Empty grocery shelves. Shuttered meat processing facilities. Overbooked grocery delivery services. The COVID-19 crisis pushed our food supply system to its limit. The critical behind-the-scenes component holding it together: cold storage.
Cold storage is the infrastructure and real estate subsector consisting of large refrigerated warehouses. These warehouses store the U.S.’s fresh and frozen produce and protein while they move from farmer to processor, wholesaler to distributor, and direct to consumer. Though cold storage is far from top of mind for most people, it is a vital component of the food supply chain. Underlining the point, in March 2020 the U.S. Department of Homeland Security classified cold storage facilities and their employees as essential infrastructure, keeping them open and operating through the peak of pandemic. Ultimately, the frontline workers in this sector prevented widespread food shortages across the country.
The experience of this pandemic has changed the outlook for cold storage as an asset class, with future demand augmented by three key trends emerging from the pandemic: increasing inventory levels, shifting global food flows and automation. These trends, reinforcing previously existing growth drivers, are serving as a catalyst for the cold storage sector as it advances from a niche investment subsector to a core infrastructure asset class.
Trend 1: Reversing inventory management strategies
In the context of food, just-in-time refers to the slimming of inventory levels at every step of the food supply chain as a means of reducing cost and increasing capital efficiency. As the novel coronavirus pandemic unfolded, a complex story of parallel food supply chains played out, one for commercial users such as restaurants and one for consumers, in the form of opposite demand shocks, both impacted by the broader shift to just-in-time inventory.
On the consumer side, demand for basic food products skyrocketed. The consumer/grocery supply chain, precariously balanced from years of paring down to just-in-time inventory levels, buckled under the shock, manifesting as images of empty grocery store shelves across U.S. cities that will be remembered for a long time to come.
Meanwhile, with restaurants across the U.S. all but shuttered, product that could not shift from the restaurant/commercial supply chain to the consumer supply chain backed up in the limited warehousing stock available. Record year-on-year levels of items such as frozen poultry, beef, and potatoes were in cold storage in March 2020.
The answer to a higher frequency of demand shocks in our food system resulting from pandemic risk is “surge capacity”. Surge capacity is the ability to rapidly scale output in times of acute stress. In the post-COVID world, we will see larger tenant demand for food storage capacity across the supply chain – from retailers to wholesalers and producers. Larger storage capacity means a need for more warehouse space, square footage and pallet positions.
Trend 2: Changes to global food flows
Prior to the start of the pandemic, U.S. food imports had experienced a decades-long increasing trend. Contributing factors include improvements in containerization and storage, evolving tastes of U.S. consumers, new varietals expanding geographies of production, and lower costs attributable to labor and reduced tariffs.
The current pandemic has revealed the precarious nature of long, global food supply chains. While advocates of local/regional food systems rightly point to these approaches as resilient in times of disruption, the complete picture is not so clear-cut.
First, consuming fresh produce year-round is an important component of a healthy diet, and not just for those in regions of the U.S. with longer growing seasons. Second, to extrapolate the lessons of the novel coronavirus pandemic, epidemic outbreaks can have a highly concentrated impact on specific cities and regions. An entirely closed-loop food system is not a resilient solution in the face of pandemic risk.
The resilient answer lays in a highly open food system with low friction for domestic production to flow through the country as needed, supplemented by imported items from diversified source countries. Similarly, the world will continue to benefit from increasing U.S. food exports. For example, in the context of the protein sector, the effects of a very different epidemic, African Swine Fever (“ASF”), are playing out in real-time. ASF is a highly contagious and deadly virus affecting pigs, hogs and boars. ASF was first reported in China in August 2018 and decimated swine populations through 2019. As a result, U.S. swine exports are expected to play a significant role in filling Chinese demand for pork products.
Shifting to a resilient food system of open product flows will require not just additional square footage of cold storage, but a high-quality and diversified stock of facilities. Port-located facilities, which have attracted significant development attention to date, will continue to be critical. However, the buildout of a network of facilities at intermodal logistics hubs, in secondary and tertiary city population centers, and adjacent to centers of food production will also play an essential role.
Trend 3: New worker safety practices and rapid adoption of automation
Social distancing is a difficult proposition on the warehouse and production facility floor, and occurrences of concentrated COVID-19 outbreaks in distribution centers and food processing plants have taken a toll on workers, their families and the communities that support them.
The most accessible and short-term solutions were quickly rolled out across facilities. These measures are focused on keeping workers safe against the immediate risk posed by COVID-19 and include occupational design changes and workforce education.
On the automation side, the introduction of advanced technologies for new cold storage facilities has accelerated. Economics will continue to drive adoption, supplemented by the emerging health benefits of reducing employee density in facilities.
During this challenging year, cold storage has emerged as the most dynamic component of the real estate and infrastructure asset class, and the crisis and resulting drive for resilient food supply chains is proving to be an inflection point for accelerated growth and rapidly ramping demand. In the dark of these times, cold storage is shining bright.
We thank all essential workers in cold storage and food processing who are continuing to provide a secure food supply for our country through the COVID-19 pandemic.
A full version of this article is available at www.coldsummit.com.
Visit the NAIOP Response: COVID-19 page for critical resources and knowledge to support you now.
Alex Langerman is the COO of Cold Summit Development, a pure-play cold storage developer and owner of refrigerated warehouses and low- temperature distribution centers.