U.S. Retail’s Renaissance?

Introduction

The U.S. retail sector experienced a profound shift in sentiment over the last decade, but is the pessimism still warranted? Growing pressure from e-commerce that cannibalized brick and mortar sales caused a wave a retailer bankruptcies, changed consumer behavior and caused many retailers to reinvent themselves or fail. As the economy reopened post-pandemic, unemployment fell to 4% and wages rose. A new generation of retailers in survival and growth mode now realize that physical retail is an essential complement to their online presence. After a decade of minimal construction, quality, well-located retail space today is in short supply. As a result, vacancies have fallen to the lowest levels on record since the late 1980s across all retail formats, aside from enclosed malls. While demand slowed in 2024—in part because so little space was available—construction activity fell even further. We expect the inflation-driven costs to build and finance new development will continue to constrain new retail deliveries over the next five years to a historic low. The absence of any meaningful new supply will result in low vacancy levels, setting the stage for above-inflation rent growth. In our H1 2025 Investment Outlook, retail is the only traditional commercial real estate sector slated to offer the combination of real rent growth and positive leverage to going-in cap rates.

In this paper, we will explore the evolution of the U.S. retail sector and the unique value proposition the sector offers investors today.

Retail space markets

From 2000 to 2008, U.S. retail space grew by an average of 2.1% per year, faster than any other real estate sector and nearly double the rate of population growth (Figure 1). During this time, retail space per capita rose from 52.4 SF in 2000 to 57.2 SF in 2008—a period in which retail vacancies broadly fell as the U.S. enjoyed an extended period of economic growth centered on expanding homeownership, especially in fast-growing Sunbelt suburbs and a technological revolution brought on by the growth of the Internet.

Figure 1: Annual supply growth and retail space per capita

The Great Financial Crisis (GFC) of 2008 brought to a sudden end the era of generous lending for home construction and ownership and with it the suburban growth model that had sustained the retail sector. The same year Amazon’s annual North America revenues topped $10 billion for the first time, up 26% from the prior year—a growth rate the company would sustain for the next decade.¹

Brick-and-mortar vacancies soared to the highest levels on record as retail sales plunged during the deep and extended recession of 2007-2010 (Figure 2). Storefronts vacated by failed retailers including Circuit City, Hollywood Video (followed by Blockbuster Video), Borders Books, and Linens ‘N Things, among others, were visual evidence that a new era for retail had dawned. Digital media replaced physical media, products could appear on doorsteps within days and more Americans would choose urban apartment living over large suburban homes.

Figure 2: U.S. retail vacancy rates

The retail sector responded to the changes wrought by e-commerce in several ways. First, construction of new retail space stopped and has yet to recover, with annual completions averaging just 0.5% of inventory from 2009 to 2024—the lowest rate (along with office in recent years) of the main property types. Second, retail demand also slowed—the 120 million SF of annual net absorption from 2009-2019 was about half of the pre-GFC average. Demand also shifted away from consumer goods and toward food and experiences as grocery square footage more than doubled and the number of restaurants and bars increased by 110,000 over the decade. Third, owners dealt with high vacancies by demolishing more than 400 million SF of space, much of it for redevelopment into multifamily. The steady march of bankruptcies and store closures continued, eventually claiming JCPenney, Sears, Brooks Brothers, Bed Bath & Beyond and Toys "R" Us, among others—freeing up coveted locations for more resilient brands in expansion mode like TJX, Target, Nordstrom and Walmart.

A new generation of retailers began to understand and leverage their key advantage over Amazon—that their physical locations could serve as distribution and return centers for online sales, provide lower cost customer acquisition and reinforce brand experience/loyalty. Small local shops, conversely, could reach a global consumer base with a minimal investment in an online presence—often on Amazon’s third-party platform. Digitally native brands like Warby Parker found that opening physical stores significantly grew online revenues in the area. The combination of these factors—low supply, growth of grocery and food and beverage and demand for physical space from a new generation of digitally savvy brands, combined to reduce neighborhood and community center (NCC) retail vacancies to new lows by 2019.

