Why New Retail Construction Is at Historic Lows — And What It Means for Investors

New retail construction is expected to fall 37% in 2026 according to Colliers. At first glance, this sounds like bad news for the retail real estate sector. For most developers, it is. But for investors in existing grocery-anchored shopping centers, this isn't a problem — it's an opportunity.

When supply contracts sharply while demand remains steady (or grows), the dynamics shift dramatically. Rents rise. Occupancy improves. Tenant bargaining power weakens. And landlord returns strengthen. This is exactly the environment taking shape in retail real estate right now.

The Long Road to Structural Shortage

Retail development didn't just slow down overnight. The trajectory began with the 2008 financial crisis, which dramatically curtailed development for years. Even as the economy recovered, builders faced a persistent headwind: uncertainty. The rise of e-commerce, shifting consumer behavior, and the pandemic further suppressed development activity.

The result? Years of underbuilding created a structural shortage of well-located retail space. This isn't temporary. New shopping centers require 2-3 years just for entitlements and permitting, before construction even begins. In the current environment, many projects simply aren't penciling out.

Retailers know this. Their leasing strategies have shifted from seeking new space to intensifying their presence in existing, proven locations. That shift is rewarding landlords of stable, well-managed centers.

2026: The Data Points to Opportunity

Colliers projects approximately 1.5% nationwide rent growth driven by tight supply conditions. While that may sound modest, context matters: this represents growth in an asset class that spent a decade treading water.

More importantly, retail vacancy rates are at multi-decade lows. Higher occupancy rates mean more revenue per property and stronger leverage with tenants. Landlords can be more selective with tenant mix, negotiate better lease terms, and have greater flexibility on renewal terms.

PwC's latest analysis shows retail demonstrated 4.1% year-over-year positive momentum — the strongest performance among the four major commercial asset classes.

Why New Construction Isn't Coming Back Soon

Even as the opportunity becomes clearer, new development remains challenged by several structural headwinds:

• Cost barriers: Tariffs on steel and aluminum have increased construction costs by approximately 50%, making projects uneconomical at current rental rates.
• Financing constraints: Interest rates remain elevated relative to historical norms, raising the cost of development capital and extending payback periods.
• Land scarcity: Prime suburban locations where retail anchors drive traffic are increasingly scarce and expensive.
• Regulatory delays: Entitlement and permitting timelines of 2-3 years create long lead times and execution risk for developers.

These factors aren't temporary. They're structural. The path to economic feasibility for new retail development requires either significant rent growth or a meaningful drop in construction costs and financing rates. Neither scenario appears imminent.

The Demand Side: Still Growing

While supply contracts, demand continues to strengthen. Several trends are driving this:

Grocery expansion: Major grocers are aggressively expanding their footprints. Aldi is opening 180+ new stores, while Kroger is planning 30% more new builds. These grocers compete fiercely for the best available locations in existing centers.

Service tenants: Medical practices, fitness centers, personal services, and other necessity-driven retailers need physical space and continue to seek locations. These tenants provide stable cash flows and complement grocery anchors.

E-commerce companies: Paradoxically, online retailers like Amazon are increasingly opening physical locations for returns processing, local fulfillment, and customer interaction. These expanding categories need space in convenient, visible locations.

The Investment Implications

The supply-demand imbalance is creating a powerful backdrop for investors in existing grocery-anchored and open-air centers:

• Occupancy improvement: Higher tenant demand and limited new supply mean existing centers are filling vacancies faster.
• Rent growth acceleration: As demand outpaces supply, landlords have greater pricing power on renewals and new leases.
• Lease term improvements: Landlords can negotiate longer lease terms, reduced tenant improvement allowances, and stronger renewal options.
• Tenant quality improvement: Greater selectivity means landlords can upgrade tenant mix, reducing turnover and improving stability.

CBRE's recent market assessment concluded that risk-adjusted returns in retail "look especially attractive" for well-located grocery-anchored and open-air centers. This isn't boosterism — it's a clear-eyed assessment of supply-demand dynamics.

J.P. Morgan's research team weighed in with an equally bullish view: "strongest valuations in a decade across active shopping centers." When institutional capital sees opportunity, it matters.

How Value-Add Investors Win

For value-add investors, this environment creates a clear playbook:

Acquire below replacement cost: Buy existing grocery-anchored centers at prices below what it would cost to build equivalent space. With construction costs elevated by tariffs and financing, this gap is widening.

Stabilize through active management: Implement leasing strategies that capitalize on tenant demand. Upgrade tenant mix. Negotiate better renewal terms. Improve non-rental income through better CAM management and operational efficiency.

Capture dual upside: As NOI grows through improved occupancy and rent growth, cap rates begin to normalize. Well-managed properties see valuations rise from both earnings growth and multiple expansion. This dual upside is the hallmark of value-add real estate.

The structural shortage of retail supply won't reverse in 2026 or likely for several years beyond. For investors with the conviction to deploy capital in well-located grocery-anchored centers, this window of opportunity has expanded considerably.

To explore how grocery-anchored retail fits into a diversified investment portfolio, download our comprehensive investor guide to grocery-anchored real estate.