The pandemic and the concurrent increase in demand for grocery delivery 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 from $250 to $350 per square foot. foot compared to $100 per sq. ft. for dry warehouse space. So historically it hasn’t been a play that was attractive to a broader set of investors and developers.
In fact, the vast majority of refrigerated warehouse space has historically been developed, owned and operated by a small group of cold storage REITs, such as Amricold Realty Trust, and third-party, publicly traded refrigeration warehouse (PRW) logistics providers. , such as Lineage Logistics, Agile Cold Storage and Newcold.
But with online grocery sales booming over the past 12 to 18 months and U.S. restaurants and bars reopening, demand for cold storage space is at an all-time high, with average national vacancy falling from 4.7 percent to 3.8 percent Is. last 12 months. As a result, this alternative asset type is now attracting both private equity and institutional capital. For example, commercial real estate services firm CBRE’s most recent investor intent survey noted that the share of investors pursuing cold storage increased from 7.0 percent in 2019 to 22.0 percent in 2021.
“The cold storage sector has traditionally been dominated by owner-occupants, but this is changing as more investors are attracted to this specific property type,” says Mark Russo, director of research at the real estate services firm Sevilles North America. ” Investors are attracted to the sector’s high returns, he noted, as well as the opportunity to diversify a real estate portfolio beyond traditional property types. Rousseau expects competition among investors to drive up prices in the coming year.
Just 12 months ago, growth yields for cold storage development averaged about 7.5 percent to 8.5 percent yield-at-cost (YOC), while dry warehouse yields averaged between 5.00 percent and 6.0 percent, according to Dallas-based Dustin Volz. According to senior managing director JLL Capital Markets “Now, for cold storage, the spread looks like 6.0-7.5 per cent YOC,” he says, but adds that rising rents, which are more than double the charges levied for dry storage space Yes, continues to show strength.
In the past, investors flocked to cold storage chasing growth and acquisition yields, Volz says, noting that cold storages traded on dry space over-sized spreads. But he noted that this spread continues to shrink, and the investor makeup in the sector is now similar to those focused on traditional industrial assets. 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 is very limited, according to Matthew Walaszek, director of industrial and logistics research with CBRE. This may explain why sales of cold storage facilities rose from $2.7 billion in 2019 to $3.5 billion in 2020, then fell to nearly $2.5 billion last year, according to real estate data firm Real Capital Analytics (RCA).
A newcomer to the area is real estate mogul Sam Zell’s investment firm Equity Group Investments, which recently acquired an unspecified ownership stake in East Coast Warehouse, which operates 72 million cubic feet of temperature-controlled warehouse space.
The supply-demand imbalance in the cold storage sector has attracted new developers. Firms that build 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 Cozarits, senior vice president of industrial services and Real estate services firm TransWestern with Tenant Advisor.
He cites Atlanta-based industrial developer Realty Link, which has established a cold storage division, and New Jersey-based Saxum Real Estate, which recently launched a cold storage platform and developed projects in partnership with other developers. is doing so, such as an Austin-based Yukon enterprise.
Noting that speculative cold storage development follows population growth, Volz notes that 18 to 24 months ago, speculative cold storage development outside a 2019 project in Fort Worth by Dallas-based Southwest ColdSpot did not exist—until now. The first US spec cold storage project of .
“You now have over 40 speculative projects announced, which is a bit of an increase, because we believe that some of the developers in this space who are launching press releases for new projects are likely to build-to-suite ( bts) are fishing for tenants,” he says, adding that the actual spec projects under construction are probably in the range of 15 to 20.
The explosion in the development of cold storage is not only due to the current supply shortage, but also the demand from tenants for modern facilities. Russo notes that US cold storage inventory totals 210 million square feet. ft., and much of it is made up of obsolete assets that are 30 to 40 years old, with an apparent height not exceeding 30 ft.
According to Volz, apparent heights of 50 to 80 feet and above, state-of-the-art refrigeration technology and more efficient operating systems are top features of today’s tenants cold storage facilities.
Kozarits says that high-tech facilities that improve efficiency and reduce human labor requirements are becoming popular among tenants due to the current labor challenges. They noted that a new design system, where automation and robotic technology as well as facilities are built around a structural rack skeleton up to an apparent height of 80 feet, allows for more pallets in less space, while reducing both storage and labor. allows stacking. Cost. He hopes that over time the dry warehouse community will recognize and adopt the benefits of this design.
As grocers look for ways to expand their multi-channel sales and improve delivery times, operators including Whole Foods, HEB, Kroger and others are moving into the types of automated features described by Cozartis, Volz notes. Huh.
For example, Kroger has partnered with Okado, a high-tech, cold storage distribution provider with automated racking systems, to build 20 high-tech robotic warehouses nationally. Ocado-powered automated customer fulfillment centers fill digital orders for same-day and next-day delivery.
“We are still in the early innings of grocery e-commerce penetration,” says Russo. “The sector was hit by the pandemic and will continue to take a large share of the market, creating even greater demand for state-of-the-art cold storage facilities near major US population centers.”
