What tariffs could mean for Canadian industrial real estate

New tariffs on Canadian goods crossing the U.S. border are among the fresh flurry of levies announced at a White House ceremony the U.S. administration nicknamed ‘liberation day.’

And impacts from those tariffs that affect commercial real estate in North America may be far-reaching, with owner-operators of Canadian industrial properties most acutely feeling the initial impacts, says a recent analysis from Morningstar DBRS.

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“Credit ratings of our rated industrials can withstand a relatively modest economic impact, if the tariffs are implemented for a short period or are narrower in scope,” says the ratings agency’s report, Canadian Industrial Real Estate on Front Lines of Trade War.

“In the longer term, the ability of our rated industrials to sustain their current credit ratings will depend on the duration of the tariffs and the degree to which these companies benefit from the range of mitigants that could insulate them from the most immediate effects.”

It adds higher exposure to U.S. markets means more concerns for the Canadian industrial real estate sector compared with Europe, which has so far seen more limited U.S. tariffs.

Impacted industrial real estate includes manufacturing plants producing steel, aluminum, auto parts and other components destined for transit over the U.S. border, as well as logistical hubs, warehouses and related facilities that support industrial operations, according to insurance industry sources.

Insurance considerations

While no insurance policies directly address tariffs, there are steps facility owners can take to guard against pricing changes for goods delivered to clients and to manage costs for any components needed to maintain the functional levels of industrial facilities.

For example, owners can purchase surety bonds and performance bonds, which can protect parties if companies they’re doing business with fail to meet contract obligations, such as delivery of goods or completion of a construction project, says Aliya Daya, senior client executive at Acera Insurance.

They can also include tariff pass-through clauses, which ensure the supplier is not responsible for price increases caused by a tariff, into future contracts with business partners. When the clause is in place, the buyer would incur the increased cost.

And there are product extensions that can act as “soft tariff coverages,” such as trade credit insurance which can protect a business against non-payment of risk from buyers or suppliers impacted by the tariffs or trade barriers, says Daya.

Mitigating impacts

Facility owners can also take steps to reduce how much tariffs harm their operations.

While one key tool, geographic diversification, is less useful for Canadian industrial property owners due to longtime integration with the U.S., damage from tariffs can be managed through lease maturity profiles. That process ensures only some of an owner’s leases will expire in any given year to reduce the immediate impact of falling lease renewal rates on revenues.

All three major Canadian industrial real estate firms Morningstar DBRS rates benefit from “well-laddered lease maturity profiles,” it notes. “However, should an extended trade war result in a prolonged period of tariffs, lower renewal rates will contribute to more significant deterioration in credit quality over time.”

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Meanwhile, efforts to better manage renewal spreads could improve financial results for industrial property owners, because current averages for in-place rents are below estimated market rates for the firms analyzed in the report.

“The significant mark-to-market opportunity [a process by which property owners shift from lower-paying existing tenants to new tenants paying current market rates] helps buffer the industrials against the possibility of declining market rents and supports revenue stability in the face of declining occupancy rates in the near term,” the authors write.

Likewise, more diversified tenant mixes will help reduce tariff impacts on any single industrial sector. Currently, industrial property companies rated by Morningstar DBRS currently enjoy a low rate of sector concentration among their tenant base.