US Retail Real Estate After the E-Commerce Wave

Introduction

US retail real estate lost ground in 2025 and barely loosened. Through the first nine months of the year the sector posted 10.6 million square feet of negative net absorption, meaning tenants vacated more space than they took, which nudged national vacancy up to 4.3% in Q3 2025 from a record low near 4.0%, the tightest reading since the late 1980s outside enclosed malls. The notable part is how little the market gave back: vacancy ticked up only modestly because new supply was even scarcer than the lost demand. After roughly a decade of barely any ground-up development, there simply was not enough competing space for the tenant attrition to loosen the market much. The "retail apocalypse" thesis that dominated coverage notes from 2018 to 2020 has inverted into something closer to structural undersupply.

The recovery is not uniform, and the divergence is the part that matters for relative-value work. Grocery-anchored centers, open-air neighborhood centers, and other necessity-driven formats led the rebound. Enclosed regional malls remain bifurcated, with a handful of trophy assets resilient and the long tail still bleeding tenants. Public retail REITs span that whole spectrum, from Simon Property Group's super-regional malls to Realty Income's 15,500-property net-lease book, and treating "retail" as one asset class is the most common analytical error in the space.

Vacancy ran down to a multi-decade low and has only just begun to edge higher (CoStar series, all-retail basis):

The roughly 20 to 30 basis point uptick from the trough to Q3 2025 happened in a year of net move-outs, yet the rise stayed small. That is what makes retail unusual right now: the supply side, not the demand side, is doing the work. With deliveries running at decade lows and consumer spending holding, the scarcity of competing space gives landlords pricing power even on a soft absorption year, and it is the single biggest reason retail cap rates have stopped widening across the better formats.

Retail Real Estate (Institutional Definition)

Income-producing commercial real estate consisting of shopping centers and standalone retail buildings serving consumer retail tenants. The institutional category spans enclosed regional malls (Class A super-regional, Class B regional, struggling Class C); open-air neighborhood and community centers (grocery-anchored, neighborhood serving); strip centers (sub-100K sqft, often single-anchor); power centers (250-600K sqft, big-box-anchored); lifestyle centers (mixed-use with restaurants and entertainment); outlet centers (manufacturer outlet brands at discount); and urban high-street retail (street-front retail in major urban corridors). Different sub-segments have meaningfully different operating economics, tenant credit profiles, and forward outlooks; the headline "retail" category masks substantial divergence across the sub-segments.

Why Vacancy Stayed So Low While E-Commerce Kept Growing

E-commerce is now roughly 16% of total US retail and still climbing (closer to 25% measured against core retail that strips out autos, gas, and food service), so the tight market is not a story of online shopping retreating. Five forces explain how physical retail absorbed that headwind and still ran short of space:

The demand-side story is that retailers stopped treating stores and websites as substitutes and started treating them as one system. A store that also fills online orders, processes returns, and anchors local delivery is worth more to a retailer than a pure-transaction box, and that revaluation is what kept tenants in space even as online sales grew.

Omnichannel Retail Strategy

An integrated retail model that runs physical stores and digital channels (web, mobile, app) as a single customer-experience system rather than separate businesses. Stores double as fulfillment points (buy-online-pickup-in-store), return-processing centers, and brand-experience destinations alongside in-store transactions. The shift moved real estate demand toward formats that complement online operations: smaller urban stores, suburban centers near dense population, and locations that can support last-mile delivery.

The reinforcing dynamics break down as follows:

There is no generic "retail REIT" to benchmark against. The public names specialize by format, and their multiples, lease structures, and tenant credit profiles diverge enough that they barely belong in the same comp set:

Simon and Macerich live in the regional mall world, where Class A trophy positioning has held up but Class B/C exposure has been the drag. Realty Income runs the largest net-lease platform, diversified across thousands of small free-standing buildings. The grocery-anchored names (Regency, Federal Realty, Brixmor, Kimco) have led the necessity-retail rebound. Because the cash-flow drivers differ this much, the property-level valuation framework you apply to a mall landlord (in-place rents, sales productivity, redevelopment optionality) looks almost nothing like the one you apply to a net-lease book (lease duration, escalators, tenant credit).

