield opportunities while enhancing financial performance and operational efficiency.
• Financing Solutions: Delivering structured capital solutions to ensure large-scale developments move forward efficiently, even in challenging economic conditions.

Visit Smart Capital to learn more about how we can support your commercial real estate ventures.

The Future of Canadian Commercial Real Estate Amid Tariff Challenges

While the short-term effects of US tariffs present financial hurdles, the long-term outlook for commercial real estate remains strong.

Key Market Trends for 2025-2026:

• Industrial & Warehouse Development: Strong demand continues, particularly in logistics and e-commerce sectors.
• Multifamily Commercial Projects: Developers are continuing to prioritize multifamily buildings due to the ongoing housing crisis, while also exploring mixed-use projects to diversify revenue streams and meet evolving market demands.
• Energy-Efficient Buildings: Government incentives for sustainable construction can help offset increased material costs.

As developers adapt to these market changes, strategic sourcing, pricing negotiations, and value engineering will be crucial in maintaining profitability in commercial real estate.

Conclusion

In conclusion, U.S. tariffs on Canadian construction materials have a profound impact on the Canadian commercial real estate (CRE) market. The increased costs for essential materials like steel, aluminum, and softwood lumber have raised construction expenses, delayed project timelines, and reduced profit margins for developers. These challenges are compounded by the potential for higher lease rates, which may strain tenant affordability, particularly in major urban centers. While these tariffs present significant obstacles, strategic planning, such as sourcing alternative materials, negotiating long-term supplier agreements, and optimizing lease structures, can help developers and investors navigate these complexities. Ultimately, the Canadian CRE market will need to adapt to these changes by embracing flexibility, innovation, and cost-effective strategies to maintain its resilience and long-term growth.

Frequently Asked Questions (FAQ)

1. What types of commercial properties are most affected by rising material costs?
   • Industrial & warehouse facilities, office buildings, and mixed-use developments are among the most impacted.
2. How can developers reduce the impact of rising construction costs?
   • Developers can reduce the impact of rising construction costs by sourcing alternative materials, locking in bulk pricing, implementing phased construction, and negotiating lease structures to offset costs. Additionally, alternative financing options can help minimize upfront investments and optimize returns, allowing developers to better manage cash flow and mitigate financial pressures during the construction process.
3. Will these tariffs affect commercial lease rates?
   • Yes, rising development costs are expected to push commercial lease rates higher, especially in major markets like Toronto and Vancouver.
4. Are there government incentives to offset increased costs?
   • Yes, Canada offers energy-efficiency grants and tax incentives to reduce construction expenses.
5. What is the long-term outlook for commercial real estate despite these challenges?
   • Strong demand for industrial, mixed-use, and energy-efficient developments will drive long-term growth.

Plan Your Next Move with Expert Advice

Understanding how tariffs impact your commercial real estate projects is essential for staying profitable in 2025. Book a free consultation with our real estate investment specialists to explore tailored cost-saving strategies.

Contact Us Today to secure your competitive edge in the evolving market.

Sources:

• Canada’s Response to Unjustified US Tariffs on Canadian Steel and Aluminum Products
• Softwood Lumber Tariffs Impact on Canada’s Economy
• Impact of Tariffs on Canada’s Construction Market