At the peak of the last cycle, late 2006 to late 2007, the US 10-Year Treasury Yield ranged between 4.6% and 5%, and the best “core”-anchored shopping centers in Orange County were selling at about a 5.5% cap rate. Presently, the very best centers in Southern California are pricing at about a 4.25% cap rate, and the 10YT hovers around 2.25%. That is a nearly three times wider cap-rate-to-10YT spread. This means, for buyers using leverage, it is a historically great time to achieve cash-on-cash yields far superior to bonds in a tangible asset class that will hedge inflationary pressure well over time—which is not the case with bonds.

Also, 2017 has thus far been a fantastic year for stocks. Equity indexes, chiefly the S&P 500 and the DOW, have outperformed this year, increasing nearly 20% in the case of the S&P 500. This means private investors, most of whom have stock-market exposure, have seen significant increases in net worth year to date. Hence, private-capital investors generally feel flush and optimistic, and that optimism rebuts the pervasive negativity about retail in the media to some extent. Generally, retail investors will not sell great retail properties unless the property being sold can be replaced with another great property. Orange County remains one of the best and most-favored markets for retail investments nationally, for both private- and institutional-capital investors. With limited new inventory under development, new retail product supply is not meeting demand. Thus, we're at a stalemate in Orange County: Investors with great properties will not sell since they have a hard time replacing them, and positive demographic trends in Orange County—including limited supply, exceptional household incomes, a diverse economy and steady population growth—keep demand well in excess of supply. The result is strong pricing.

High-quality retail strip centers with food, beverage, service and light-medical uses continue to price at record levels on a price-per-square-foot basis, and at low cap rates of less than 5%. We expect cap rates to rise and pricing to slacken slightly at unanchored and non-grocery-anchored centers in the $10-million-to-$70-million range, though few sale comparables in this category have sold this year so far.

High-performing grocery-anchored centers in Orange County price at some of the lowest cap rates and highest prices anywhere in the country. Though, again, who would sell a “core” one-of-a-kind center if they could not replace it? This explains why transaction volume is down slightly in Orange County (and the West) year over year, and also why pricing remains strong to exceptional.

GlobeSt.com: What factors could drive rates higher?

Voorhees: For the most part, cap rates are not yet moving higher. CBRE would expect larger “power” shopping centers with box-anchor and junior-anchor tenants to trade higher year-over-year on a cap-rate basis, but no centers of this type have sold in Orange County. Negativity about the impact of the Internet on retail does not help “commodity” retail centers, nor does it support regional mall assets with many of the large big-box anchors. As in life, challenges in retail also present opportunities. Where departments-store anchors—most of which own their real estate, pay little rent and provide a modest customer draw at best—fail, redevelopment opportunities should arise as restrictive anchor-tenant approval rights go by the wayside.

GlobeSt.com: Where do you expect cap rates to go in 2018?

Voorhees: Over time, cap rates historically track interest rates, and for now interest rates remain within 1% of record lows, and forecasts for higher rates over the past eight-plus years have not yet proven accurate. At some point, rates will rise, but with the German 10-year bond at less than .4%, it could be some time before significant increases take place globally and even could move lower before tracking higher. This is a long way of saying we expect lower interest rates to continue, and pricing to remaining strong for Orange County retail assets at least through the first half of 2018—probably all year.

GlobeSt.com: What types of retail properties will investors be most interested in during 2018?

Voorhees: Retail providing a bulwark against internet competition should continue as an investor favorite. This means food-and-beverage tenants of all sorts, health clubs and gyms, service retail uses and medical and dental uses in shopping centers should remain compelling to investors. Retail delivering an experience and a “sense of place” that cannot be matched online should also fare well as shoppers seek to connect during their retail experiences.

From regional projects like South Coast Plaza, Fashion Island and Bella Terra to the Irvine Co.'s curated neighborhood centers to exceptional smaller projects like the Anaheim Packing House and the Camp, retail shoppers seek projects that engage them. And, this trend is not contained to specific projects. Streets that “act” like shopping centers, such as Traffic Circle in Orange, 17th Street in Costa Mesa and Marine Ave. on Balboa Island all deliver a retail experience, arguably in a more authentic way than any single project. To an extent, what is old will become new: Expect sophisticated retail shoppers to choose “local favorites” over national brands and projects scaled for convenience and better tailored to the communities that surround them.