In a controversial move, President Donald Trump has significantly strained the long-standing relations between the United States and Canada, one of its closest allies and a key trading partner. During recent remarks, Trump not only suggested the idea of the U.S. annexing Canada but also threatened to impose punitive tariffs on imports from its northern neighbor, stirring a wave of concern among investors and business leaders.

The decline in diplomatic relations between the two nations could have far-reaching implications for the U.S. economy, particularly disrupting a crucial channel of investment into U.S. commercial real estate. Since 2015, Canadian investors have poured approximately $184 billion into various sectors of U.S. real estate, including multifamily apartments, office buildings, retail spaces, and industrial warehouses, as reported by MSCI, an investment research firm. This substantial investment has made Canada the largest foreign investor in the U.S. real estate market, surpassing all other countries.

Experts in the field are expressing concerns that the recent rhetoric from the Trump administration may lead Canadian investors, which include some of the world’s wealthiest pension funds, to delay or even withdraw from potential U.S. real estate deals. Mark Rose, the CEO of Avison Young, a Toronto-based commercial real estate services firm, noted that many Canadian clients are upset by the recent developments. He stated, “When the U.S. can treat a friend this way, it raises doubts about investing in the country.” He emphasized, “I don’t think Canadian investors are rushing to close deals in the U.S. today.”

Gunnar Branson, CEO of the Association of Foreign Investors in Real Estate, commented on the heightened anger among Canadian investors, remarking that he had “never seen so many angry Canadians before.” He explained that the U.S. has historically been viewed as a low political risk jurisdiction for cross-border investors, but now, risk managers are reassessing their positions due to the recent developments. Branson noted that foreign investment had already been weakened by a sluggish sales market characterized by elevated interest rates and fluctuating property values. However, the outlook for foreign investment had recently improved, with hopes that decreasing interest rates would stimulate deal activity.

According to the real estate services firm CBRE, foreign investment in U.S. property surged to $37 billion in the second half of 2024, marking a 31% increase from the same period the previous year. Within this context, Canada emerged as the leading foreign investor, contributing approximately $4 billion to U.S. real estate transactions—more than double the investment from the United Kingdom, which was $1.62 billion. However, these positive trends now appear at risk.

Branson commented on the palpable pause in investment activity, stating, “There is certainly a pause going on,” as both Canadian and foreign investment strategies are reevaluated. Looking ahead, CBRE projects an 8% growth in foreign investment in U.S. properties for 2025, although they cautioned that “downside risks remain,” particularly due to high long-term bond yields, potential tariffs, and ongoing geopolitical uncertainties.

Large Canadian pension funds have been pivotal players in acquiring prestigious U.S. commercial assets. For instance, Oxford Properties, part of the Ontario Municipal Employees Retirement System (OMERS) with assets totaling around $100 billion, is a significant partner in Hudson Yards, one of the largest private real estate developments in the U.S., located on Manhattan’s west side. Similarly, Caisse de dépôt et placement du Québec, overseeing about $340 billion, possesses several noteworthy real estate holdings, including the office tower at 3 Bryant Park and a major stake in 1211 Avenue of the Americas.

The arrival of President Trump and his administration in January 2017 has noticeably disrupted the global trade landscape, which could also impact investment flows. In March, the U.S. imposed a 25% tariff on Canadian goods and resources, including steel and aluminum, outside the protections of the North American Free Trade Agreement. This aggressive stance has not only imposed financial burdens but has also fueled a sense of indignation among Canadians. Trump’s assertion that “Canada only works as a state” of the U.S. further exacerbated tensions, prompting Canadian Prime Minister Mark Carney to declare that Canada must “dramatically reduce our reliance on the United States” and seek alternative trade relationships.

Experts argue that the souring of U.S.-Canada relations is significantly influencing investor behavior. Rose emphasized the impact of political rhetoric on real estate trading, noting the outrage among his Canadian executives regarding Trump’s comments and the U.S.’s combative economic approach. Rose took steps to mitigate concerns among Canadian employees and clients, publicly expressing his distress over the ramifications of U.S. actions and comments directed at Canada.

Meanwhile, some investors are beginning to explore alternatives to the U.S. market. David Steinbach, global chief investment officer at the development and investment firm Hines, remarked that there has been a notable increase in interest in European investment funds managed by the company. He cited a recent uptick in discussions concerning European investments and expressed a desire to raise more capital for a fund focusing on that region. “We have an unprecedented amount of dry powder for Europe right now,” he stated, indicating a shift in investor sentiment.

Nonetheless, many believe that while the immediate outlook appears challenging, U.S. real estate could still remain an attractive option for global investors. Dirk Aulabaugh, global head of advisory services at Green Street, argued that the U.S. will not be blacklisted despite the ongoing economic tensions. He highlighted that the U.S. continues to offer exceptional growth potential, transparency, and a stable government, all critical factors that investors consider.

Sam Tenenbaum, head of multifamily insights at Cushman & Wakefield, echoed this sentiment, mentioning a conversation with a Canadian investment firm contemplating a U.S. acquisition. While the firm expressed discomfort with the current international tensions between the two countries, Tenenbaum suggested that economic viability would ultimately drive their investment decisions, emphasizing, “They’re not happy about it, but that doesn’t seem to significantly affect their investment strategies.”