Q1 2025 Market Outlook
By Dusty Batsell
After ending 2024 on relatively solid footing, the global economy encountered turbulence in the first quarter of 2025 as the new administration rapidly enacted a series of sweeping policy initiatives across trade, taxation, regulation, and federal spending. The result has been a complex interplay between economic resilience and emerging vulnerabilities, as markets adapt to a shifting macroeconomic environment shaped by evolving consumer behavior and investment dynamics. While certain sectors – including retail real estate – exhibited strength heading into the second quarter, unsettled headwinds such as tariff impacts, rising inflation, and ongoing policy adjustments continue to influence broader economic sentiment.
Despite these macroeconomic challenges, the U.S. economy demonstrated notable resilience during the first quarter. Retail sales posted healthy gains, with average monthly increases of 3.9% compared to the same period in 2024. Job growth remained positive, and the unemployment rate held steady at 4.1%. Domestic demand also remained strong, as evidenced by a 3.0% increase in real final sales to private domestic purchasers. However, GDP contracted slightly by 0.3%, largely due to a surge in imports as businesses and consumers accelerated purchases in anticipation of newly implemented tariffs. In response, the Federal Reserve maintained a cautious “wait and see” stance, holding the federal funds rate at 4.25% – 4.50% while signaling that future policy adjustments will depend on evolving economic conditions.
Retail property fundamentals remained strong in the first quarter. Although net absorption declined by 1.5 million square feet – driven in part by store closures and a growing supply of obsolete space – the national retail vacancy rate held firm at 4.8%[1], which is within 10 basis points of the historically low level reported last quarter. Rental rate growth continued, though at a more measured pace than in previous quarters. Meanwhile, new retail development remained near all-time lows, as elevated construction costs (exacerbated by tariffs on materials), labor constraints, and tight lending conditions discouraged ground-up projects. These supply constraints have benefited existing landlords and are drawing increased investor interest, intensifying competition among well-located assets.
In conclusion, the first quarter of 2025 demonstrated the U.S. economy’s ability to navigate an increasingly dynamic and evolving landscape. Despite headwinds from new federal policies, rising inflation and global trade disruptions, strong retail sales, steady employment and resilient consumer demand underscored the economy’s fundamental strength. The retail real estate sector, in particular, continued to perform well, supported by low vacancy rates and steady rent growth. While uncertainties persist, Baceline remains optimistic for the remainder of the year, bolstered by the resilience and consistent performance of Neighborhood Shopping Centers.
[1] CBRE, Q1 2025 US Retail Report