Last summer, CBRE SVP Phil Voorhees told us why OC retail was red hot. Now he tells us why things aren't slowing down for '15.
1. Investors Demand Remains Strong
Phil says new development is at just 15% of the “peak market” level of 2005, and supply is not meeting demand. Investors, institutional and private alike, covet OC space for the county’s economic diversity, nearly perfect weather, high population density and affluence.
2. Weak Pipeline
Most of the development since the Great Recession is tenant-driven, with value and discount tenants leading the way. CBRE Econometric Advisors expects an uptick in new project deliveries in 2017, Phil says, but current development in OC remains at record lows. There will, however, be continued development of quick-service restaurant and beverage chains like Chipotle, McDonald's, Starbucks, and Coffee Bean & Tea Leaf.
3. Declining Cap Rates
Compared with bond yields in other countries, the US provides vastly superior risk-adjusted returns. For this reason, Phil expects more foreign investment in 2015, and consequently lower interest rates. That should push cap rates lower, since cap rates usually track interest rates. Compared with the peak of the market in the last cycle in 2006/2007, the spread between cap rates and bond yields is much wider; about three times wider. This, too, signals lower cap rates to come.
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