U.S. Retail Construction Sputters in First Quarter

U.S. retail construction activity was down in the first quarter of 2026, reports CoStar, a provider of commercial real estate analytics. The 64.2 million square feet of retail space that got underway in the first three months of the year is down from 70 million square feet a year earlier and down even more from the 10-year average of 90 million square feet that occurred during the last expansion cycle.

The sluggish pace of construction reflects the degree to which supply growth is disconnected from demand fundamentals, CoStar experts say.

“The pullback in construction reflects a development environment that remains difficult to pencil in most markets,” said Brandon Svec, the group’s National Director of Retail Analytics. “The sharp rise in land prices, construction costs and interest rates over the past several years has pushed required rents well above prevailing market levels for many retail formats. Even in markets with strong population growth and leasing demand, achieving returns that justify ground up construction has become increasingly challenging.

“Beyond cost pressures, developers remain cautious following years of heightened supply risk awareness, while retailers continue to favor measured, capital disciplined expansion strategies. Competition for sites from higher-density residential, industrial, and mixed-use projects further constrains retail development opportunities, particularly in infill locations. At the same time, ongoing competition with ecommerce for consumer spending, especially within soft goods categories, has reinforced a preference for smaller footprints and selective growth rather than broad-based expansion.”

But there are some exceptions, especially in Texas, CoreStar concludes, with Dallas, Houston and Austin leading the way in construction activity. In those markets, as well as several high-growth Southern metros, a significant share of space under construction is already pre-leased, reflecting strong tenant demand for well-located, modern product the company says.

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