Retail Vacancy at 4.1% — The Quiet Outperformance Nobody Is Covering
National retail vacancy printed at 4.1% in Q2 2026, according to CoStar's latest release — the lowest reading since Q3 2007. The figure has been improving steadily for eight consecutive quarters. The average retail investor narrative has not kept pace with the data: retail is still widely perceived as a challenged, e-commerce-disrupted asset class, while the actual vacancy and NOI metrics are outperforming almost every other property type.
Why vacancy is this tight:
Three structural forces have converged to create the tightest retail vacancy in a generation. First, new retail supply is effectively zero — retail construction starts have been running at 30%–40% of their historical average since 2019, as financing for speculative retail development dried up after the 2017–2019 department store disruption cycle. No new supply means existing supply is absorbing demand without competition from new inventory.
Second, necessity and service retail has proven genuinely e-commerce resistant. Grocery, healthcare services, fitness, restaurants and food service, personal services (nail salons, hair salons, urgent care), and dollar stores cannot be effectively substituted by online commerce. These categories have continued to expand their physical footprints and represent the majority of active retail leasing.
Third, the retail tenant base has quietly improved. The 2018–2021 period of department store, specialty apparel, and toy store closures cleared the weakest credit from the tenant pool. The retail tenants actively signing leases in 2025–2026 — healthcare systems, discount grocers, fitness operators, fast-casual restaurant groups — are generally stronger credits and more durable business models than the tenants they replaced.
The NOI story:
Retail same-store NOI growth ran at approximately 3.8% year-over-year in Q1 2026, according to NCREIF Property Index data — above multifamily (2.1%), office (-4.2%), and approximately equal to industrial (4.1%). That is a remarkable result for an asset class that national headlines have been writing off for seven years.
The NOI growth is driven by rent mark-to-market — below-market leases signed during the 2018–2022 distress period are now rolling to current market rates that are 15%–25% higher — and by CAM recovery improvement as occupancy has tightened and operating expenses are shared across a fully occupied tenant base.
The underwriting implication this week:
Retail underwriting needs to be refreshed for the current reality. Three specific adjustments:
Anchor rent mark-to-market: grocery and discount anchor rents signed in 2015–2020 are now significantly below market. Modeling the rent at expiration using current market comparables will show meaningful embedded upside. For grocery-anchored centers with anchor expirations in 2025–2030, this is a quantifiable value driver.
Vacancy assumptions: models using 7%–10% stabilized vacancy on grocery-anchored or necessity retail are using assumptions that are 300–600 bps above the current market. Tightening to 3%–5% for well-located necessity product is now the market-supported assumption.
Cap rate: grocery-anchored retail in major markets is trading at 5.5%–6.5%, not the 7%–8% that distress-era pricing suggested. Exit cap assumptions need to reflect the institutional re-rating of the asset class.
Klyvora note: Retail underwriting — CAM reconciliation, anchor lease mark-to-market modeling, co-tenancy clause analysis, and tenant credit monitoring — is one of the most data-intensive analytical workloads in CRE. Klyvora's offshore retail-specialist teams maintain the analytical cadence that quality retail portfolios require.
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