Balanced US retail performance is forecast as market dynamics shift

Article originally posted on CoStar on February 17, 2026

Eddie Bauer recently said it will close all stores as part of its third bankruptcy filing. The bankruptcy only applies to the company's brick-and-mortar stores; the retailer's e-commerce and wholesale operations will remain in operation. (Getty)

The U.S. retail property market entered 2026 on firmer footing, following a turbulent first half of 2025 marked by elevated store closings and more space vacated than newly occupied.

The picture changed in the second half of the year, with demand for store space increasing sharply in the fourth quarter, the wave of store closings appearing to crest, and a dearth of new construction keeping a lid on new supply. As a result, the updated CoStar forecast calls for U.S. retail market fundamentals to remain balanced for the foreseeable future.

The national retail vacancy rate is expected to increase slightly in the first half of 2026, then decline in the back half of the year and into 2027. This forecast is consistent with CoStar’s previous two forecasts, which similarly had the U.S. retail vacancy rate peaking at just under 4.4%.

Underpinning the stable outlook was the resumption of positive demand by expanding retailers in the second half of 2025. After two consecutive quarters of falling demand, conditions stabilized in the third quarter as the pace of store closures slowed and demand surged to backfill the space that became available.

This positive leasing momentum accelerated in the fourth quarter, resulting in 11.1 million square feet of positive absorption, or the net change in occupancy, the strongest level of quarterly absorption since the fourth quarter of 2023. As demand increased, the national vacancy rate ticked down by three basis points to just under 4.3%, and retail space absorption exceeded deliveries by 3.2 million square feet.

Overall, U.S. retailers vacated 13% less space in the fourth quarter of 2025 than in the third, as the pace of store move-outs moderated as bankruptcy-driven closures tapered off. Store closures are expected to increase again in the first half of 2026, following the important holiday sales season, as the bifurcated retail sales environment pushes certain retailers to trim locations.

That culling has already begun in the first month of 2026, with retailers such as Francesca’s, GameStop, and Saks 5th Avenue each announcing significant store closures. As a result, net absorption is expected to reach just 1.1 million square feet in the first quarter of 2026 before regaining momentum and rising to an average just over 5.2 million square feet per quarter in the remaining three quarters of the year.

That would result in just over 16 million square feet of positive absorption for all of 2026, the third-lowest annual demand formation recorded in the past decade, with only 2020 and 2025 underperforming the forecast for 2026.

Nevertheless, a near-historically low level of retail space availability and minimal new supply are expected to keep vacancy range-bound throughout the year.

Retail construction starts have fallen to multi-decade lows amid sharply rising costs, reducing the amount of space under construction to a near-historic low of just 50 million square feet. A significant gap exists between current market rents and the rents required to support new retail development.

As a result, construction activity is expected to remain subdued for the foreseeable future. The lack of new supply, combined with Oxford Economics’ forecast for reaccelerating retail sales in late 2026 and into 2027, underpins our outlook that supply and demand fundamentals in the U.S. retail sector will remain balanced over the mid-term, with vacancy holding around 4.3%.

The forecast carries both downside and upside risks, though the balance currently tilts to the downside. Significant uncertainty remains around the impact of increased tariffs on spending by an already fragile consumer. While suppliers and retailers have largely absorbed these costs to date, many have signaled that price increases may be imminent.

With consumers already showing signs of spending fatigue, tariff-related price hikes could further strain household budgets and dampen discretionary spending. Additional downside risks include a softer labor market, resulting in slower wage growth, and lower-than-expected population gains due to stricter immigration enforcement, which may further restrict retail spending.

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