Retail Construction Just Hit a 20-Year Low. Here’s What That Means For Southwest TI and Renovation Owners

The Floor Dropped Out of New Retail Construction

US retail construction completions hit 4.7 million square feet in Q1 2026. Lowest quarterly delivery volume in at least twenty years, per CBRE. The sector’s modern peak was above 25 million square feet in Q4 2015 — that is an 81% collapse in delivered supply over a decade. Not a slowdown. A structural retrenchment.

The Q2 2026 pipeline data from CoStar confirmed the trajectory. Roughly 72.1 million square feet of retail space was under construction nationally, below the 10-year average of 78.9 million square feet. Marcus and Millichap pegged the active construction pipeline at just 0.3% of existing retail inventory as of mid-2026. The sector added only 32 million square feet across all of 2026, the third consecutive year of sub-0.4% inventory growth. Most active construction is concentrated in build-to-suit convenience stores and supermarkets. Broad speculative retail development has effectively stopped.

Phoenix Still Has Pipeline But the Economics Are the Problem.

CoStar identified 15 markets accounting for nearly 47% of the national retail construction pipeline in Q2 2026. Phoenix made that list alongside Dallas, Houston, Austin, Las Vegas, Chicago, Charlotte, Atlanta, Miami, and Denver. That is worth noting. Phoenix is drawing active speculative and build-to-suit activity at a time most markets have gone quiet.

But activity does not equal viability. Marcus and Millichap notes developers typically need rents above $30 to $35 per square foot to justify new retail projects at current construction costs. National average retail rents remain in the mid-$20 range. That gap does not close through value engineering or schedule compression. It closes when costs fall or rents rise, and neither is happening fast enough to justify broad new development in most submarkets. Phoenix gets pipeline, but not enough of it to absorb tenant demand on its own.

Demand Never Softened

TenantBase tracked 75 US commercial real estate markets in Q2 2026 and found retail and storefront space leading tenant search activity in 74 of those 75 markets. Retail vacancy is sub-5% in more than half of tracked markets nationally. The NAR September 2026 Commercial Real Estate Market Insights report confirmed retail vacancy held at 4.3% in July, with general retail continuing to lead absorption nationally.

CBRE logged more than 20,000 new lease commitments in the first half of 2026, totaling roughly 75 million square feet of demand. Approximately 4,130 store openings were announced during H1 2026, slightly exceeding closures. The signal is not ambiguous. Tenants are not leaving retail space. They are competing for space that is not being replenished.

What the Supply Drought Means for Renovation and TI Owners

When construction economics prevent new development and vacancy is historically tight, the investment logic shifts hard toward the existing stock. Landlords renovate to stay competitive. Tenants execute TI buildouts to capture quality space before lease options tighten further.

Newmark’s Q1 2026 retail analysis flagged stagnant, older retail space as a case for redevelopment and mixed-use conversion, noting that repositioning removes outdated inventory from the market and ultimately reduces the total retail footprint. That is a renovation call. CoStar’s national director of retail analytics described the pipeline as “very thin,” with most active projects being build-to-suit that add little broadly available inventory to the market. Net result: landlords gain pricing power on well-located existing space while tenants face fewer viable options.

TenantBase projects 2027 as a tightening cycle across every region and asset class. The new supply needed to offset current vacancy is simply not being built. Renovation and TI work executed during the current window, while contractor relationships are established and construction scope is quantifiable, positions landlords and tenants ahead of that cycle. Waiting does not reduce cost. It reduces options.

For commercial and retail renovation contractors in Arizona and across the Southwest, this supply drought is not a market risk. It is the market condition that drives demand directly to renovation and tenant improvement work. The new inventory that would have absorbed tenants and deferred renovation investment is not arriving.

FAQ

Why is retail construction so low in 2026? Developers need rents above $30 to $35 per square foot to justify new projects, per Marcus and Millichap, but national average retail rents remain in the mid-$20 range. Combined with elevated materials costs and tighter financing conditions, speculative new retail development cannot pencil in most markets. Only build-to-suit projects with committed tenants are moving forward at scale.

Is Phoenix still an active market for retail construction? Yes. CoStar’s Q2 2026 data places Phoenix among the 15 markets that collectively account for nearly 47% of the national retail pipeline. That distinction matters for Arizona landlords and tenants. Active pipeline does not offset the broader supply drought, but it signals continued concentrated investment in the Phoenix metro.

What types of projects benefit from the current retail supply environment? Tenant improvement buildouts, second-generation space renovations, and mixed-use conversions of underperforming retail stock are all positioned well. Newmark noted in Q1 2026 that repositioning older retail assets through redesign or conversion reduces obsolete inventory while meeting current tenant demand, creating a compelling case for renovation over new build across most Southwest markets.