From ever-increasing e-commerce adoption to the consolidation and folding of major chain stores to the drastic decline in relevance and activity of many malls across the country, the retail real estate market has experienced a significant transformation in recent decades. With this disruption, developers have increasingly directed capital toward industrial, multifamily and other property types.
Through this upheaval, what was a response to the sector’s decline has brought an unintended, positive consequence for players that remained engaged in the space: the United States has built relatively little new retail space.
While other commercial real estate segments have recently worked through significant additions to supply, retail enters the second half of 2026 with a development pipeline that remains exceptionally constrained. At the same time, retailers continue to seek well-located space, consumers are still spending and occupancy across much of the sector remains healthy.
The result may be a healthier supply-demand balance than the retail sector has enjoyed in decades.
A Development Pipeline That Never Fully Recovered
Retail construction has remained subdued even as the outlook for physical stores has improved.
CoStar reported that approximately 72.1 million square feet of retail space was under construction nationally during the second quarter of 2026, below the 10-year average of approximately 78.9 million square feet. More importantly, the economics of new development remain difficult. Higher land prices, construction costs and interest rates can require rents substantially above those available at existing properties, limiting the number of projects that make financial sense.
The result is a market in which improving fundamentals have not yet triggered a major development response.
AEW reported that 28.5 million square feet of retail space was completed nationally during the 12 months ending in the second quarter of 2026, less than half the pre-pandemic annual average of nearly 62 million square feet. As a result, U.S. retail inventory increased just 0.3% year over year.
The significance extends beyond the amount of space being delivered. Much of today’s development is concentrated in single-tenant properties and build-to-suit projects rather than large speculative shopping centers. That makes a broad-based supply surge increasingly difficult to envision in the near term.
Limited Supply Is Supporting Existing Properties
The limited construction pipeline is particularly significant because it has coincided with relatively healthy tenant demand.
National retail availability held at 4.9% during the second quarter of 2026, according to AEW, essentially unchanged from prevailing levels over the past year. Although availability has edged up from its lows, retail space remains scarce relative to long-term averages, with occupancy demand continuing to absorb most new inventory entering the market. At the same time, just 28.5 million square feet of new retail space was completed during the 12 months ending in the second quarter, less than half the pre-pandemic annual average of nearly 62 million square feet.
Consumer spending is also providing support. U.S. Census Bureau data showed retail and food-service sales in July were 5.0% higher than a year earlier, despite declining 0.6% from June. Sales from May through July were 6.3% above the same three-month period in 2025.
Importantly, growth in e-commerce no longer necessarily translates into a corresponding retreat from physical stores. Retailers have spent years integrating stores with online ordering, returns, fulfillment and customer acquisition. Physical locations increasingly operate as one component of a broader distribution and marketing strategy rather than as an alternative to digital commerce.
That evolution means the industry’s current demand for space looks different from the expansion cycles of previous decades. Many retailers remain selective about store counts and locations, but selectivity combined with limited construction can still create significant competition for the best existing spaces.
The Advantage Is Not Evenly Distributed
The national numbers can obscure significant differences among retail formats.
Grocery stores, restaurants, convenience retail and necessity-oriented neighborhood centers continue to benefit from relatively durable demand. Other formats like malls face greater challenges. Individual retailers continue to close stores, restructure operations and adjust their physical footprints.
That distinction is important. Retail’s improved fundamentals do not represent a return to the era when virtually any shopping center could benefit from expanding consumer demand. Increasingly, value depends on location, demographics, tenant mix, accessibility and a property’s ability to accommodate the ways retailers now operate.
In that environment, obsolete space and well-located space can behave almost like different asset classes.
Scarcity Could Change the Development Conversation
What will it take to kickstart the development cycle? Beyond tenant demand surpassing availability, construction economics must improve.
A May CoStar report estimated that developers in many markets need blended rents above $30 to $35 per square foot to justify new multi-tenant retail development, compared with national market rents closer to the mid-$20s. Higher land prices, construction costs and interest rates have all contributed to that gap, making projects difficult to pencil even in markets where population growth and leasing demand are strong.
That could extend the advantage enjoyed by existing properties.
The opportunity may also increasingly involve redevelopment rather than entirely new construction. Older centers in strong locations can potentially add restaurants, entertainment, services, medical uses or new retail concepts without requiring developers to recreate the infrastructure and land assemblage of a ground-up project.
For owners and investors, this makes the quality and adaptability of existing retail particularly important.
Retail spent years being defined by what the industry was losing: department stores, struggling malls and market share to e-commerce. The more consequential story today may be what it did not build.
A decade of development restraint has created scarcity at a time when retailers still need physical locations and consumers continue to spend in them. That does not guarantee retail’s future performance, but it does provide something many property sectors are currently seeking: a relatively disciplined supply side.
Sometimes the strongest foundation for the next development cycle is the one that never got overbuilt.
