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Research blog

January 19, 2018

NAFTA’s Canadian CRE Implications

Stephen Poloz, the BoCGovernor, has said that any changes to Naftawill have an impact on business investment, not only by sector but also from firm to firm.

Talks Begin Next Week

The sixth round of Naftanegotiations between Canada, the U.S. and Mexico get underway next week in Montreal. As it currently stands, the U.S. is serious about its threat to withdraw from the negotiationsif there’s no breakthrough on proposals the Trump administration has made that are intended to rebalance trade. While Mexico has shown some flexibility on the U.S. proposals, Canadian officials are more reluctant to give ground, preferring to promote Prime Minister Justin Trudeau’s concept of a "progressive" trade agenda based on improving gender equality and the environment, among other things. Canada has said it will present new ideas in the upcoming round of talks.

The Impact on Canadian CRE

The two sectors in the CRE landscape most affected by NAFTA renegotiations/withdrawal would be the retail and industrial sector. In a scenario where the U.S. returns to protectionism measures and/or there is an end of free trade and tariffs on U.S. imports under WTO rules, retailer margins are expected to be

squeezed through both a direct (higher costs of goods sold) and indirect impact (lower sales).

The industrial and logistics real estate market would be the most affected by the U.S. electing to withdraw from NAFTA as supply chains have become reliant on international trade relationships.

My Two Cents

Next week will be an interesting one for the Canadian economy. In this week’s rate hike, the Governor mentioned NAFTA jitters twice which leads me to believe that the next hike is further than initially expected. We routinely receive questions from investors as to which sectors/companies would be affected the most if NAFTA is terminated. In all fairness, the answer is complex given the ensuing changes to the trade landscape.

According to AT Kearney, for every 1% in increased tariffs Canadian retailers would see their costs increase by at least $1 billion in direct impact alone, and indirect impacts including a

reduction in household spending would add to the pressure. Unless there is a return to the Canada-U.S. Free Trade Agreement, ending NAFTA would lead to higher tariffs. Retailers with high exposure to U.S.-originated goods are expected to feel the biggest impact. A less profitable environment for retailers would limit rent growth for retail landlords, limit demand for square footage and potentially increase bankruptcies which could decrease occupancy

As supply chains have become reliant on international trade relationships, a disruption in the supply chain would negatively impact the flow of goods and the businesses tied to U.S. imports and exports. This could have a broad impact on industrial space users in a variety of industries. Industrial products in the chemicals, rubber and plastics complex and automotive sectors would experience large declines in bilateral exports to NAFTA partners