Retail conditions remained stable in Q4 2025, supported by resilient holiday spending, value-oriented tenant demand, and limited new supply, even as performance varied across markets.
Key Takeaways
Secondary-space absorption accelerates: Retail demand strengthened in Q4 as value-oriented tenants backfilled vacant space, driving the strongest absorption since late 2023 despite limited new supply.
Holiday spending remains resilient: Sales grew modestly despite economic uncertainty, with in-store shopping holding firm and widening income-driven trade-down behavior shaping demand.
Retail Vacancy Holds Near Historic Lows as Demand Rebounds Unevenly
Retail demand strengthened in Q4 2025, but the recovery remained uneven across markets. National vacancy finished the year at 5.7%, up 40 bps year over year yet still well below pre-pandemic levels near 7%. Vacancy declined in 20 of 81 U.S. markets, with drops exceeding 100 bps in growth-oriented areas such as Montgomery and Northwest Arkansas, and additional tightening in San Francisco, Boulder, and Salt Lake City. In contrast, vacancy increased by 170–240 bps in several legacy metros including New Orleans, Buffalo, Pittsburgh, Providence, and Milwaukee. Despite these regional differences, Q4 absorption totaled 3.4 msf, supporting overall market stability.
Retail Supply Remains Constrained as Development Gradually Rebuilds
Retail construction remained historically limited in 2025, with just 10.2 msf of new space delivered, the lowest level on record and 63% below the 2015–2019 average, as elevated costs and tariff pressures continued to suppress development. While supply constraints persist, developer interest is beginning to re-emerge, with the 12.7 msf under construction marking the strongest pipeline in five years. Activity is concentrated in neighborhood centers, which account for roughly two-thirds of projects, reflecting demand for convenience-oriented retail formats such as grocery, discount, and convenience stores. Despite this modest improvement, the pipeline remains small at just 0.3% of total inventory, signaling that a meaningful supply surge remains unlikely in the near term.
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Outlook
Retail enters 2026 on relatively firm footing, supported by resilient holiday spending and structural supply constraints that limit downside risk. Vacancy is expected to remain below 6.0%, with rent growth stabilizing in the 2.0–2.5% range, signaling a new equilibrium. Consumer spending remains the primary variable to watch, with demand increasingly concentrated among higher-income households amid softer confidence and labor-market headwinds. Elevated tax refunds should provide near-term support for lower- and middle-income consumers, while retailers with strong value propositions, omnichannel strategies, and resilient supply chains are best positioned to expand physical footprints and sustain healthy operating fundamentals in 2026.
