Rising Online Grocery Sales Drive Cold Storage Investments
The pandemic and the concomitant increase in demand for grocery deliveries have increased the need for cold storage. Now, this trend is changing the calculations surrounding the development of cold storage projects.
Cold storage facilities are expensive to build, costing $250 to $350 per square foot, compared to $100 per square foot for dry storage. So historically it hasn’t been an attractive game for a wide range of investors and developers.
In fact, the vast majority of cold storage space has historically been developed, owned, and operated by a small group of cold storage REITs, such as Americold Realty Trust, and third-party cold storage logistics providers (PRW ) listed on the stock exchange, such as Lineage Logistics, Agile Cold Storage and NewCold.
But with the pandemic accelerating online grocery sales over the past 12 to 18 months and the reopening of restaurants and bars across the United States, demand for cold storage space is at an all-time high, the average national vacancy rate dropping from 4.7% to 3.8%. the last 12 months. As a result, this type of alternative ownership now attracts both private equity and institutional capital. For example, the most recent investor intentions survey from commercial real estate services firm CBRE noted that the share of investors seeking cold storage rose from 7.0% in 2019 to 22.0% in 2021.
“The cold storage industry has traditionally been dominated by owner-occupiers, but that’s changing as more investors are attracted to this type of niche ownership,” says Mark Russo, director of the research department at real estate services company Savills North America. Investors are drawn to the higher yields in this sector, he notes, as well as the ability to diversify a real estate portfolio beyond traditional property types. Russo expects competition among investors to push prices higher in the coming year.
Just 12 months ago, development returns for cold store development averaged around 7.5% to 8.5% return on cost (YOC), while dry store returns averaged averaging between 5.00% and 6.0%, according to Dallas-based Dustin Volz, senior managing director at JLL Capital Markets. “Now for cold storage, the gap is more like 6.0-7.5% YOC,” he says, but adds that the increase in rents, which are double those charged for the space dry storage, continues to strengthen.
In the past, investors have looked to cold stores for development and acquisition returns, Volz says, since cold stores trade in oversized space relative to dry space. But he notes that this gap has continued to narrow, and the mix of investors in the sector is now similar to those focusing on traditional industrial properties. Investors in cold storage now include private equity, advisors, infrastructure funds and traditional commercial real estate investment managers.
Investment sales of cold storage facilities have increased during the pandemic, but the supply of assets for sale remains very limited, according to Matthew Walaszek, director of industrial research and logistics at CBRE. This may explain why sales of cold storage facilities accelerated in 2020 from $2.7 billion in 2019 to $3.5 billion, according to real estate data firm Real Capital Analytics (RCA), then returned to about $2.5 billion last year.
A relative newcomer to this sector is real estate mogul Sam Zell’s investment firm Equity Group Investments, which recently acquired an unspecified stake in East Coast Warehouse, which operates 72 million cubic feet of warehouse space. at controlled temperature.
The supply-demand imbalance in the refrigeration sector has attracted new developers. Companies that have built traditional industrial facilities have entered this space over the past 12 to 18 months and are now building speculative cold storage projects – a new phenomenon, according to Chicago-based Steve Kozarits, senior vice president of industrial services and tenant advice at real estate services company Transwestern.
He cites Atlanta-based industrial developer Realty Link, which has created a cold storage division, and New Jersey-based Saxum Real Estate, which recently launched a cold storage platform and is developing projects in partnership. with other developers, such as Austin-based Yukon. Companies.
Noting that speculative cold storage development follows population growth, Volz notes that 18 to 24 months ago, speculative cold storage development did not exist outside of a 2019 project in Fort Worth by Southwest ColdSpot, based in Dallas, the very first US-spec cold storage project. .
“Now you have over 40 speculative projects announced, which is a bit inflated, as we think some of the developers in this space who are putting out press releases for new projects are looking for potential Bespoke (BTS) tenants,” he says, adding that the actual projects being built are probably between 15 and 20.
The boom in cold storage development is not only due to a shortage of existing supply, but also due to tenant demand for modern facilities. Russo notes that cold storage inventory in the United States totals only 210 million square feet, and the majority is obsolete assets that are 30 to 40 years old, with clear heights no greater than 30 feet.
Clear heights of 50 to 80+ feet, advanced refrigeration technology, and more efficient operating systems are key features tenants today are looking for in cold storage, according to Volz.
Kozarits says high-tech facilities that improve efficiency and reduce human labor requirements are becoming increasingly popular among tenants due to current labor challenges. He notes that a new design system, where facilities are built up to 80 feet of clear height around a structural rack skeleton from the inside out, along with automation and robotic technology, allow more pallets to be stacked in less space, reducing both storage and labor. costs. He expects that over time the dry storage community will recognize the benefits of this design and embrace it as well.
As grocers seek ways to expand multi-channel sales and improve delivery times, operators such as Whole Foods, HEB, Kroger and others are turning to the kinds of automated setups Kozartis describes, notes Volz.
Kroger, for example, has partnered with Ocado, a high-tech cold storage distribution provider with an automated racking system, to build 20 high-tech robotic warehouses nationwide. Automated customer fulfillment centers powered by Ocado fulfill digital orders for same-day and next-day delivery.
“We’re probably still in the early stages of grocery e-commerce penetration,” Russo says. “This sector has been rocked by the pandemic and will continue to take a larger share of the market, which will create even more demand for state-of-the-art cold storage near major US population centers.”