NEWS | RESEARCH
Q1 2025 White Paper
Tariff-Induced Challenges Slow U.S. Retail CRE Momentum
Fears of increasing inflation, job losses and volatility in the equity and bond markets led to a dramatic decrease in consumer confidence during the First Quarter 2025, prompting predictions that consumers will cut back on purchases through the balance of the year. Supported by ongoing supply-side constraints, landlords continued to enjoy low vacancy rates, above average leasing velocities and rent growth; however, Q1 2025 negative absorption and anticipated record store closures dampened the exuberance that prevailed during the second half of last year. Although more lenders and investors initially expressed a willingness to transact this year, some subsequently hit pause until it becomes clearer what the interest rate environment and larger economic environment will be. This may present a buying opportunity for value add and opportunistic buyers who recognize the benefits of ong0ing supply side constraints benefitting open air retail properties.
Declining Consumer Confidence Raises Questions Regarding Sales Performance for the Balance of the Year
U.S. retail commercial real estate’s strong 2024 performance prompted analysts to forecast at year end continuing strong results and increased transaction volume in 2025. Notwithstanding the foregoing, the Trump Administration’s aggressive cost cutting efforts and trade policies negatively impacted consumer sentiment, which, according to the University of Michigan’s Consumer Sentiment Survey, fell to 57.9, the lowest since November 2022. March’s sentiment number represented an 8.24% decrease from February’s number and represented the third straight month that the sentiment number declined. According to Jessica Hus, Director of Surveys of Consumers at the University of Michigan, “Sentiment has now lost more than 30% since December 2024 amid growing worries about trade war developments that have oscillated over the course of the year.” Much of the decrease related to expectations for the future across multiple facets of the economy, including personal finances, labor markets, inflation, business conditions and stock markets.
ADVANCED ECONOMIES: CRE SENTIMENT INDICATOR
The decline in consumer sentiment impacted U.S. retail sales during Q1 2025. Following a 1.07% month-over-month decline in January for total retail sales (including restaurants but excluding automobile and gasoline), February month-over-month total retail sales decreased 0.22%. March retail sales increased 0.6% month-over-month and 4.75% year-over-year. According to the Retail Monitor, total retail sales for the quarter were up 4.52% year-over-year. Much of the gain could be attributed to buyers rushing “to try and beat the tariffs.” According to National Retail Federation President and CEO Matthew Shay, “The pullback we’ve seen the past few months comes despite strong economic fundamentals. A major factor appears to be driven by the uncertainty caused by tariffs. March’s increase is partly the result of stocking up to get ahead of the tariffs. With the economic outlook unclear and the situation fluid, consumer sentiment is weakening, and many consumers are shifting disposable income into savings.” Placer.ai reports that retail visitation slowed over the past three months, and Americans of all income levels are cutting back on every type of purchase, including necessities. Lower-income shoppers “only have enough money for basic essentials,” according to Dollar General CEO Todd Vasos. Affluent shoppers, who, per The Wall Street Journal, now account for 49.7% of all spending, have increased visitation at value-oriented stores. Luxury in-store and online spending dropped 9.3% in February year-over-year, following a 5.9% dip in January, according to Citibank. Aspirational shoppers and aspirational retailers have been squeezed, and aspiration apparel brands like Gucci, Burberry and the Tapestry concepts have suffered earnings and sales setbacks as a consequence. To the extent that inflation increases and the stock/bond markets continue their correction, this is likely to negatively impact retail sales through the balance of the year. According to a report issued by the Organization for Economic Co-operation and Development, “Greater policy uncertainty can be expected to hold back spending decisions by companies and households….” Moody’s analyst Christina Boni concurred, changing their outlook for the retail industry from “stable” to “negative,” noting “Industry prospects for second half of 2025 and early 2026 are bleak….” The National Retail Federation projects that U.S. retail sales will slow down to between 2.7% to 3.7% over 2024, or between $5.42 trillion to $5.48 trillion.
Amidst this environment, foot traffic in grocery stores has rebounded, up 10.9% since 2019 after an 11.4% decline in 2020, according to Placer.ai. Inflation-weary consumers are visiting multiple grocery stores, taking advantage of deals and comparing prices between grocers. According to Globest.com, average dwell time decreased to 23.4 minutes in 2024, down 1.4 minutes from 2109, perhaps as a result of online ordering and comparison shopping. Low prices and a “treasure hunt” atmosphere have proven to be valuable in this competitive environment and most grocers have promoted private label as a way to combat inflation and preserve margins. In particular, discount and specialty grocery stores have fared particularly well, with Aldi and Trader Joe’s experiencing among the highest growth in visits. These chains, along with Sprouts, have been among the fastest growing grocers for the past few years.
Select urban markets that are supported by dense mixed-use environments have had success weathering challenges. Manhattan’s SoHo, Philadelphia’s Walnut Street and Chestnut Street corridors, Washington, D.C.’s Georgetown and Boston’s Back Bay and Seaport District continue to flourish and actually have become more dynamic, despite the recent challenges. According to JLL, much of this can be attributed to attention to pedestrianization and streetscapes, transit improvements and a commitment to leasing co-tenancy characterized by variety, non-traditional concepts and experiential tenants.
