• National retail vacancy projected to peak at 4.4% by late 2026 (CoStar).
• Quarterly net absorption forecast at 3.8M sq. ft. in 2026, 61% below pre-2020 average.
• Retail construction starts at multi-decade lows; cost pressures persist.
• Cap rates expected to compress slightly if bond yields ease in 2026.
• Value-focused and necessity retail outperform as consumer spending stratifies.
• Retail CMBS spreads stabilize, signaling improved investor sentiment.

The U.S. retail real estate sector stands at a disciplined inflection point: vacancy rates, while ticking up, are forecast to remain well below historical peaks—projected to crest at just 4.4% by late 2026 (CoStar). Net absorption has slowed considerably, with quarterly averages set to reach only 3.8 million sq. ft. next year versus 9.8 million pre-pandemic. Meanwhile, construction starts languish at multi-decade lows, keeping new supply in check and market fundamentals stable. This interplay of subdued supply and measured demand is shaping capital behavior, underwriting, and leasing conversations across the sector.

Current U.S. retail vacancy hovers near 4%, close to all-time lows, but is projected to edge up modestly as store closures normalize and absorption slows. The controlled rise—peaking at 4.4%—reflects a sector with limited speculative supply and disciplined tenant retention. Construction activity has dropped sharply, with development economics constrained by a persistent gap between market rents and the higher rents needed to justify new builds. As a result, the pipeline for new retail centers remains thin, supporting the value of existing assets. “You can count cranes on one hand these days,” notes a regional retail owner, underscoring the visual impact of this construction lull.

Net absorption is forecast at just 3.8 million sq. ft. per quarter in 2026—well below the five-year quarterly average of 9.8 million sq. ft. While store closures have receded (Q3 saw 3% less space vacated YoY), overall demand remains muted as retailers grow more selective with footprints. Necessity-based and value-oriented tenants (grocery, discount, pharmacy) are driving leasing velocity, whereas discretionary and specialty soft-goods chains act with caution. In turn, landlords are prioritizing tenant retention, longer lease terms, and blend-and-extend strategies to preserve occupancy. Longer downtime for new or vacant space is becoming the norm.

Retail operating expenses continue to rise, as labor and utilities outpace inflation. Tariff-driven price increases and consumer fatigue threaten to dampen discretionary sales, pressuring NOI, especially where sales-based rent clauses apply. Underwriting assumptions increasingly build in higher expense growth and stress-test percentage rent scenarios. Despite recent stabilization in retail CMBS spreads, the sector remains exposed if consumer health weakens in 2026. On balance, prudent expense management and tenant mix diversification are now core to asset strategy.

Despite 10-year UST yields hovering near multi-year highs, investor sentiment for retail has improved. Green Street’s all-property index shows retail values up 3.1% YoY, with NOI growth—not cap rate compression—driving most of the gains. Cap rates may compress slightly if bond yields ease, but most underwriting remains conservative, assuming flat or only marginally lower exit cap rates absent a clear policy shift. The “K-shaped” consumer recovery—where value-focused formats outperform and luxury holds up—continues to shape deal flow and lender preference, particularly for grocery-anchored and necessity retail.

Over the next 12–18 months, expect U.S. retail vacancy to edge up to 4.4% before stabilizing as new supply remains limited and store closures normalize. If the Fed signals rate cuts in mid-to-late 2026, capital markets could see renewed activity and slight cap rate compression. Meanwhile, landlords and operators must balance cost discipline with leasing agility, as absorption stays muted and consumer spending stratifies. Properties aligning with omnichannel retail, fulfillment, and experiential trends are best positioned to maintain occupancy. Should macro risks—tariffs, rates, or weak holiday sales—materialize, expense vigilance and tenant diversification will be essential. Ultimately, the sector’s equilibrium is built on scarcity: fewer new centers, but steadier long-term demand.

Scarcity and discipline—not exuberance—are underwriting resilience in US retail real estate.