In my previous article, I discussed where retail stood at the end of 2025—a market in transition that requires more innovative strategies from everyone involved. Now, as we look toward 2026, one word sums up the overall feeling: uncertainty.
Not pessimism. Not optimism. Just deep uncertainty about what lies ahead.
As developers at LRE & Co, we can’t wait for clarity that might never come. We must make decisions now based on the trends we see, the risks we can take, and the opportunities we can seize. Here’s what we’re observing for the year ahead.
The Macroeconomic Reality: Caution Without Crisis
Store-based retail is expected to grow by 1.5% in 2025, accounting for 76% of total sales, with rents increasing around 2% by year’s end. These figures aren’t recessionary, but they’re not exciting either. We are in a long period of slow growth where success depends on execution excellence rather than market momentum.
The big unknown? Tariffs. Nearly every industry expert points to tariffs as the primary concern for 2026, with potential effects on consumer prices, retailer margins, and supply chain plans. The uncertainty itself—not just the tariffs—is causing retailers and developers to hesitate on significant decisions.
California encounters further challenges. Despite recent progress, the state’s high operating costs, regulatory complexity, and rising minimum wage continue to squeeze retail margins. Neighboring states are increasingly competing for both retailers and development capital.
The AI Revolution: From Hype to Reality
A quarter of shoppers are expected to use specialty retail chatbots by 2026. But the real change isn’t in how customers see it—it’s in operations. AI-driven systems are making thousands of small decisions every day about inventory, assortment rotation, and supply chain management.
For developers, this has immediate implications. Retailers increasingly need flexible spaces that can adapt quickly as AI systems identify changing consumer preferences. The days of static ten-year store layouts are ending. We need to design for agility.
Vacancy: The Slow-Motion Crisis
Through the third quarter of 2025, national retail vacancy rose to 4.3%, with 10.6 million square feet of negative net absorption. This marks the first sustained negative absorption in years, and the trend is expected to continue into 2026.
Southern California reflects this trend. Los Angeles retail vacancy is about 5.7%, Orange County is near 5%, and San Diego is at 4.3%—all historically low but increasing. Three US specialty retail chains are forecasted to declare bankruptcy in 2026 as high interest rates, a shift to online shopping, and fierce competition push overleveraged companies toward insolvency.
An industry insider summarized it: “The lack of new development has been a major factor in the market’s ability to absorb this level of closures. My big concern has been whether this dynamic could hold. I suspect we are going to see vacancy levels climbing much more visibly in 2026.”
The silver lining? Quality retail space of 5,000 square feet or less, or junior box space in the 20,000 to 30,000 square foot range, still faces a shortage. Well-located properties with proper layouts continue to command strong rents.
The Experience Imperative Intensifies
More than two-thirds of people worldwide now expect high-quality, personalized, and wellness-enhancing experiences in every space they engage with, up 5% from 2024. The concept of “experience obsolescence” is that emerging buildings and spaces that fail to provide compelling experiences risk becoming functionally outdated even if they are physically sound.
Food and beverage continue to lead this trend. Functional ingredients, health-focused products, and experiential dining are transforming the industry. Retailers are adding AR displays, hosting classes and events, and crafting immersive brand stories that turn shopping from a simple transaction into an experience.
For developers, this means reevaluating every part of project design. These aren’t just luxury features anymore; they’re now standard expectations, especially among younger consumers who fuel spending growth.
The Private Label Surge
Gen Z is expected to allocate 18.4% of their spending to private labels by mid-2026, surpassing all other generations. This isn’t just about price; it’s about packaging, trust, authenticity, and innovation. In Europe, retailer brands already make up 38.1% of food sector sales.
This trend presents both opportunities and risks. Retailers with robust private-label programs see higher margins and stronger customer loyalty. However, it also heightens competition, which could lead to more retail consolidation.
What’s Actually Working: The 2026 Playbook
Based on current data and our portfolio experience, here’s what succeeds in 2026:
Service and necessity retail remain resilient. Fitness studios, medical clinics, discount retailers, and ethnic grocers continue expanding. These internet-resistant concepts serve essential local needs and demonstrate consistent performance.
Small format dominates. The shortage of high-quality space under 5,000 square feet gives landlords with properly configured properties pricing power.
Grocery-anchored centers maintain strength. Quality grocery-anchored centers in strong demographics show stable occupancy and modest rent growth.
Suburban outperforms urban. Suburban retail benefits from residential density, easier access, and parking—fundamental advantages in a consumer environment focused on convenience.
Adaptive reuse accelerates. With new construction near all-time lows, the opportunity lies in transformation. Converting struggling malls, adding residential components, and integrating EV infrastructure represent the path forward.
The California and Western U.S. Outlook
Retail fundamentals stay steady, with low vacancy rates and consistent rents despite softer leasing activity. Expect activity to pick up in 2026 as vacancy decreases and rent growth stabilizes around historical levels.
The Western U.S. market increasingly functions as a single, connected region. California’s issues prompt developers and retailers to consider Nevada, Arizona, and Oregon as alternatives. However, California’s size, wealth, and infrastructure benefits keep it at the center of any regional plan.
Southern California’s Inland Empire provides robust industrial fundamentals and opportunities. Sacramento, Fresno, and Bakersfield act as growth alternatives to coastal markets, offering affordability and available space.
The Bottom Line
The retail real estate market in 2026 isn’t collapsing, but it’s not thriving either. We’re experiencing what one industry observer called “uncertainty fatigue,” a period in which the rules keep changing and traditional strategies no longer work reliably.
Success demands financial discipline, operational excellence, strategic flexibility, and the courage to invest when others hesitate.
At LRE & Co, we’re approaching 2026 with eyes wide open. The macro uncertainty is real. The competitive pressures are intense. The technological disruption is accelerating.
But retail isn’t going away, it’s transforming. And transformation creates opportunity for those positioned to capture it.
The retailers, developers, and investors who succeed in 2026 will be those who stop waiting for certainty that won’t come and start making smart, informed decisions despite the uncertainty.
The upcoming year won’t be easy. But for those willing to adapt, act decisively, and think strategically instead of reacting emotionally, 2026 presents a real opportunity.
Not because the market is great—but because it’s genuinely tough. And tough markets reveal those who truly understand the business from those just riding the wave.