The recovery has been deeply uneven, and the gap between the strong and weak formats is the most important thing to internalize about the sector. The strongest performers in 2025:

The weakest performers in 2025:

The Class A regional mall (Simon Property Group's portfolio, Macerich's portfolio) continues to show selective resilience, but with tighter operating economics than the pre-pandemic period.

This divergence is why a retail REIT trading comp has to start with format exposure. The grocery-anchored names trade at premium multiples on the back of the necessity-retail recovery; the mall-heavy names carry the trophy-versus-tail split inside a single ticker. Pull a sector-average multiple across the group and it describes none of them. The first cut in any relative-value screen should be sub-segment weighting, not the "retail" label.

Class A Trophy Mall Resilience

The Simon Property Group portfolio illustrates the Class A trophy mall resilience thesis. Simon's top 30 super-regional malls (King of Prussia, Roosevelt Field, Sawgrass Mills, The Galleria Houston, Aventura Mall, and similar trophy properties) have demonstrated continued tenant demand, occupancy resilience, and selective rent growth even as broader regional mall fundamentals have challenged. The top trophy properties benefit from irreplaceable locations, captive luxury and premium-brand tenant demand, and integrated entertainment, dining, and experiential offerings that pure-transactional retail cannot match. Simon's strategy has emphasized continued investment in the trophy portfolio while accepting attrition in lower-tier properties. The bifurcation between trophy and lower-tier mall performance is one of the structural features of the post-pandemic retail real estate landscape.

The Mall Conversion Story

Where Class B and C enclosed malls have failed, mall conversion has emerged as a meaningful real estate strategy. Conversions include demolition and ground-up redevelopment into multifamily or mixed-use; conversion of mall space into last-mile logistics, where a dead mall's parking-rich footprint near dense population is exactly what the industrial supercycle needs; conversion into medical office or healthcare uses; and conversion into entertainment, fitness, or experiential venues. The same e-commerce wave that hollowed the mall is now bidding for its land. The conversion economics depend on the underlying land value (which often exceeds the failed mall value), the local zoning environment, and the specific alternative use that the location can support. Mall conversion activity has expanded meaningfully through 2024-2025 as failed mall ownership has consolidated and conversion expertise has scaled across specialized operators.

The forward case rests mostly on the supply side. New construction stays below historical levels for the medium term, which keeps rent growth running above inflation regardless of how demand evolves. On the demand side, retailers keep refining omnichannel models that favor the formats covered above, and barring a real recession, consumer spending should carry tenant performance and renewals through the cycle. The watch items are the deal markets: REIT M&A has been thin but could reaccelerate if NAV discounts widen, and follow-on equity issuance has reopened for the strongest names while staying closed to the weaker ones.

The genuinely interesting thing is how wrong the consensus was. The pre-2020 view had retail in secular decline, and the pandemic was supposed to be the accelerant that finished the job through forced closures and a permanent shift online. Instead vacancies sit at multi-decade lows, supply is structurally short, retailers are reinvesting in stores, and institutional capital has come back. Many allocators positioned for continued decline and missed the turn, which means the residual risk in retail underwriting today is the opposite of what it was five years ago: applying stale pessimism, not stale optimism. Underwriting that still carries a secular-decline discount systematically understates current values and forward NOI.

Retail tenant credit varies meaningfully across sub-segments and store formats. The investment-grade tenant base anchoring necessity retail (Walmart, Target, Costco, Kroger, Publix, CVS, Walgreens, Home Depot, Lowe's) supports premium valuations for grocery-anchored and big-box-anchored centers. The mid-tier tenant base (specialty retail, restaurant chains, fitness operators) carries more credit risk and produces wider cap rates. The small-shop tenant base (local restaurants, services, specialty retail) carries the highest credit risk and the most lease-rollover sensitivity.

