Retail is facing some confusion and mixed messages in the short term, but will likely have a favorable path ahead for investors who “keep their eyes on the horizon,” said John Chang, chief intelligence and analytics officer, research services, at Marcus & Millichap, in a recent video.
What seems to be a “solid footing” at the end of 2024 has seen a “notable shift of momentum.” In the last quarter of last year, the vacancy rate ended at 4.4%, with construction only 0.4% of inventory, 17 straight quarters of positive absorption and rents growing at a modest 2%. Retailers showed ongoing demand for space and supply was relatively limited.
However, in the first quarter of 2025, the vacancy rate for all retail grew by 10 basis points, reaching 4.5%. That’s still a low number, historically, but space absorption became negative and declined by 4.7 million square feet.
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By itself, that decline wouldn’t have meant much in a total pool of 9 billion square feet of retail space that Marcus & Millichap tracks. Then came the implications of the trade war, suggesting, together with the Q1 cooling, that retail space demand could soften.
Multiple companies — Japanese retailer Daiso, Five Below, Academy Sports, Costco, Home Depot, Target, and many others — announced their intentions to expand this year. Then again, such companies as Rite Aid, Joann, Big Lots, Family Dollar, Walgreens, and others announced significant numbers of closures.
Tariffs will have an impact, but the details depend on the retailer and its specific supply chain. “For example, an estimated 60% to 80% of Five Below’s goods come from China, which faces the highest tariff barriers,” Chang said. “For Best Buy, the estimate is 55% to 60%. Meanwhile, only about 30% of Target’s products are sourced from China.”
Most neighborhood communities and strip retail centers are less vulnerable because they are largely occupied by grocery stores, health services, restaurants, and fitness facilities. In other words, services and unavoidable goods. The ultimate impact on a retail center depends on the tenant mix.
National vacancy on multi-tenant retail rose 20 basis points from Q4 2024, but at 4.5%, it was the same as Q1 2024. About 60% of the markets the firm tracks had negative absorption, but 40% were positive. It seems that “demand is just short of treading water,” making it difficult to tell where there is an anomaly or a shift in momentum.
But retail cap rates remain in the upper 6% range. Commercial lending is in the low-to-mid 6% range. That leaves positive leverage on retail CRE as an option. Demographics are also in favor of longer-term investors, with 73 million millennials entering their peak growth and spending years. With limited construction and potential additional costs of building from tariffs and stricter immigration policies, existing space has some ongoing strength.
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