But just as the physical environment was reinventing itself, retail experienced another exogenous shock, with the COVID-19 pandemic shuttering physical retail for much of 2020 through 2022. Retailers who evaded extinction embraced online sales channels and diversified their services. A new round of bankruptcies and store closings led to an uptick in the vacancy rate but also put many prime retail locations on the market for the first time in a generation. House-bound consumers amassed record savings. As a result, the retail sector that reopened its doors around 2022 featured resilient retailers in growth mode, landlords with prime space on the market and a consumer base ready to spend. Average annual asking rents for NCC retail rose at the fastest rate in 15 years as retail vacancies fell to the lowest levels on record (Figure 3).

Figure 3: NCC retail asking rent change and vacancy rate

Retail fundamentals outlook

Retail fundamentals remained healthy, but 2024 saw a rise in store closure announcements as higher operating costs in the form of rising wages, increased labor expenses and higher transportation costs put pressure on financially weaker retailers. As a result, many retailers had to close underperforming stores or reduce their physical presence to stay profitable. The pressure was particularly evident in specialized big box retailers like Party City and The Container Store, which struggled to match the pricing advantages of general merchandise giants like Walmart and Target. However, the increase in recent closure activity to date has not significantly disrupted the retail market. National NCC retail vacancy rates remained near a historic low of 5.6% as of Q1 2025 and much of the newly available space is expected to be relatively quickly reoccupied due to the market's limited existing inventory and constrained new supply. Beyond minimal new development, demolitions of older legacy stock within the retail sector have become more prevalent in recent years. The removal of obsolete space, coupled with the lack of new construction is expected to benefit the sector’s outlook (Figure 4), with vacancies projected to remain near current levels over the forecast horizon. The strength of NCC fundamentals is expected to drive above-trend asking rent growth of 3.1% per year over the next five years.

Figure 4: NCC retail demand, supply and vacancy outlook

The rent growth outlook varies significantly across different regions. Sunbelt markets with strong population and buying power growth such as Phoenix, Las Vegas, Atlanta, Tampa, Dallas and Nashville, are expected to achieve robust rent gains due to tight supply and demand dynamics. Mature markets like Boston, Northern New Jersey and Philadelphia are projected to achieve lower, yet still healthy, rent growth driven by a lack of supply and their large and affluent population bases that support strong buying power. While market-level metrics are important, submarket and micro-location attributes, including demographics, market fundamentals, as well as accessibility, visibility, foot traffic, nearby amenities and zoning, play a crucial role in determining retail rent growth.

Figure 5: Forecast annual average rent change by market, 2025-2029

Capital markets

The retail sector is the least institutional sector within commercial real estate, primarily due to its fragmented ownership structure and generally localized investment patterns. While multifamily, office and industrial properties historically have attracted more institutional capital, retail assets remain predominantly held by private investors. This fragmentation stems from the heterogeneity of retail assets and the sector’s inherent sensitivity to local market dynamics, tenant relationships and community preferences, as well as small check sizes for local NCCs, leading to lower rates of institutional ownership and a higher share of private owners or owner-users (Figure 6).

Figure 6: Asset value by ownership type, $ trillions

Institutional investor interest in retail assets came back in 2024 and continues in 2025 as market conditions have improved. Driven by higher going-in yields, improving rent and occupancy outlooks, as well as increasing lender appetite, the retail sector garnered a 27% share of sales volume across the four major sectors in 2024, compared with about 20% prior to the pandemic in 2019. Financing accessibility has improved as interest rates have eased. The CBRE Lending Momentum Index, which tracks the pace of CBRE-originated commercial loan closings in the U.S., rose 37% in 2024 as lending activity improved among banks, life companies, alternative lenders and CMBS. CMBS issuance rebounded to $108 billion in 2024, nearly doubling annual issuances in 2022-2023, and the share of loans backed by retail properties steadily increased to 25.9% in 2024 compared with 21% in 2019.² Lenders are focusing on retail as a means to diversify their portfolios, having focused primarily on multifamily and industrial lending in recent years. Within the sector, lenders have demonstrated a preference for grocery-anchored and service-driven retail over other product types, like traditional malls and big box power centers, given their lower-risk tenant profile.

