Retail Property Outlook
The U.S. retail real estate sector enters the second quarter with momentum that few industry participants would have predicted several years ago. After prolonged concerns around e-commerce disruption, shifting consumer habits, and store closures, retail properties have re-emerged as one of the most stable commercial real estate asset classes. Tight supply, limited new construction, resilient consumer spending, and renewed demand for experiential and service-oriented tenants are all supporting fundamentals across much of the market. However, the outlook remains uneven by asset type, tenant category, and geography.
Retail Fundamentals Remain Historically Tight
One of the defining characteristics of the retail property market heading into Q2 is the continued scarcity of available space. National vacancy rates remain near multi-decade lows despite elevated store closures in select categories. Analysts from CoStar Group project retail vacancy to remain in the mid-4% range through 2026, supported primarily by constrained supply and relatively balanced demand.
Unlike prior expansion cycles, developers have been extremely cautious with new retail construction. High financing costs, elevated construction expenses, and limited availability of viable development sites have significantly slowed new deliveries. According to Marcus & Millichap, less than 10 million square feet of multi-tenant retail space was delivered during the trailing 12 months through Q3 2025, marking one of the lowest completion levels in over a decade.
This limited supply pipeline is helping landlords maintain pricing power even as tenant expansion activity becomes more selective.
Open-Air Centers Continue to Outperform
Performance disparities within retail remain substantial. Grocery-anchored shopping centers, neighborhood strip centers, and well-located suburban retail corridors continue to outperform enclosed malls and weaker power centers.
Research from CBRE indicates that grocery-anchored and necessity-based retail centers are expected to post the strongest occupancy and rent growth in 2026 due to steady consumer traffic and limited competitive supply.
The resilience of open-air retail stems largely from tenant mix. Daily-needs retailers, restaurants, medical users, fitness operators, and service-oriented businesses continue to drive leasing demand. Unlike discretionary apparel retailers that remain vulnerable to shifts in consumer confidence, these tenants rely heavily on physical proximity and repeat local traffic.
Industry sentiment increasingly reflects this divergence. In discussions among commercial real estate professionals, strip centers and neighborhood retail assets are frequently viewed as the preferred retail investment category, while Class B malls remain under pressure from structural obsolescence and tenant attrition.
Service-Based Tenants Are Reshaping Retail Space
A major trend influencing the Q2 outlook is the growing dominance of service-oriented tenants. Fitness studios, wellness providers, med spas, beauty concepts, and experiential operators are now occupying a growing share of retail square footage nationwide.
Recent reporting from The Wall Street Journal noted that service businesses now lease more retail space in the U.S. than traditional goods retailers for the first time on record. Meanwhile, med spa and wellness-related leasing has accelerated rapidly across major metropolitan markets as landlords adapt tenant mixes toward experiential and recurring-service concepts.
This evolution reflects broader shifts in consumer spending behavior. While e-commerce continues to capture a large share of transactional retail purchases, services remain fundamentally location-dependent. As a result, retail centers increasingly function as convenience and experience hubs rather than purely merchandise-driven destinations.
Consumer Spending Remains a Key Variable
Despite healthy property fundamentals, the retail outlook for Q2 is not without risks. Consumer spending growth has moderated amid inflationary pressures, elevated household debt, and continued uncertainty surrounding tariffs and pricing.
CoStar Group analysts warn that retailers may face renewed pressure if suppliers pass through additional tariff-related costs to consumers, potentially dampening discretionary spending activity.
Still, the broader economic backdrop remains relatively supportive. Forecasts from Kiplinger suggest moderate GDP growth, easing recession concerns, and the possibility of lower interest rates later in the year, all of which could support retail tenant performance and leasing activity.
Retailers themselves are also becoming increasingly disciplined in site selection. Expansion strategies are now highly data-driven, focused on proven trade areas, affluent suburban demographics, and omnichannel convenience. This selectivity favors landlords with high-quality locations and strong traffic fundamentals.
Investment Activity Shows Continued Confidence
Investor appetite for retail properties remains surprisingly durable relative to other commercial real estate sectors. As office fundamentals continue to struggle nationally, many institutional and private investors are rotating capital toward retail assets with stable cash flow characteristics.
According to ICSC and Marcus & Millichap, grocery-anchored centers and high-performing neighborhood retail properties are attracting strong investor demand due to stable occupancy, predictable income streams, and favorable inflation hedging characteristics.
Cap rates have largely stabilized after the repricing experienced during the interest rate tightening cycle. However, buyers are becoming increasingly selective. Assets with strong tenant credit, below-market rents, and embedded rent growth potential continue to attract competitive bidding, while weaker centers face longer marketing periods and more aggressive pricing adjustments.
The result is a bifurcated investment environment where quality remains the dominant differentiator.
Regional and Urban Trends
Market performance also varies significantly by geography. High-income suburban trade areas continue to outperform due to stronger household spending patterns and population migration trends.
Urban retail corridors are showing signs of recovery as well. In Manhattan, for example, leasing activity improved notably across several key shopping districts during the second half of 2025, led by luxury brands, food-and-beverage tenants, and fitness concepts.
At the same time, secondary markets with population growth, lower operating costs, and expanding suburban density continue to attract retailer interest. Sun Belt markets remain especially attractive for both investors and tenants due to favorable demographic trends.
A Final Word: Outlook for the Remainder of the Quarter
Looking ahead, the Q2 outlook for U.S. retail properties remains broadly constructive. Fundamentals are expected to stay relatively stable due to the persistent imbalance between limited supply and moderate demand.
Landlords with well-located open-air assets are likely to maintain strong occupancy and continue achieving modest rent growth. Service-oriented tenancy trends should remain a key driver of leasing activity, while grocery-anchored centers and affluent suburban corridors are expected to outperform the broader market.
However, risks remain tied to consumer spending, retailer profitability, and broader macroeconomic uncertainty. Elevated operating costs, cautious expansion plans, and slower discretionary retail demand could limit leasing velocity in weaker submarkets and older retail formats.
Overall, retail real estate appears positioned to remain one of the more resilient commercial property sectors during the second quarter, particularly for owners and investors focused on necessity-based, convenience-oriented, and experience-driven assets.
