The U.S. retail real estate sector has recorded back-to-back quarters of negative net absorption during 2025, the first time this has happened this century other than during the pandemic, according to Marcus & Millichap's Q3 retail report.
Nearly 15 million square feet of both single- and multitenant retail was relinquished in just six months, even as asking rents hit record highs and investor activity accelerated. It’s a paradox in a sector long considered commercial real estate’s most resilient.
Going forward, tenant demand will be tested as consumer spending appears on the verge of pulling back after months of beating expectations. Core retail sales dipped slightly in July on a month-over-month basis, with the largest declines coming in discretionary categories. Marcus & Millichap said this is an indication that consumers are beginning to prioritize necessities ahead of potential budget tightening.
Meanwhile, the impact of new tariffs has yet to be fully realized, according to the report. Although some categories showed tariff-related price increases during the second quarter, soft goods inflation suggests many firms have delayed passing tariff costs to consumers. As inventories turn over, however, companies are more likely to transfer higher costs to consumers.
Department stores, apparel, sporting goods, electronics, home goods and auto repair stores are expected to be more exposed to tariffs during the coming quarters. Overall, the sector may benefit from historically strong property fundamentals and a pullback in construction as developers added only 7.2 million square feet to the pipeline in the second quarter, the lowest quarterly total since at least 2000.
During the first half, retail vacancy increased 40 basis points to 4.9%, on par with its prior 10-year average and 80 bps below the long-term mean.
In the single-tenant category, drug and department store vacancy rates reached historical highs, but convenience stores, fast food and auto repair remain space hungry, each posting vacancy rates under 2%. The restaurant sector was the only single-tenant category to post declining vacancy over the past year, bolstered by higher consumer spending at restaurants and bars, according to the report. Single-tenant rents averaged $22.96 per square foot, a record mark.
Meanwhile, multitenant vacancy increased to 5.9%, a number that is skewed by record-high regional mall vacancy, which stood at 10.5% in July. Strip and power centers continue to outperform the sector, with vacancy at 4.6% across both sectors. Multitenant average asking rents were at a record of $21.84 per square foot.
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