3 minute read
Flexible Space Warehousing for the Cold Storage Market
The United States has approximately 3.6 billion cubic feet of food commodity cold storage capacity covering 180 million square feet of industrial space and 2 billion cubic feet of similar capacity covering 300 million square feet of retail space.
But, when something like the Coronavirus disease (COVID-19) hits, thus transforming the grocery retail market, that cold storage capacity also transforms to become a more flexible solution for all ever-changing demands.
COVID-19 vaccine distribution certainly presents opportunities for the cold storage sector, but the most important element may very well be cold chain logistics. Some pharmaceutical cold storage capacity will be needed as pharmaceutical cold storage volumes rachet up. While the emergence of the vaccines and their ultra-cold requirements has drawn global attention, pharmaceutical cold storage is a very small subset of the overall industrial cold storage sector, so the investment opportunity will naturally also be rather limited.
The need for new facilities
New facilities, or at least a large number of expanded facilities, will be required to handle the new vaccines. These facilities may not differ too much from existing pharmaceutical cold storage facilities. It is hard to imagine that storage for those products can be economically stored in warehouse environments, unless they are in mobile, ultra-cold freezer units.
Capital sources targeting cold storage sector
New opportunities for real estate investment
The logistics cold chain will continue to see tremendous investments in mobile cold storage units. It is also important to appreciate the difference in scale between a traditional cold storage warehouse, which typically would be between 150,000400,00 square feet, while a pharmaceutical cold storage facility would typically be between about 20,000-60,000 square feet. Even if pharmaceutical cold storage facilities expand their footprints significantly, the overall impact to the broader sector will be relatively minor. Nevertheless, vaccine storage demand should present opportunities for those not intimidated by high costs per square foot for critical facilities. industrial rental rate growth, which is near record-high due to industrial demand and strong absorption rates.
Interest in developing or owning “cold storage” has become a key focus by many developers over the last couple of years, and has been magnified during the pandemic with a tremendous push by developers to learn how to build “cold storage” on speculative basis. Cold storage buildings are costly, often 3-4 times the cost of dry warehouses to build, and the returns can be slightly less than dry warehouse buildings, while the risks are higher. There is an abundance of capital interested in cold storage warehouse investing. Sources vary from real estate investment trusts (REITs) to institutional investors, private equity firms, family offices, high net worth individuals and foreign investment. Prior to COVID-19, interest in cold storage had already increased, but acceleration witnessed in e-commerce, online grocery and meal kit sales created very visible needs for additional and more modern cold storage facilities. Most investors are still primarily focused on buying @kokliang1981 - adobe.stock.com buildings in core industrial markets with strong credit tenants and long-term leases. This somewhat coincides with overall
Available returns for investors
Investors/developers in cold storage are seeking higher, double-digit returns to compensate for the perceived additional risk associated with more complex and costly assets. These higher returns may become more difficult to achieve as competition has certainly increased in the cold storage sector. As more investors have entered the space, the yield premium associated with stabilized cold storage warehouses has certainly narrowed.
Obstacles to investing in cold storage facilities
The first and most significant obstacle to investing in cold storage is scarcity. The sector is relatively small, and a large percentage of cold storage operators insist on owning their own facilities. Additionally, cold storage warehouses only comprise 1-3% of industrial warehouses within most parts for the United States. Go to https:// foodl.me/xf7hl6 to read more.
ABOUT THE AUTHOR
KEVIN KELLY
cold storage specialist and SVP,
CBRE National Food Facilities Group
