Cold storage

The Evolution of the Cold Storage Market

As consumers increasingly purchase almost everything they need online, will that comfort level translate to how they buy food? If consumers begin to bypass the modern-day grocery store, how will their desire for quick delivery of relatively cheap goods impact demand, development and investment in the cold storage industry?

David Egan, senior director, global head of research, CBRE, provided a glimpse into what the future could hold for industrial cold storage. He noted that food in the U.S. is an approximately $2.5 trillion category; grocery makes up almost $1 trillion of that number. While a small percentage of that market share is currently happening online, Egan said he thinks that will change.

“When Amazon bought Whole Foods in 2016, 15% of people in the U.S. said they were comfortable ordering their groceries online,” Egan said. “Now that number has climbed to 40%. While not all of them are shopping this way, they’re increasingly comfortable with it.”

As Egan noted, most grocery stores are already accommodating some of this click-and-pick behavior, with 2-3% of current online activity is already satisfied by an Instacart-style model where someone else travels by car to the local grocery store to shop and then deliver the items.

What if we started to see even 15% of that activity, or about $150 billion in sales, shift in the way food moves through the supply chain, from in store to online model. It’s not far off as Kegan noted, citing that in the United Kingdom the grocery store is less prominent, and fulfillment is direct to the consumer from a warehouse.

The tipping point is when you start to imagine the impact on the amount of cold storage square footage that will be needed for logistics, not even taking into account the growth of meal delivery services and ongoing restaurant fulfillment.

As Kegan said, when you look at e-commerce trends and how the conversion from brick and mortar has impacted the amount of warehouse space built, there is tremendous potential for increased demand for more cold storage space when consumers change the way they buy groceries.

Steve Reents, managing director, investments, of BentallGreenOak, shared why the firm increased its investment in the cold storage niche over the last three to five years, noting that they emphasize purpose-built product, fully developed as cold storage.

 ”We like the spread and yield, there’s less competition, a nice supply/demand imbalance, with not a lot of new spec,” Reents said. “We target best-in-class assets, infill core-driven uses, near major metro centers.”

One of those deals was a building in Seattle, near Seattle Airport and 15 minutes from the Port of Seattle – a primary port of call for Alaskan seafood. Reents shared that they look for embedded demand for these buildings, which is why they’re less likely to go to a tertiary market or acquire older buildings, noting they are fine with more tenant risk than asset risk.

The panelists all concurred that there are three legs of success: aggressive capital, developers with experience and a sophisticated operator/tenant who understands the operational requirements for fulfillment.

The Seattle cold storage building acquired by Reent’s firm was the first modern cold storage built in the Pacific Northwest with no pipeline for supply behind it.  While the location was strong, the firm took considerable risk with the tenant, whose total revenue at the time was equal to the rent being charged. The operator’s business model was designed to grow based on moving into the new facility.

The firm conducted its due diligence but took comfort in knowing that if the operator didn’t succeed it wouldn’t be because of the building. “We felt there was abundant demand regardless. Luckily the operator filled the building almost 30 days after we turned it over. While we took the credit risk we had a great deal of comfort with the asset quality.  Ultimately the operator sold the business so we are able to mitigate our risk,” said Reents.

To Anthony Pricco, president/partner, Bridge Development Partners, another key to success for this model is a generic building with convertible units. He noted a factor that supports cold storage growth in addition to potential consumer-to-warehouse buying models is the fact that a lot of facilities in the market are 40 to 50 years old with 20-foot clear heights.

“There are a lot of users who would like to be in more efficient space,” Pricco said. “It’s all about cube height.” Pricco’s firm manages every building it owns. “Every facility has full-time on-site personnel because when you are dealing with these large systems you have to be careful and you are dealing with constant maintenance. It really is an operating business.”


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