Retail Supply Crunch Keeps Vacancies Tight as Demand Slows

According to Globe St, retail landlords are still benefiting from one of the tightest supply environments in decades, even as tenant demand starts to cool. New data from CoStar Group shows that while leasing momentum has slowed over the past year, the sector’s extremely limited development pipeline continues to keep vacancy rates historically low.

The imbalance between muted construction activity and still-stable tenant demand has created an operating environment where retailers are competing for a shrinking pool of quality space. That dynamic has supported elevated lease spreads and continued rent growth across many markets despite softer absorption trends.

A Retail Pipeline Stuck in Low Gear

CoStar Group reported declining retail net absorption in three of the past five quarters. The trend signals softer tenant demand. Even so, available retail space remains roughly 15% below the sector’s 10-year average.

Brandon Svec, CoStar’s national director of retail analytics, said the retail development pipeline remains “very thin.” Most new projects involve freestanding build-to-suit properties instead of speculative multi-tenant centers. Build-to-suits add little broadly available inventory to the market.

Retail development economics remain challenging across most markets. Svec said developers often need rents above $30 to $35 per SF to justify new projects. Meanwhile, national average retail rents remain closer to the mid-$20 range.

The Details

Retail availability averaged more than 650M SF over the past decade, according to CoStar data, and surpassed 800M SF during the mid-2010s retail oversupply cycle. That figure dropped sharply after 2021 as pandemic-era demand recovery collided with a near-standstill in new construction.

Available space remained below roughly 550M SF throughout 2024 and only edged slightly higher entering 2025 and early 2026. Despite weaker absorption, the market has avoided a meaningful inventory buildup because bankruptcies and store closures have moderated.

Importantly, many vacated retail spaces are now being quickly backfilled by expanding tenants rather than sitting dark for extended periods. Retailers continue prioritizing locations with strong visibility, parking access, and established trade-area demographics, particularly in grocery-anchored and high-traffic suburban corridors.

A Different Retail Cycle

Today’s retail market stands in sharp contrast to the oversupply conditions that defined much of the 2010s. Prior to the pandemic, developers routinely delivered large amounts of speculative retail product, contributing to elevated vacancy and weaker landlord pricing power.

Now, replacement costs and higher financing expenses have fundamentally reshaped development behavior. Construction lending remains selective, and developers have largely avoided speculative retail projects unless preleasing thresholds are exceptionally strong.

That supply discipline has insulated the sector from broader economic softness. While apartment and industrial markets have experienced vacancy increases tied to aggressive post-pandemic construction waves, retail has largely escaped that pressure because new deliveries remain limited. Multifamily markets, especially across the South and West, continue facing softer fundamentals as elevated supply weighs on rent growth and occupancy.

Why It Matters

The retail sector’s resilience increasingly comes down to constrained supply rather than surging demand. Even as consumer spending growth moderates and retailers become more cautious with expansion plans, landlords still hold leverage because tenants have relatively few high-quality location options.

That dynamic is helping stabilize rent growth and occupancy levels at a time when many other CRE sectors are grappling with excess inventory. According to CoStar, the lack of supply elasticity has prevented softer leasing activity from translating into materially higher vacancy rates.

For investors, the trend reinforces why grocery-anchored centers and necessity-based retail assets continue attracting capital despite broader market uncertainty. Durable occupancy and limited competitive supply remain key drivers of pricing stability.

What’s Next

Retail fundamentals are likely to remain supply-constrained through at least the near term unless construction economics materially improve. Developers still face elevated labor, material, and financing costs that make speculative projects difficult to pencil at prevailing market rents.

That suggests vacancy rates could remain historically tight even if leasing demand weakens further in 2026. Industry watchers will also be monitoring whether retailers continue backfilling vacated space at current rates, a trend that has so far helped prevent a broader rise in availability.

Svec is scheduled to present CoStar’s findings during an ICSC Las Vegas session on May 19 at the Las Vegas Convention Center.