2024 Year-in-Review

Despite a rise in retailer bankruptcies and store closures, the U.S. retail space market showed remarkable resilience, with the national vacancy rate steady at 4.1% throughout all four quarters of 2024. This reflects ongoing demand despite a limited supply of high-quality space, as less than 25% of available retail properties were built this century.

Retail leasing totaled 197 million square feet, a 9% year-over-year decline, while net absorption dropped 53% to 23.3 million square feet. Although demand remained positive, it slowed due to supply constraints and evolving market conditions. New retail development declined, with 30 million square feet delivered in 2024—a 26.7% drop from the previous year. Growth was concentrated in high-demand markets such as Austin, Orlando, Dallas, and Miami, though increases in new supply were modest even in these regions.

The impact of new supply was minimal, as only 44.8 million square feet of retail space was under construction at the end of 2024—a historically low level not last seen since 2010. Rising construction financing costs, combined with elevated land, labor, and material expenses, challenged the feasibility of new projects. New development was primarily limited to pre-leased freestanding properties, ground-floor retail in mixed-use developments, and smaller strip centers where higher rents justified costs.

Trends to Watch in 2025

• Space Crunch: Elevated construction costs, now 30%–40% above pre-pandemic levels, are limiting new retail developments. In 2025, less than 20 million square feet of retail space will be delivered, well below historical averages. Despite strong demand, these cost pressures challenge developers to justify new investments, and instead push retailers to optimize and innovate within existing spaces. 
     
• Brick-and-Mortar Momentum: Physical retail is still central to consumer shopping habits, with shopping center occupancy at a decade-high rate of 95.6%. Brick-and-mortar locations are increasingly vital as critical drivers of omnichannel strategies, blending in-store and online shopping. Retailers that integrate experience and convenience are best positioned to thrive in 2025. 
     
• Adaptive Solutions: Most consumers are expected to maintain or reduce retail spending compared to the previous year, by a projected 10 basis points by the end of 2025. In response, retailers are investing in automation to meet customer demand more efficiently and adopting omnichannel solutions to lower service costs. As they also leverage AI and machine learning to create adaptable supply chains that can anticipate disruptions, consumers will be able to shop confidently yet cautiously within their budgets. 
     
• Prioritization of Value: Consumers are becoming increasingly selective, driven by financial concerns continuing into 2025. Forty-seven percent feel pessimistic about finances, while record-high credit card debt and soaring interest rates are driving more deliberate spending. With 60% of consumers spending more on groceries due to inflation, discretionary spending is expected to decline. To adapt, retailers should highlight savings opportunities and create bundled offerings for cost-conscious shoppers. 

U.S. National Retail Forecast

• Vacancy: Vacancy rates are forecast to remain steady throughout 2025, demonstrating the market’s resilience. Less new retail construction is balancing supply with consistent demand. However, in specific segments, particularly freestanding retail locations, vacancy rates may rise as thousands of pharmacies and discount retailers close, partially offsetting the lower rates in other retail subtypes. 
     
• Lease Rates: Market asking rents are projected to rise by approximately 2% in 2025, continuing the momentum from 2024’s record-high rents. That reflects the sustained strength of retail real estate, as landlords capitalize on steady demand and limited new construction to maintain rental growth even amid broader economic uncertainties. 
     
• Demand: Demand for retail space is expected to remain strong because of the ongoing need for strategic physical locations. Net absorption may decline slightly but is still likely to stay positive for both malls and shopping centers. This dip reflects the reduced number of new retail completions and a potential slowdown in leasing due to market stabilization. 
     
• Construction: New retail construction is expected to drop sharply, by 45%, with significantly fewer new space deliveries in 2025. Limited new supply will play a critical role in maintaining stable vacancy rates and sustaining strong demand for existing space. However, the shrinking pipeline also reflects the higher construction costs and economic uncertainties.  

Click here to read more on how expansionary fiscal policies and ongoing challenges are likely to influence the economic and commercial real estate landscape in 2025.