The U.S. entered 2025 with solid economic momentum—rising wages, job growth, and healthy household balance sheets. But a sharp pivot in trade policy is driving up import costs and weighing on retail margins. Consumers are feeling the pinch, yet overall fundamentals remain strong as the country prioritizes fair trade and domestic production.
Key Takeaways Summary:
Market Softening: Q1 saw a decline in demand, with net absorption down 5.9 million sq. ft.—the weakest since the pandemic—signaling a broader cooling trend.
Tariff Impact: New tariffs are expected to raise costs and curb consumer demand, leading to cautious leasing, rising vacancies, and slower rent growth.
Underlying Stability: Despite headwinds, fundamentals remain solid with historically low vacancy, limited new supply, and right-sized tenant footprints.
Tariffs are here
Newly imposed tariffs are driving up costs for both retailers and consumers, squeezing margins and dampening demand—particularly in tariff-sensitive categories like appliances and sporting goods. Strategic planning has grown more difficult amid policy uncertainty, slowing leasing activity. Consumer sentiment in April fell to its lowest point since 2021, with tariff concerns amplifying anxieties around jobs, income, and market volatility—especially among older and affluent shoppers, putting further strain on discretionary and luxury spending.
Retail Vacancy Rises, Rents Cool
U.S. retail vacancy rose to 5.5% in Q1 2025, up 20 basis points from a year ago, as net absorption fell by 5.9 million sq. ft.—the steepest quarterly decline since Q3 2020. Over the past year, average quarterly absorption turned negative at -900,000 sq. ft., with neighborhood centers accounting for 75% of the pullback. According to Cushman & Wakefield, 48 of the 81 markets tracked experienced declining demand, reflecting broad-based softening across all four regions. Still, a few markets—Raleigh/Durham, St. Louis, Charleston, Seattle, and Norfolk—recorded modest gains. Rent growth slowed to 2.3% year-over-year, falling below inflation, and is expected to come under further pressure as store closures rise and tenant cost burdens grow.
Bottom Line
Retail CRE faces added pressure from new tariffs, with vacancy expected to rise to 6.0–6.5% by early 2026. Store closures will outpace openings, but limited new supply and resilient retailers may soften the impact. Market stability is likely if economic growth strengthens beyond 2026.
