Limited supply, rising costs, and shifting capital dynamics are challenging the retail market, yet adaptation is keeping the sector strong. Kidder Mathews, the largest fully independent commercial real estate firm in the Western U.S., recently shared insights with GlobeSt.com on how these pressures are reshaping retail performance and strategy across the region.
Retailers and investors continue to navigate shifting consumer confidence, elevated development costs, and the ripple effects of tariffs. These pressures have forced rapid adjustments in both retailer strategies and capital deployment. And while the Western U.S. remains a market of opportunity, today’s landscape requires sharper navigation and a more agile approach, according to Kidder Mathews experts.
Tariffs are impacting the market in two ways, notes Robert Coron, SVP in Kidder Mathews’ Bellevue office. Construction costs, particularly in the Pacific Northwest, where lumber, millwork, and steel are often imported from Canada, have risen, which landlords generally absorb. Retailers importing goods from China, such as textiles and electronics, are either absorbing higher costs or passing them on to consumers, adding another layer of complexity to operating and leasing decisions.
Navigating a Constrained Pipeline
One of the industry’s biggest challenges is the restricted development pipeline. “Developers are having a hard time committing to a rental rate for a project that is 12 to 24 months away from delivering, as general contractors won’t or can’t lock in pricing for more than a few weeks,” explains Chuck Wells, SVP in Phoenix.
With few projects moving forward, redevelopment and adaptive reuse have surged. KC Patterson, associate in Sacramento, notes that developers are turning vacant anchor boxes into multi-tenant, service-oriented retail hubs, backfilling them with off-price chains, fitness concepts and grocers.
Inventory challenges are not limited to development. Blake Weber, SVP in Tacoma sees a lack of investment inventory. “We’re aware of only one other Western Washington multi-tenant retail asset built 2015 or later that’s actively on the market.”
In addition, Coron observes that retailer bankruptcies in the Pacific Northwest, including Rite Aid, JoAnn Fabrics, Party City, and At Home Furniture, have shifted the vacancy landscape, creating opportunities for expanding retailers to acquire prime space and strategically reposition their footprints.
A Strong Market Despite Pressure
Even with limited supply, high borrowing costs, and volatile conditions, retail performance has remained surprisingly strong. At 4.7% to 5%, retail vacancy rates remain at or near historic lows nationwide. Despite high borrowing costs, retail investor appetite has rebounded considerably.
“The retail market remains healthy, with low vacancy rates in traditional neighborhood and strip centers,” says SVP Michelle Schierberl, SVP in Orange County. “This strength and stability are why investors want it.”
From a capital perspective, EVP Brad Kraus in Los Angeles observes meaningful improvement. “Retail is activated from a debt perspective. The rate compression of the last two months has resulted in debt being used as positive leverage cudgel once again. Hence, cash-on-cash returns look more attractive to the middle-market investor.”
Leasing activity has concentrated around high-quality, adaptable spaces. Value-oriented and experiential retailers are especially competitive in targeting prime locations, while investors have focused on the stable cash flow of daily-needs retail and community centers.
Kidder Mathews SVP Ryan Jones in Bellevue notes that these market pressures, combined with the uncertain pipeline and selective fourth-quarter spending, have “opened the door for strategic repositioning and re-tenanting, with 2026 favoring omnichannel, experience-driven, and value-focused operators.”
Looking Ahead to 2026
Consumer spending is the biggest unknown for retail in 2026. Colleen Colleary, First VP in Portland, expects a challenging year as rising grocery and utility costs continue to pressure household budgets.
“Discretionary, disposable income is the backbone of the restaurant and retail industry,” Wells adds. “Things need to change to bring everyday consumer confidence and traffic back. Supply and demand need to be in better balance.”
On the business side, Patterson says to keep an eye on inflation from tariffs and rising insurance and labor expenses that could further slow redevelopment. Landlords and retailers will need to collaborate on creative lease structures to share risk in a volatile market, and he notes the surge in short-term and pop-up leasing will further impact retail owners’ long-term asset value and lease strategies.
Coron emphasizes that retailers capable of being opportunistic with site selection will likely benefit from these conditions, leveraging gaps created by closures and constrained supply to build on continual forward momentum.
Adaptation as the Defining Advantage
Adaptability is proving to be retail’s most critical strength, whether through flexible space planning, creative deal structuring, or brokers sourcing off-market opportunities amid constrained supply. Despite significant headwinds, the sector continues to find ways to evolve, perform, and remain resilient.
Key Takeaways
- Retail in the Western U.S. remains resilient, with vacancy rates holding near historic lows despite pressures from limited supply, rising costs, and shifting economic conditions.
- Tariffs are reshaping retail development and operations, with construction materials and imported goods driving higher costs, especially in the Pacific Northwest.
- Development pipelines remain constrained, leading to increased redevelopment, adaptive reuse, and conversion of vacant anchor boxes into multi-tenant, service-oriented retail.
- Investment inventory is scarce, particularly in markets like Western Washington, creating competition for newer, high-quality retail assets.
- Retail bankruptcies are creating selective leasing opportunities, allowing expanding tenants to secure well-located space in tight markets.
- Retail investment activity is strengthening, supported by improving debt markets, rate compression, and attractive cash-on-cash returns for middle-market buyers.
- Value-oriented, daily-needs, and experiential retail concepts are driving leasing demand, especially in well-located neighborhood and community centers.
- 2026 outlook hinges on consumer spending, with rising household costs impacting discretionary income and influencing retail and restaurant performance.
- Landlords and retailers are adopting creative lease structures, short-term deals, and flexible formats to manage risk in a volatile economic environment.
- Adaptability remains retail’s competitive advantage, as operators and investors pivot strategies to navigate supply constraints, cost pressures, and shifting tenant demand.
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