Retail transaction activity demonstrated remarkable geographic dispersion as well, with capital flowing beyond traditional gateway markets into secondary locations throughout the country. Regional and NCC retail in Sunbelt metros in the southeast, Florida and Arizona saw particularly robust investment, while even historically slow-growth markets in the Midwest and Northeast attracted higher levels of institutional capital seeking higher yields. This regional diversification reflects investors' growing comfort with retail fundamentals as physical store performance has stabilized across nearly every submarket. The influx of institutional capital also increases liquidity and transparency and solidifies the retail sector as a vital component of a diversified investment portfolio.

Figure 7: Retail transaction volume by top 25 markets, 2024 vs. 2017-2019 average, $ billions

The opportunity in the retail sector is also evident in the recent historic reset of market values, which fell a cumulative 24% since 2017. Private market retail values, as measured by the NCREIF NPI, peaked in 2017 and subsequently declined during the pandemic, falling by 14% from 2017 to 2022. In contrast, the residential and industrial sectors proved most resilient during the pandemic period, buoyed by strong liquidity and relevancy that drove values to new heights. Despite the challenging higher interest rate environment of recent years, in which values across all sectors have declined, retail write-downs have been the shallowest, at 10% since Q4 2022 (Figure 8), reflecting improved market fundamentals. The sector’s values plateaued in the last two quarters of 2024—a clear indication of stabilizing private market pricing. This trend is further corroborated by the public market, where retail REIT prices have experienced the smallest decline among the major property types since 2021 of just 2% (Figure 9). After suffering losses in March and April 2025 due to tariffs concerns, REIT valuations have shown a modest recovery following recent trade agreement developments.

Figure 8: NCREIF NPI Value indices by property type, Q4 2019 = 100
(Labels show cumulative decline from COVID-era peak)

Figure 9: U.S. REIT price indices by property type, December 2019 = 100
(Labels show cumulative decline from COVID-era peak)

NCC retail assets have consistently delivered yield premiums compared to most other commercial property sectors (Figure 10), with cap rates over the last decade typically 100 basis points higher than comparable office or multifamily assets in the same markets.

Figure 10: Property sector cap rates and 10-year Treasury rate

Sector risks

Challenges remain, as in all sectors. Potential volatility in the macroeconomic environment may continue—from universal tariffs that may inflate the cost of goods and further squeeze profit margins, to immigration restrictions that could potentially dampen demographic growth, to public sector job cuts—and could impact consumer demand. The growth of e-commerce continues as well. The rise of digital platforms like Temu and Shein has captured market share, particularly in the fast fashion and discount retailer segments, contributing to store closures. This has disproportionately affected malls and power centers that have not adapted to online sales channels.

Retail market fundamentals should be able to withstand these headwinds. Store closures by weaker retailers will free up coveted space for healthier retailers to expand—likely at higher rents. This turnover process ultimately strengthens the overall retail ecosystem by removing underperforming stores and creating opportunities for more viable businesses. The most stable outlook within the retail sector exists in the NCC retail segment, which offers a more defensive investment profile, especially during periods of economic uncertainty. These centers, typically anchored by grocery stores and focused on necessity goods and services, benefit from consistent consumer traffic patterns regardless of broader economic conditions. Daily needs retailers that populate these centers provide steady income streams that are less vulnerable to e-commerce competition.

Shorter lease terms have also become increasingly common as retailers seek greater flexibility amid market uncertainty, while capital expenditure requirements continue to rise as retail spaces need to be upgraded and reconfigured to accommodate evolving retailer needs and consumer expectations. Forward-thinking property owners are responding to these challenges in the market with targeted approaches to tenant selection, property focus, partnership development and capital planning that anticipate potential consumer spending constraints resulting from economic policy shifts.

Conclusion

We believe the NCC cohort of the retail sector offers a compelling long-term investment opportunity driven by healthy and stable fundamentals, growing liquidity and attractive yields for an abundance of products across a wide range of markets and strategies. While the retail landscape continues to evolve amid the challenges of e-commerce growth and shifting consumer preferences, our investment approach focuses on resilience. NCC retail centers and their notable advantages, are well-positioned to thrive in the evolving retail landscape.