Warehouses are no longer viewed as cost centers where goods simply sit waiting to be shipped to a store. As retailers shift their distribution strategies to meet consumer demand for speedy delivery of online purchases, warehouses are evolving into profit centers that help retailers maximize revenue and differentiate from their competition. Part one of this two-part series explored the key drivers behind the industrial market’s strength, and opportunities for owners and developers of infill sites. This part explores why demand for cold storage facilities is also booming and highlights the disruptive technologies that will continue to transform the industrial property sector.
Cold Storage is a Hot Investment
Shifting consumer demographics and preferences are creating opportunities for investors in cold storage facilities. Consumers are dining out and demanding more fresh foods than in the past, and this has increased demand for cold storage space in urban areas. Further, grocers are seeing their businesses change, with more demand for prepared foods and accelerating use of online services. The aging population is also propping up demand from pharmaceutical firms requiring climate-controlled storage for medication. As these trends unfold, modern cold storage space is increasingly becoming in short supply.
Cold storage has become a niche investment opportunity for those who understand the dynamics of the business and the more complex physical and mechanical characteristics of the buildings. For example, cold storage facilities are often leased to third-party logistics (3PL) companies that sub-lease spaces to smaller-scale users. These properties also benefit from less elastic demand drivers than more traditional warehouses — the amount of food and medication people require is about the same regardless of the state of the economy — so cold storage investments should be more recession-resistant than other industrial properties.
Pricing in Risk and Assessing Tech Impacts
E-commerce isn’t the only reason for the recent success of industrial property investments. The market is clearly getting a boost from organic economic growth. Infill sites aren’t the only properties in high demand. Regional distribution centers are also benefiting from improving economic conditions abroad, an increase in U.S. exports and steady GDP growth within the 50 states. But technology has clearly been, and will remain, a major disruptor in the industrial sector.
While the outlook for industrial investment remains optimistic, disciplined investing requires prudent assessment of risk. Active construction pipelines in many markets, the likelihood of an economic slowdown in the next five years, geopolitical risks and emerging technologies all pose potential threats to industrial space market fundamentals and investor demand. Strong demand drivers and low volatility will keep us active in this sector, both as a buyer and a developer, but pricing is aggressive enough that at Bentall Kennedy we must be content to pass on some opportunities.
Technology-related innovations blur the outlook for the sector and complicate asset selection. For example, if automated warehousing systems and driverless vehicles eventually take the place of distribution workers, the reduction in labor demand could have a significant impact on location decisions and property features such as high parking ratios and mezzanine space.
Industrial real estate is rapidly evolving, creating hidden risks as well as emerging opportunities. To succeed in this sector, investors need to understand the dynamic future of the distribution business. It seems clear, however, that tenants will continue to place growing value on properties that allow them to efficiently navigate the last leg of the journey to consumers.
Part one of this two-part series explored the key drivers behind the industrial market’s strength, and opportunities for owners and developers of infill sites.
Paul Briggs is Senior Vice President and Head of Research at Bentall Kennedy (U.S.) Limited Partnership, Bentall Kennedy includes Bentall Kennedy (Canada) Limited Partnership, Bentall Kennedy (U.S.) Limited Partnership and the real estate and mortgage operations of their affiliates. The information provided in this article is not intended to provide specific advice, and is provided in good faith without legal responsibility.