An excess of retail space pre-COVID yielded to a dearth of it. Now, the industry has finally started a measured march to equilibrium. Forecasts show a small uptick in new retail construction planned for 2025 and considerably more for ensuing years. When paired with rising investor interest and other go signs, that gives hope to landlords and brokers hankering for new Class A space in which to settle expanding retail and restaurant tenants. But the question of when the supply will increase lingers.

Retail construction forecasts vary. The American Institute of Architects’ 2024 Consensus Construction Forecast, based on 10 different forecasts submitted to AIA, projects retail construction will rise only 0.3% in 2025. ConstructConnect forecasts 7.1% and Piedmont Crescent Capital 4%. Economist Ed Sullivan at the Portland Cement Association told C+CT this fall that retail construction spending should start rebounding in the second half of 2025 and that 2026 would become a year of positive year-over-year growth. However, most signs point to late 2026 and 2027 for significant new completions. JLL projects that retail vacancy should start loosening in 2027, when more than 150 million square feet is projected to be delivered to U.S. As far as tenant opportunities in 2025 go, the 100 million square feet of announced closures far outweighs the projected 8 million square feet of new space slated to deliver, JLL said.

Investment activity is another promising signal. “There’s been a real push for retail investment in the marketplace,” said Kyle Stonis, senior vice president for Matthews Real Estate Investment Services’ multitenant retail department. “Money that was on the sidelines is getting very active in a sector that was declared dead during COVID but has since proven itself to be quite the contrary,” he said. Retail is no longer undesirable. “It’s front and center among institutional and private investors,” Stonis said.

Investor appetite for both anchored and unanchored centers is the strongest he has seen in years, buoyed by attractive cap rates, investment strategies supported by artificial intelligence tools, dropping interest rates and healthy consumer spending. “There is growing interest, particularly among those investors with significant exposure to multifamily, office and industrial assets, where it’s difficult to find yields,” he said. “New development is going to start but start slow. We still have the fundamental challenges of high construction and land prices, but we’ve got real headway.”

Market to Market

Dallas-Fort Worth was on track to add 1.9 million square feet of retail in 2024, said Weitzman executive chair Herb Weitzman, “but there’s extremely limited speculative space, so new, predominantly grocery-anchored construction adds to occupancy, not vacancy.” Dallas-Fort Worth was reporting “the tightest retail market in its history” in 2024 at a record 95.2% occupancy, Weitzman said.

However, Houston-based developer and broker Kenneth Katz, a partner in Baker Katz, feels inflation will persist through 2025 or longer and the wave of 2024 store closings should delay added construction. “Building costs are unlikely to drop meaningfully, and the cost to borrow is unlikely to improve dramatically,” he said. “Plus, the appetite to lend is still fairly small, but improving. Retail construction costs are still 40% to 50% higher than they were pre-COVID.” The Houston market was on track to deliver 1.2 million square feet of space in 2024, an increase of more than 847,000 square feet from 2023, the Weitzman firm reported, adding that those were mostly needs-based projects.

Any new Houston-area retail construction will come in grocery-anchored or regional developments with junior anchors or big discounters. “The truth is: What the larger-format retailers are willing to pay right now hasn’t kept pace with these costs, and what retailers of nearly any size expect right now in terms of delivery, allowances or shell delivery is as expensive as almost ever for landlords.”

While hopes in the Chicago market remain high for new, quality retail, “I’ve yet to see any real signs of an impending shift,” said Rick Scardino, principal of Lee & Associates of Illinois. Recent interest rate cuts are a start, he said, “but I fear materials and labor costs won’t be dropping soon.” This year is likely to be like 2024 with “extremely” tight inventory, high lease rates and minimal construction, he said. “Brokers will need to continue to dig to find viable options for their tenants.”

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What Landlords Should Do Now To Capitalize on Vacancy Once It Arrives

Even if significant new space doesn’t arrive until 2027, developers and their partners would be wise to start prepping to remain competitive, said JLL executive vice president and national agency retail lead Chris Wilson. “Landlords should be focusing on retrofitting their tenant-closure spaces, prepping for further store closures, modernizing existing spaces with flexible configurations and integrating technology and sustainability features,” he said.

They also should explore properties’ mixed-use potential and should design or redesign spaces that support experiential retail concepts, he added.

Joseph Serruya, principal of architecture firm RDC, said: “Property owners should carefully examine tenant rosters and begin making physical improvements that will accommodate their future plans for their properties.” RDC recently did such design work for the 86,000-square foot Ranch at Hollywood & Verdugo in Burbank, California. The property sits near entertainment employers like Warner Bros. and The Walt Disney Cos., and tweaks improved pedestrian access; added safety features upgraded lighting, parking and landscaping; and added three outdoor seating areas to repurpose underutilized space, Serruya said.

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Pete Pavlakis, a partner in development and leasing firm Legend Partners, said landlords and brokers also can invest proactively in marketing: producing professional visuals, creating compelling property stories, enhancing their online presences and preparing detailed information on housing growth for potential new clients. “They’ll also need to have ready occupancy numbers within the trade area and comparative sales numbers for similar [space].”

Given high occupancy and lack of new construction, some landlords are keeping a small number of vacancies in reserve. Steiner, for instance, is holding out for just the right retailers for Easton in Columbus. “There’s less incentive for centers such as Easton to quickly backfill after a tenant lease expires,” said Steiner senior vice president of leasing Spencer Jordan. “The strategy is not to lease to whoever is ready; it is to wait for the appropriate retailer.”

In 2025, most quality space opening will come from vacancies left by Big Lots, CVS, Macy’s, Conn’s, Red Lobster, TGI Fridays, multiple dollar-store concepts and other troubled or downsizing retailers, Stonis said. American Freight’s plans to close all 300 of its stores due to the Chapter 11 bankruptcy of parent firm Franchise Group Inc., announced in November, will add another chunk of space to the market, he said. With so many retailers shedding locations, “experienced brokers and landlords alike will be strategizing for their tenants or those they wish to chase who would be obvious backfills for many of these options,” Scardino said.

Leasing of quality, vacated spaces always will be a big part of dealmaking in the Marketplaces Industry, but the development wheels unquestionably are in motion after a long consolidation and retrenching period in retail, Serruya said. “While it’s still a landlord’s market, I believe leasing will become more competitive with the new space coming online.” Lenders are becoming increasingly supportive on short-term rates and construction loans, which portends “a healthy increase” in construction on the horizon, seconded NewMark Merrill Cos. president and CEO Sandy Sigal. “For our tenants, that will be a very good thing, as that’s the only way to support the store-count growth they’ve been announcing.”