Subdued Construction Keeps Retail Vacancy in Check After Wave of Closures
Retail fundamentals are expected to remain steady through 2026, with weakness in tenant demand offset by historically low levels of new construction, according to CoStar Group.
The first half of 2025 was turbulent, marked by elevated store closures and more space vacated than newly occupied. Bankruptcy-driven closures added to the churn, raising concerns about weakening demand. By midyear, however, conditions stabilized, setting the stage for a relatively balanced outlook despite ongoing risks tied to tariffs and consumer spending.
"Underpinning the stable outlook was the resumption of positive demand in the back half of 2025," said Brandon Svec, national director of retail analytics at CoStar Group.
"After two consecutive quarters of falling demand, retail fundamentals stabilized in the third quarter as the pace of closures slowed and backfill demand surged. With higher demand, the wave of store closures seemingly cresting, and new supply remaining elusive, performance is forecasted to remain in balance for the foreseeable future."
Leasing momentum accelerated in Q4, producing 11.1 million square feet of positive absorption, the strongest quarterly gain since late 2023, CoStar data showed. Vacancy ticked down three basis points to just under 4.3% and absorption exceeded new deliveries by 3.2 million square feet.
However, closures are expected to rise again in the first half of 2026, as a bifurcated retail sales environment pushes some tenants to trim locations. Early-year announcements from Francesca's, GameStop and Saks Fifth Avenue illustrate the trend.
First-quarter absorption is projected at just 1.1 million square feet before recovering to an average of more than five million square feet per quarter in the remaining three-month periods of 2025, according to CoStar projections.
Despite these headwinds, vacancy is expected to hold near 4.3%. Retail construction starts have fallen to multi-decade lows amid sharply rising costs, leaving roughly 50 million square feet under construction nationwide, CoStar said.
That constrained pipeline is expected to keep fundamentals balanced over the midterm. While risks remain, including tariff-driven price increases, consumer spending fatigue, a softer labor market and slower population growth, the limited new supply is likely to prevent significant deterioration in occupancy, Svec said.
Source: GlobeSt/ALM