Retail fundamentals softened in Q2 as tariffs, weaker consumer demand, and mounting uncertainty slowed leasing, pressured sales, and led to a second straight quarter of negative absorption (–6.5 msf). Vacancy rose to 5.8%, rent growth slowed to 2.3% YoY, and store closures continued to outpace openings—signaling broader caution heading into the back-to-school season.
Key Takeaways:
Retail momentum slows. Net absorption remained negative at –6.5 msf in Q2—marking the weakest two-quarter stretch since 2020 despite a slight improvement from Q1.
Leasing activity stalls. Tariff uncertainty and rising buildout and rent costs have pushed many retailers into a holding pattern, with closures continuing to outpace new openings.
Outlook stable—but cautious. Vacancy rose to 5.8%, still below pre-pandemic norms; rent growth is expected to stay modest.
Tariff Uncertainty Weighs on Retail
Economic uncertainty has intensified as consumer confidence softens and retail sales slow, despite ongoing job growth and low unemployment. Tariffs remain a major wildcard heading into the back-to-school season, complicating pricing and inventory planning. This uncertainty is contributing to delayed leasing decisions—down 20% year-to-date—and an ongoing trend of store closures outpacing openings.
Cautious Start to 2025 for Retail Sector
Retail demand weakened in Q2 2025, with national vacancy rising to 5.8% and net absorption turning negative for a second consecutive quarter—the worst two-quarter stretch since 2020. More than two-thirds of tracked markets saw declining absorption, though select metros like Phoenix and Houston showed strength. Slowing demand is easing pressure on rents, with shopping centers asking rents rising just 2.3% YoY—now trailing inflation—as store closures and cost headwinds weigh on tenant sentiment.
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Outlook
Retail is recalibrating under the weight of tariffs, inflation, and shifting consumer behavior. While the leasing environment has softened, strong occupancy is supporting landlord income, and tenant quality remains high. Limited new construction will help keep vacancy contained, expected to rise modestly to 6.0–6.5% by early 2026 before stabilizing with stronger economic growth.
