Despite several high-profile retail bankruptcies pushing the U.S. retail real estate market into negative absorption for the second consecutive quarter, the continued lack of new development and demand for quality retail space kept availability relatively stable in 2Q 2025. While tariff uncertainty lingers, resilient consumer spending has driven the productivity of overall retail space. Capital markets activity continues to improve, driven by a notable increase in big-ticket retail centers trading in 2025.
Economic Conditions & Demand Drivers
- Consumer sentiment rose in June. Still, overall sentiment remains tempered by future expectations, which have declined 17% since June 2024.
- Wage growth has slowed but continues to outpace inflation by more than140 basis points. Inflation has eased. Retail sales growth has moderated as consumers remain cautious amid ongoing economic uncertainty.
- Imports are expected to rise in July, according to the Global Port Tracker via NRF, as retailers prepare for the 2025 Holiday Season. However, volumes are projected to fall below trend in later months-signaling a potential shortfall in goods.
Capital Markets
- Retail investment sale volume in 2Q25 rose 22% year-over-year, keeping the 12-month rolling volume up 4% year-over-year. Pricing and cap rates remain relatively stable. The uptick in $100 million-plus individual property sales signals growing interest, which could drive higher volume by year-end 2025 and into 2026.
- Retail values continue to rise in 2025, posting positive gains month-over-month, over the past three months and year-over-year, the only property type to show growth across all three timeframes.
Leasing Market Fundamentals
- Net absorption was negative in 2Q25, indicating that 2025 may echo 2020, the last year to record consecutive quarters of negative net absorption. As retailers close underperforming locations and others restructure through bankruptcy, 2025 is emerging as a transitional period for retail assets.
- Despite these shifts, overall retail fundamentals remain largely intact. The availability rate rose 10 basis points to 5.3% but remains well below the long-term average of 6.6%. Asking rents recorded their first year-over-year decline as subprime space enters the market.
- Retail space continues to perform strongly, with sales per SF up 4.2% year-over-year and 45% above 2019 levels.
Outlook
- Net absorption is expected to remain negative through year-end 2025, as retailers continue to recalibrate store footprints for greater efficiency, often by closing locations in subprime areas.
- Asking rents are projected to grow 1.9% in 2025, with a modest deceleration to 1.8% in 2026 under the base case. In a moderate downside scenario, rent growth will remain slow through 2025 and 2026, decline in 2027, and return to growth in 2028.
