For the data behind the commentary, download the full Q1 2025 U.S. Retail Report.
Tariffs Are Here
The U.S. consumer economic backdrop was solid heading into 2025 and there remain many positive forces such as healthy household balance sheets, continued job growth and positive wage gains. But trade policy has shifted abruptly, presenting near-term headwinds to consumer spending and the retail sector more broadly. Tariffs placed on imported goods have been implemented at a dizzying pace, and while there is little clarity on the stable-state size and scope of the tariffs, the policy shift is already impacting the economy.
Tariffs impact the retail sector in several ways: 1) Retailers pay higher costs for imported goods and materials, reducing profit margins; 2) Consumers face higher costs for retail goods, impacting the mix and amount that they spend; 3) The uncertainty surrounding trade policies complicates operational planning, potentially reducing conviction about strategic investments. While some retailers may be able to mitigate cost increases through negotiations with suppliers, higher costs and elevated uncertainty will likely impact leasing decisions in the coming quarters. The tariffs will directly impact some sectors more than others given the specifics of the policies—appliances and sporting goods for example are heavily sourced from China—but the entire sector will feel strained from a consumer lens. Consumer sentiment in early April slumped to the lowest level since 2021 as tariff concerns compounded anxiety about the employment and income picture. Heightened volatility in the stock market is also fueling concerns for older and wealthy consumers, which raises concerns about discretionary spending on luxury and big-ticket purchases.
It is too early, however, to sound the recession alarm. Our view is that the tariffs will gradually be rolled back as trade negotiations progress, allowing consumer confidence and business sentiment to improve over the next few months. While we may see a pause in leasing activity as we await greater clarity, a wave of unexpected layoffs and store closures seems equally unlikely. Generally, this feels like a moment of pause rather than contraction.
Sluggish Start to 2025
The national vacancy rate rose to 5.5% in the first quarter of 2025, a 20 basis point (bps) increase from the historic low observed in the same quarter a year ago. Net absorption registered -5.9 msf, which was the largest single quarter decline since the third quarter of 2020. Absorption was negative during two quarters last year, and now the annual trend has dipped into negative territory for the first time post-pandemic; absorption is averaging -900,000 sf over the past four quarters, down from 4 msf a year earlier. Neighborhood centers accounted for 75% of the pullback in demand, and all four regions of the country contributed; 48 of the 81 markets tracked by Cushman & Wakefield showed declines. Raleigh/Durham, St. Louis, Charleston, Seattle and Norfolk were the leading markets with increased demand in the first quarter.
The reversal in net demand is leading to easing pressure in asking rents. Nationally, asking rents for shopping center space averaged $24.76 per square foot in the first quarter, which represents a 2.3% increase versus a year prior. Rent growth has taken a material step back from early 2024 when it was trending above 4.0%, and now retail rents are rising below the current rate of inflation. Increasing numbers of store closures and mounting cost pressures on tenants are likely to put continued downward pressure on rental growth in the next several quarters.
For the data behind the commentary, download the full Q1 2025 U.S. Retail Report.
