Five converging dynamics shaped 2025 and will carry into 2026: AI-driven investment and productivity gains, solid but uneven growth, a cooling labor market, moderating inflation, and a declining global cost of capital. That combination of disruption and durability sets the tone for the year ahead. U.S. GDP growth accelerated through the year, labor productivity rose at its fastest pace in two years, and more than 80% of S&P 500 companies beat earnings expectations in the third quarter. Cooling shelter costs combined with moderating wages provided the Federal Reserve room to ease, and falling borrowing costs, now roughly 40% below 2023 peak levels, are materially improving equity yields. Capital markets reopened in earnest as global real estate transaction volumes rose approximately 19% from the prior year, with retail among the primary beneficiaries of renewed investor appetite.
Holiday sales proved resilient, growing 3.9% to 4.2% year over year according to Visa and Mastercard data, with 73% of purchases occurring in physical stores. Growth was bifurcated:
wealthier households fueled the majority of spending while nearly two-thirds of consumers traded down to cheaper brands or discount formats. Despite smaller basket sizes, aggregate volumes remained sufficient to support steady retail demand, reinforcing the durability of brick-and-mortar retail in FRE's target markets. This resilience mirrors a broader inflection. Private real estate values troughed in 2023, marking the third major downturn in 45 years. In the prior two downturns, private real estate delivered double-digit average annual returns over the following five years as fundamentals and capital markets recovered. We believe today presents a similarly attractive entry point.
Retail fundamentals strengthened in Q4 as secondary space absorption accelerated to 3.4 million square feet, the strongest quarterly gain since Q4 2023. Discount retailers, grocery chains, and sporting goods stores drove the rebound, backfilling recently vacant spaces and stabilizing occupancy across markets. Shopping center vacancies remain near historic lows at 5.7%, well below the pre-pandemic norm of approximately 7%, and high-quality retail space remains scarce in most markets. The market enters 2026 on firm footing: structural supply constraints limit downside risk, rent growth is tracking in the 2.0% to 2.5% range, marking a new retail market equilibrium, and vacancy is forecasted to remain below 6.0% for years. Retailers with strong omni-channel presence, value propositions, and resilient supply chains will continue to expand into brick-and-mortar spaces. This backdrop of falling financing costs converging with constrained development, creates attractive conditions for value appreciation and reinforces FRE's conviction in leaning into the current cycle.