Despite the ongoing war in Iran and U.S. tariff-driven price increases, retail has become one of the strongest CRE asset classes in 2026. U.S. retail vacancy is expected to peak at about 4.4% in 2026, edge slightly higher, then stabilize and tighten gradually in 2027, according to a recent CoStar press release. This vacancy rate is well below the office (14%), industrial (7.5%), and multifamily (8.5%) rates cited by the CRE data provider.
The vacancy rate is near historic lows, in part, because new supply is constrained. “64.2 million square feet of retail space was under construction in the U.S. in Q1, down from approximately 70 million square feet a year earlier and well below the 10-year average, which consistently exceeded 90 million square feet during the last expansion cycle,” according to another Costar press release. “The pullback in construction reflects a development environment that remains difficult to pencil in most markets,” said Brandon Svec, national director of retail analytics at CoStar Group.a “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.”
Demand is being driven primarily by grocery, discount, value, medtail (healthcare and wellness services integrated into traditional retail environments), and other service-oriented tenants. Service retail now outpaces goods retail as wellness and fitness brands drive demand. E-commerce growth has also reduced the need for physical retail space to sell products. In 2025, just over half of the total retail square footage leased went to service-oriented businesses. This is according to CoStar data reported by CRE Daily. Fifteen years ago, this figure was just 40%. Wellness and fitness have emerged as leading sectors in the surge of service tenants. The U.S. wellness market hit $2.1T in 2024. This was driven by demand for services ranging from salons and facials to boutique fitness studios. Fitness operators now account for nearly 30% of service-based leases, up from 20% in 2016.
Medtail is also booming. A recent National Association of Realtors’ article reports that the combination of an aging population, increased consumer demand for convenience, and increased competition among healthcare systems has made medical retail one of the hottest sub-sectors in healthcare real estate. Urgent care centers like American Family Care, CareNow, Concentra, and GoHealth are capturing consumers who want to avoid hospitals and long emergency room wait times.
Can It Last? Potential Headwinds Ahead
While all outward signs appear healthy, it’s not unreasonable to be concerned about external factors affecting retail. These include the cumulative impact of tariffs, rising fuel prices due to the ongoing war in Iran, and a steady drop in consumer confidence.
Tariffs
“In Q1 2025, we were introduced to tariffs and had no idea how the economy would react. Broadly, the impact is not to be understated,” stated Spencer Kerrigan, Vice President and Partner in the San Diego office, in his analysis of the San Diego market that mirrors conditions across much of the country. “Consumers have continued to experience high inflation, and the cost of everyday goods has risen. With the recent spike in oil prices, not only have transportation costs increased, but also the cost of manufacturing many goods has climbed due to the widespread use of petroleum-based inputs.”
Research by the Harvard Business School tracked pricing on 350,000 goods. It estimated that prices for imported goods rose by 5% since March 2025 and 2.5% for domestic goods. If prices are compared with pre-tariff deflationary trends in 2024, the impact is larger. Imported goods are 6.6% more expensive, while domestic goods are almost 3.8% more expensive. Consumers are seeing price hikes on electronics (smartphones, laptops, tablets, monitors), clothing (shoes, jeans, toddler apparel), and food (coffee, olive oil, some produce).
A more recent report by the Labor Department’s Bureau of Labor Statistics showed import prices increased 1.9% last month. This was the largest gain since March 2022, following a 0.9% rise in March. In the 12 months through April, import prices vaulted 4.2%. That reading was the largest year-over-year rise since October 2022 and followed a 2.3% increase in March.
Rising Fuel Costs
Before the war with Iran began in late February 2026, the national average price for a regular gallon of gas in the U.S. was approximately $2.98 ($4.75 in California). On Memorial Day, the national average for gas prices was $4.507, and in California it was $6.116 — the highest in the nation, according to AAA. That’s over a 50% hike nationally and a nearly 30% spike in California. Beyond gasoline, higher oil prices are increasing consumer prices through freight, shipping, heating, and the cost of making and moving goods. So, the effect often shows up first in energy-heavy categories and then works its way into broader inflation. Here are some examples:
Transportation Costs
Trucks run on diesel. So, when oil rises, shipping costs usually rise too, and retailers may pass those costs on in the form of higher shelf prices.
Supply-Chain Pass-Through:
Higher fuel prices also raise costs for cargo ships, delivery fleets, airlines, and package carriers, which increases prices for goods and e-commerce orders.
Production Inputs
Oil is also used in manufacturing processes and as a raw material in plastics, chemicals, and other industrial inputs. As a result, cost increases can spread beyond energy to consumer goods.
Consumer Sentiment Continues to Sink
The University of Michigan’s consumer sentiment index sank to an all-time low in May, to 44.8%. This is the lowest reading since the index began in 1957. “The cost of living continues to be a first-order concern, with 57% of consumers spontaneously mentioning that high prices were eroding their personal finances, up from 50% last month,” Joanne Hsu, director of the university’s Surveys of Consumers, said in a statement. “Critically, consumers appear worried that inflation will increase and proliferate beyond fuel prices, even in the long run.”
A potential end to the Iran war could ease fuel costs and help calm inflation expectations. However, it would not erase the pressure from tariffs or the broader squeeze on household budgets. Retail has held up remarkably well, yet its next chapter may depend on whether easing geopolitical risk can offset the more persistent drag from pricing and sentiment.