'Very Thin' Retail Pipeline Starts To Wane Tenant Demand
Scarcity continues to define the retail real estate market, with constrained development pipelines and elevated replacement costs keeping available space near historic lows even as demand conditions soften, according to new data from CoStar Group.
Net absorption has declined in three of the past five quarters, signaling a moderation in demand momentum. Yet availability has remained stubbornly tight — holding roughly 15% below its 10-year average — underscoring how limited new supply has been in offsetting even modest shifts in leasing activity.
"The pipeline of new supply remains very thin, and most development activity continues to skew toward freestanding build-to-suits rather than multi-tenant product," said Brandon Svec, national director of retail analytics at CoStar Group.
He added that construction economics remain a key constraint on new development. In many markets, developers require blended rents north of $30 to $35 per square foot to justify new projects, while national average retail rents remain closer to the mid-$20s range. That gap between replacement cost and achievable market rents continues to limit speculative development.
"Until that gap narrows, low available inventory is likely not just a story, but rather the operating environment," Svec said.
Those dynamics are feeding directly into pricing behavior. Lease spreads remain elevated as tenants compete for the limited pool of high-quality space that meets trade area requirements, including parking ratios, visibility and signage. While rent growth has cooled from recent peaks, the sector continues to benefit from several years of post-pandemic expansion.
At the same time, retail availability remains historically constrained even as distress signals ease. Bankruptcies have declined and closures are increasingly being backfilled rather than contributing to rising vacancy. That dynamic has helped prevent meaningful inventory expansion despite softer absorption trends.
Historically, U.S. retail availability averaged more than 650 million square feet over the past decade, with levels exceeding 800 million square feet in the mid-2010s. That figure began declining sharply after 2021, falling below roughly 550 million square feet through 2024 and has only ticked modestly higher into 2025 and early 2026.
Still, even with that slight uptick, the overall environment remains defined by limited supply elasticity. Minimal new construction has allowed the sector to absorb pockets of weaker demand without tipping into oversupply — effectively stabilizing vacancy at unusually tight levels.
Svec is scheduled to present these findings at ICSC Las Vegas on Tuesday, May 19, from 2:30–3:00 p.m. PT at the LVCC Central Hall Show Floor Theater.
Source: GlobeSt/ALM