The retail market entered 2025 with strong momentum, driven by high demand and stable vacancy rates. Q4 saw 1.4 million square feet absorbed, accounting for 89% of the annual total. However, overall absorption in 2024 was 90% lower than 2023 due to economic pressures, store closures, and bankruptcies. AI adoption is also set to rise in real estate and construction, optimizing efficiency.
Key Takeaways in Q4
The fourth quarter of 2024 saw the highest net absorption of the year, totaling 1.4 million square feet (msf), while the shopping center vacancy rate remained steady at 5.4%. With Q4 accounting for 89% of annual net absorption, the retail market entered 2025 in a strong position.
Retail construction remains historically low, with just 8.3 million square feet (msf) of new shopping center space delivered in 2024, a record low. With only 10.6 msf in the pipeline as of Q4, inventory growth is expected to remain sluggish in the coming years.
Post-pandemic growth was driven by the South and West, but both saw negative demand in 2024. Meanwhile, the Northeast and Midwest have taken the lead, recording positive net absorption of 720,000 square feet and 1.5 million square feet, respectively.
Remaining Cautiously Optimistic
The consumer-driven retail market remains strong, supported by steady employment, rising incomes, and solid holiday sales. While high-performing brands plan strategic expansions in 2025, competition and high operating costs will shape growth. Tariff policy remains a key factor, with potential changes under the incoming Trump administration. While the impact on retailer margins and consumer behavior is uncertain, the macroeconomic outlook remains favorable for retail real estate in 2025.
Retail Vacancy Holds Steady as Market Slows
The national vacancy rate remained unchanged at 5.4% in Q4, near a record low. The quarter saw the strongest retail demand of the year, with 1.4 million square feet absorbed, making up 89% of the annual total. However, absorption was negative in Q1 and Q3, impacted by hurricanes and potential labor strikes. While the Q4 rebound is a positive sign, overall 2024 absorption was 90% lower than 2023, indicating a broader market slowdown.This deceleration is driven by several key factors:
Economic pressures have led to a surge in store closures and bankruptcies, with 7,300 stores shutting down in 2024, the highest since 2020. Bankruptcies hit post-pandemic highs, as retailers struggled with rising debt and weak revenues. Drugstores and home/office retailers were hit hardest, accounting for 35% of closures—nearly double the 12-year average.
Limited new construction and quick leasing of vacated storefronts have kept retail space tight. With just 8.3 million square feet delivered in 2024, the lowest on record, supply remains constrained after years of subdued development.
The South and West, holding two-thirds of retail inventory, saw negative absorption in 2024 due to severe space shortages. Eight of the 11 markets with sub-4% vacancy are in the South, with Nashville, Miami, and Raleigh/Durham below 3%.
2025 Outlook
Retail Market Remains Stable but Rent Growth Expected to Slow
With limited new retail space in 2025, availability is expected to stay at record lows. However, store closures may free up sought-after locations, especially in prime retail centers. Strong retailers will compete for top spaces and secure longer leases to avoid future supply constraints.
Despite a favorable economic backdrop, consumer spending will become more polarized, creating a greater separation between thriving and struggling retailers. Consumer services and international retailers will continue to drive demand, keeping vacancy rates near historic lows despite economic fluctuations.
While the market is expected to remain steady in 2025, long-term factors like tariffs and slowing consumer fundamentals could impact demand. Rent growth is already moderating, dropping from 4.8% in 2022 to 2.8% in 2024, and is expected to slow further as vacancy rates rise slightly.
AI Adoption to Surge
In 2025, real estate and construction industries will prioritize AI for cost savings, improved safety, and project efficiency.
While AI adoption is growing in retail commercial real estate, the construction side has been slower to integrate these technologies. In 2025, both sides are expected to significantly expand their use of AI, enhancing efficiency and automation across operations. In construction, AI is breaking ground to optimize project management by automating scheduling, resource allocation, and risk detection. Additionally, use of Chatbots and other AI tools will streamline tenant communication and reduce operational costs.
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