Negative Quarterly Absorption Mirrors Weakening Consumer Confidence
After a strong second half 2024, U.S. open air retail experienced a slow start to the new year, with -5.9 million square feet of absorption for Q1 2025. According to Cushman & Wakefield, neighborhood centers accounted for 75% of the drop in demand. Some of this result can be attributed to seasonality and the general lack of available space, but the anticipated change in trade policy and weakening sales performance also encouraged retailers to hit pause. According to Robin Abrams, the Vice Chairman for Retail at Compass in New York City, [tariffs are] leading to some retailers pulling back and hesitating to make long-term commitments….”
SHOPPING CENTER NET ABSORPTION
Leasing activity occurred amidst continued supply side constraints, as only 2.2 million square feet was delivered during Q1 2025 and 10.6 million square feet remains under construction. Significant growth in supply is not foreseeable in the near future, as already high construction prices are expected to increase further due to tariffs and general inflation. Debt costs are not expected to decrease significantly, subject to Fed policy, the bond markets and general market uncertainty.
In 2025, according to Coresight Research, the U.S. is expected to experience 15,000 stores closures, a 105% increase over 2024’s closures and in excess of anticipated store openings. It is anticipated that some of the vacancies will represent opportunities for landlords to attract better credit tenants at higher rental rates. Releasing velocity averaged 9.3 months last year and is expected to remain tight for attractive spaces.
Q1 2025 vacancy ended at 5.5%, up from 5.4% at year-end. According to Cushman & Wakefield, asking rents in Q1 2025 averaged $24.76 per square foot.
OVERALL VACANCY AND ASKING RENT
Washington, D.C. Metro Performs in Line with National Statistics, But Dark Clouds Loom
Based upon data presented by Cushman & Wakefield, Washington, D.C. metro area retail trends are in line with national figures. It estimates the metropolitan area open-air retail center Q1 2025 vacancy rate to be 4.4%, with asking rents of $34.99 per square foot, 365,218 square feet under construction and an in-place inventory of 124.2 million square feet (Lee & Associates estimates Q4 D.C. retail vacancy at 4.4%, asking rents at $34.68 per square foot, with 1.1 million square feet under construction and an in-place inventory of 272.7 million square feet). Cushman & Wakefield reports -138,638 square feet of net absorption for Q1` 2025 for open-air retail in the Washington, D.C. metropolitan area.
Notwithstanding the foregoing, Washington, D.C.’s economic prospects seem particularly challenged, as government layoffs and looming budget cuts push the metro area toward a recession. According to Julie Coons, president of the Northern Virginia Chamber of Commerce, “We see this as potentially catastrophic for the region.” Oxford Economics projects gross domestic product in the region to fall 0.5% over the course of the year, worst among the 50 largest U.S. metros other than New Orleans. In April, credit rating group Moody’s downgraded the District of Columbia’s credit rating from Aaa to AA1 and revised its outlook to negative, citing cuts to federal spending, the federal workforce and the soft market for commercial real estate. Credit rating group Fitch put a ratings watch on the District in March. Further consequences of an economic downturn on the region’s retail real estate will become more apparent during the balance of the year and 2026.
Retail’s Appeal Will Be Challenged By Economic Conditions – A Buying Opportunity?
U.S. open-air retail centers were considered a favored asset class at the start of the year, as institutional investors and lenders expressed greater interest in increased exposure to the property sector. During Q1 2025, Atlanta-based Argonne Capital Group teamed up with Koch Real Estate Investments, Goldman Sachs and Ares Management to purchase 59 multi-tenant retail assets from REIT Global Net Lease. The deal represented the first phase of a transaction that is ultimately anticipated to involve 100 assets with an overall transaction cost of $1.8 billion. Truist and Key Bank also were involved in the transaction. Other portfolios, including Washington Prime Group’s assets, are on the market and general capital markets listings increased during the First Quarter. It will be seen whether this momentum will continue and what the impact of economic conditions and the interest rate environment will have on pricing.
In turn, retail transaction sale pricing led all property categories, with a 4.6% year-over-year increase in Q1 2025. According to MCSI Real Assets, “Prices have yet to respond to the new spike in uncertainty unleashed by the raft of tariffs announced by the U.S. administration at the start of April.” Nevertheless, there were indications that investor confidence has been impacted. According to the Spring 2025 RCN Capital/CJ Patrick Company Investor Sentiment Index, real estate investor sentiment fell for the second consecutive quarter, down 29% from its peak in the Fall 2024. Per Jeffrey Tesch, RCN Capital CEO, “Investor sentiment is trending along the same lines as homebuilder sentiment and consumer sentiment, which recently recorded its second-lowest score in over 50 years.” The index tracks four key metrics: current market outlook, future market outlook, expected home price increases and planned property purchases.
Similarly, the CRE Finance Council (CREFC) reported that its First Quarter 2025 Board of Governors Sentiment Index fell 30.5% to 87.9 from 126.6 in Q4 2024. The decline brings the index below the baseline of 100 for the first time since the pandemic and reflects growing concerns over economic uncertainty.
This negative sentiment and uncertainty may result in a window of opportunity for value-add and opportunistic buyers, as the fundamentally sound retail commercial property market experiences some headwinds. SageTrust Properties is actively in the market to source retail open-air property acquisition opportunities and has the capability to manage its assets. Let us know if you would like to schedule a meeting with us to discuss your needs and our capabilities further.