Tenant bankruptcy has been a recurring pressure for more than a decade. Toys R Us, Sears, Bed Bath & Beyond, JCPenney, and a long list of smaller chains each put landlords through painful wind-down periods, with co-tenancy clauses and anchor-vacancy triggers turning one departure into rent relief across a center. The 2024-2025 bankruptcy environment has been mild by comparison, which has helped the recovery, but credit concentration stays the variable that separates a premium center from a discounted one. How that risk actually flows through to landlord cash flow depends on the lease itself; the mechanics of recoveries, TI allowances, and renewal economics determine how much a tenant default truly costs. A center weighted toward lower-credit specialty retail carries far more rollover and default risk than one anchored by an investment-grade necessity occupier paying on a long lease.

Institutional capital flow into retail has rebounded sharply alongside the operating fundamental recovery. The 2024-2025 investment volume data confirms the institutional return: annual retail investment volumes have moved above long-term averages; private equity has re-engaged with retail acquisitions across sub-segments; and the bid-ask gap that constrained 2022-2023 transactions has narrowed meaningfully as sellers have accepted the new market-clearing cap rates and buyers have become more confident in the demand picture.

Geography has shifted too. Sun Belt grocery-anchored centers draw the largest institutional flow on demographic tailwinds; coastal high-street and trophy mall trades continue at smaller scale; secondary-market retail has attracted value-add and opportunistic money chasing wider yields. The pipeline through 2026 looks healthy enough to keep both sell-side and buy-side advisory busy in the format.

Capital Markets Issuance

Retail REIT equity capital markets activity has reopened meaningfully for the strongest names. Federal Realty, Regency Centers, Kimco, Realty Income, and Simon Property Group have all accessed equity capital markets in 2024-2025 through follow-on offerings, ATM programs, or other equity issuance vehicles. The reopened equity capital markets support continued acquisition pipeline funding, debt refinancing, and balance sheet optimization. Mall-focused names like Macerich have had more restricted access, and that gap compounds: the REITs that can raise cheap equity fund acquisitions and refinance on better terms, while the ones that cannot fall further behind on cost of capital. The financing market is widening the same trophy-versus-tail split that the operating fundamentals created.

M&A and Take-Private Activity

Retail REIT M&A activity has been modest in recent years compared to the active period of 2014-2018 when consolidation transformed several sub-segments. The 2024 M&A picture included Realty Income's acquisition of Spirit Realty (~$9.3B in an all-stock transaction completed in January 2024), which consolidated two large net-lease retail REITs into a single platform with expanded portfolio scale, geographic diversification, and tenant credit mix. The transaction is the modern template for retail REIT consolidation and demonstrates the continued strategic logic of scale advantages in net-lease retail.

Where the next round of deals lands is fairly predictable. Net-lease and grocery-anchored portfolios, the sub-segments where the recovery is strongest and the cash flows cleanest, are the natural consolidation targets, both as REIT-on-REIT mergers in the Realty Income-Spirit mold and as PE-sponsored take-privates of smaller names trading at wide NAV discounts. Mall REIT M&A stays harder to do: the trading-multiple gap between trophy and tail assets, plus management reluctance to sell at depressed prices, keeps most of those conversations theoretical. Pace from here turns on the cap rate environment and the rate path, but the structural backdrop through 2026 supports continued activity rather than a freeze.

That backdrop is the takeaway worth carrying out of the sector. Retail is no longer a melting ice cube, and it is not back to its 2000s heyday either. It is a structurally short market where the supply discipline is real, the omnichannel demand is durable, and the spread between the best and worst formats is wide enough that the format call matters more than the sector call. Get the sub-segment right and the rest of the analysis follows.