The Liberation Day Hangover

The Real Estate Espresso Podcast

The Liberation Day Hangover

The Liberation Day Hangover

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The Liberation Day Hangover

Welcome to the Real Estate Espresso podcast, your morning shot at what’s new in the world of real estate investing. I’m your host, Victor Menasce. If there’s one thing that’s dominated conversations over the past few weeks in the world of development and new construction, it has been the impact of tariffs and global trade on new construction projects.

Yesterday, President Trump outlined his administration’s plan for tariffs, by country, along with some special provisions for the automotive industry. It’s hard to know if the list he presented is exhaustive without reading the full text of the executive order. We have looked at the fact sheet from the White House. We also don’t know what the international response will be from China, Germany, Japan, Korea, Vietnam, and many others.

There were a few countries that have been making headlines over the last couple of months, specifically Canada and Mexico, yet these two countries were noticeably absent from the list of countries subject to newly announced tariffs, as stated in the Rose Garden address on April 2nd. The guidance from the White House on these two countries, which are among the largest trading partners of the US, are as follows:

1. The existing border security tariffs with Canada and Mexico that were aimed at leveraging the stop of fentanyl flow into the US will remain in effect.

2. Goods that are compliant with the US-Mexico-Canada free trade agreement will continue to flow between the US, Canada, and Mexico at zero percent tariff and will not be subject to a ten percent tariff.

The non-USMCA compliant products will see a twenty-five percent tariff and non- USMCA compliant energy and potash will see a 10 percent tariff. If the fentanyl border security tariffs are terminated then the 25 percent tariff would be eliminated and replaced by 12 percent reciprocal tariff.

Certain goods will not be subject to reciprocal tariffs. These include steel and aluminum tariffs. For now, the exclusions also include anything that’s subject to 232 tariffs: copper pharmaceuticals and semiconductors. However, there will be future tariffs announced for strategic goods like lumber, pharmaceuticals, and semiconductors.

Now that isn’t to say that Mexico and Canada are fully exempted when it comes to tariffs. Automotive steel and aluminum tariffs are still in place. The White House fact sheet states that tariffs affecting Canada and Mexico will not be stacked on top of existing tariffs.

As you can imagine, it’s a fluid situation and we might see further clarification in the coming days and weeks. That’s what we know right now. So, what does this mean for real estate investors and developers, particularly for your budgets and your construction projects?

If you’re buying a Mitsubishi air conditioner from Japan, then the price associated with that just went up. If you’re buying electrical components from a US manufacturer like Leviton and those components are manufactured in Mexico and are compliant with USMCA, they will continue to enter both the US and Canada with zero tariffs.

Even construction projects in Canada are often sourcing products from US suppliers that have been manufactured in Mexico and those goods flow through the US by rail or truck to reach the Canadian border. Imagine if they were hit with 225 percent tariffs at each border crossing. That’s not going to be the case because these products are covered under the USMCA trade agreement.

If you’ve been listening to the show for a while, you’ll know that we’ve not been overly concerned about tariffs affecting real estate investors. After Wednesday’s announcement, I largely stand by that position. I don’t have a crystal ball, and I certainly don’t have inside information when it comes to the deliberations in the White House. What I do have is an understanding of the negotiation playbook as a result of my relationship with George Ross. I predicted that Canada and Mexico would largely be spared and that appears to be what happened.

So, what does it ultimately mean for real estate investors and construction projects in particular? For those who are building in concrete, steel tariffs may increase the cost of a concrete build, depending on the supply-demand dynamics on steel. The US produces about 75% of its steel domestically, 25% is imported, and the three largest suppliers of steel to the US are Canada, Mexico, and Brazil. Canada represents about 25% of US steel imports, or about 6% of the market total. So, 6% of the market is going to be subject to the 25% tariff.

Now, I don’t have a statistic on how much Canadian steel is finding its way into construction. A substantial amount of it ends up in the automotive industry. There could be a minor cost increase to structural steel or concrete construction, but the largest impact will in fact be on aluminum windows. The US lacks the aluminum smelting capacity and is heavily reliant on Canadian aluminum. So we could see the price of commercial windows spike considerably, and this would not easily be addressed in any near-term investment in the US.

Hardware like door locks and hinges, these overwhelmingly come from China. I would estimate that 90 percent of the hardware supply in North America comes from China. Decorative items like light fixtures predominantly come from China. These will definitely go up in price. Overall the impact is going to be isolated. The US may eventually recover a portion of its manufacturing base. In the meantime, other countries that are not on the list may represent an opportunity for high-quality products at competitive prices. I’m thinking specifically of Turkey where I found high-quality products at competitive prices.

As I’ve been saying for some time, the biggest impact on real estate investors will, in fact, be the flow of capital in the bond market, which directly affects the cost of borrowing for real estate investors. Retaliation from trade partners that impact Treasury yields will have a larger impact than any tariff. And so far, since the start of this week, we’ve seen Treasury yields on the 10-year bond fall from 4.36 to 4.07. That’s good news for real estate investors. Tariffs are making headlines, but I’m keeping my eyes on the bond market.

As you think about that, have an awesome rest of your day. Go make some great things happen, and we’ll talk to you again tomorrow.

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