The national retail sector shifted from unfavorable headlines at the start of 2025 to stabilization in the second half of the year. While the sector recorded negative absorption in the first half, retail was able to bounce back with approximately 5 million square feet absorbed in Q3 2025. To close out the year, retail absorbed 11 million square feet in Q4 2025, marking the highest absorption level since 2023.

 

Small Spaces Take Over Leasing

Throughout 2025, leases were most prominent for small-format properties up to 5,000 square feet. In the third quarter, about 90% of leasing activity was for spaces in this range. Most tenants that signed leases were QSRs or fast casual restaurants, with the average lease around 3,000 square feet. The move to leasing smaller properties aligns with the ongoing trend of focusing on flexibility and customer convenience to prioritize consumer satisfaction.

 

Construction Levels Remain Low Across Sector

Despite the rise in absorption, slow construction activity continues to hinder retail. The decline in new developments can be attributed to high interest rates and increased material prices. Due to these factors, many developers have noted that projected rents cannot keep up with the rise in building expenses. 

 

New projects have also slowed because of a reduction in space as developers have demolished or repurposed more than 150 million square feet of abandoned malls and department stores since 2020. While construction is slow, current developments are focused on small-scale, pre-leased facilities or ground-floor components of mixed-use buildings. The retail supply constraint is expected to continue moving forward, which will likely tighten the market; yet, this activity is likely to support rent growth despite economic headwinds.

 

Expectations for 2026

In 2026, the retail sector is forecast to be defined by a flight-to-quality and supply constraints. After ending 2025 with its strongest absorption levels in years, retail will likely enter 2026 with low vacancy rates around 4.4%. 

 

As interest rates are projected to stabilize near 3%, development costs and achievable rents may begin to soften. However, 2026 deliveries will remain limited to pre-leased properties and mixed-use sites. 

 

Overall, 2026 will move from highlighting retail’s resilience to a new expansionary sector, where the lack of available inventory serves as a factor for property values and rental income.