An industrial real estate boom.
A global pandemic that has shifted trade activity and global supply chain.
An increased awareness for food safety.
Changes in consumer preferences.
…And an increase in demand for cold storage?
In this blog, I will unpack how these factors, among others, have led to the surge in demand for cold storage.
We will discuss the appeal this sector has for investors and the steps the key players are taking to keep up with current and forecasted demand.
By the end, I hope you’ll find some reasons why cold storage is, in fact, a pretty cool sector of industrial real estate.
Let’s Start with the Basics!
What is Cold Storage?
Cold storage is made up of two temperature types: frozen and chilled.
Many cold storage tenants may need a combination of both frozen and chilled areas along with dry storage in the same building.
Who Uses Cold Storage?
The most obvious answer is for food purposes! Restaurants, supermarkets, frozen food producers, agriculture procures, importers, and exporters are some of the primary users of cold storage facilities. Facilities can be used to store pharmaceuticals or other products such as make up.
What is the Cold Storage Market/Demand Like Now, and Where is it Heading?
In 2021 in the United States, there was 112 billion square feet in cold storage.
By 2028, the total US cold storage square footage is projected to be 272 billion square feet.
By 2030, the cold storage projected inventory is 323.6 billion square feet.
The rise in cold storage inventory is racing to keep up with demand.
53% of businesses in the food/pharmaceuticals industries plan to increase cold storage capacity in next five years.
This has led many investors to confidently develop cold storage facilities without signed leases.
Only one third of cold storage developments have tenants. This is 10 times the amount of cold storage developments without tenants in 2019.
Out With the Old
It’s important to remember that not all existing cold storage facilities are created equal.
The average age of a cold storage facility in the United States is 42 years old.
78% of cold storage warehouses are at least 20 years old.
With global trade becoming increasingly more strategic, food contamination prevention remains a priority. This is driving many older facilities to become obsolete.
The increase in food safety concerns is only one factor contributing to the demand for cold storage.
What Else Has Contributed to the Current Demand for Cold Storage?
Some of the factors are somewhat related to the COVID-19 pandemic.
We all know that the pandemic was coupled with a plethora of supply chain issues and changes in consumer behaviors.
Consumers’ eating habits have changed. There has been an increase in spending on cold storage products, and the pandemic has caused more consumers to opt for online grocery shopping.
With the changes and issues in supply chain and the rise in freight/transportation costs, suppliers have become more prudent in their distribution strategy.
Food must be stored and shipped quickly and more strategically than ever.
30-40% of our food supply is wasted.
20% of this waste occurs at the farm level because of insufficient food storage. When inflation, population growth, supply chain issues, and rising transportation costs linger, it makes sense to go straight to the largest source of food waste in our country and try to find a solution.
As the world is becoming more globalized, more products are being produced in different parts of the world and need to be transported quickly and securely.
This often means large quantities of supplies must be stored together.
The pandemic is certainly not the sole reason for the boom in cold storage demand. Global exports/imports have increased more than 50% since 1995.
Where farming is possible and most strategic has shifted over the years due to climate change and other factors.
Population growth is on the rise.
By 2026, 20 million additional people will be living in the United States.
Some Issues with Cold Storage Development
Cold storage is expensive!
Some developers and investors have turned a cold shoulder to the cold storage sector because of its high risk and costs.
While the average construction cost for a regular warehouse is between $80-$100/sq ft, the cost to build a cold storage warehouse is three times that amount ($240-$350/sq ft).
Investors know that the cost to operate a cold storage warehouse is expensive.
The labor cost in cold storage warehouses is typically 70% of the entire warehouse operation costs.
The cold climate is hard on employees. Utilities are expensive. The cold climate is rough on the interior equipment (like forklifts).
Investors must be cognitive of the increased complexity of this asset class compared to traditional warehousing.
For Many Investors, Their Fire for Cold Storage Isn’t Cooling Down
Although cold storage does bring its own set of risks, investors and major players in this sector are not cooling down on cold storage.
Currently, approximately 39% of groups that invest in alternative investments are interested in the cold storage sector of industrial real estate. This is a large rise compared to the 25% interested in 2021.
Who are the Key Players in the Cold Storage Market?
Here’s the Top 5
Lineage Logistics with 242 facilities and 2.7 billion cubic feet of storage capacity.
United States Cold Storage, Inc.
Interstate Warehousing, Inc.
VersaCold Logistics Services.
And the Expansion Continues…
Many of the major players are planning to expand their holdings.
Lineage Logistics has raised over $700 million for a cold storage expansion to support over $1.25 billion in new projects underway.
New Cold, the 10th largest cold storage provider, is constructing $333 million in cold storage facilities in Atlanta.
USB Asset Management is joining with other investors to invest $700 million in new refrigerated storage facilities in the US.
In South Carolina
South Carolina is no exception to the cold storage expansion.
Flex Cold, a cold storage warehouse provider based in Jacksonville ,Florida, plans to invest $49.9 million in cold storage facilities in Dorchester County.
Arcadia Cold plans to building $70 million in cold storage in Ridgeville, S.C, along with other projects they have under construction in several states.
The current national industrial vacancy rate is 4.1% for all warehousing.
Cold storage comprises a small fraction of total warehouse inventory, so it’s no wonder why the inventory is tight in this sector.
Cold storage demand will remain strong for several years as providers try to keep pace with the demand driven by many factors.
I hope this article brought some insight into why cold storage is, in fact, pretty cool.
If you’d like to discuss this article or anything related to commercial real estate, let’s connect.
McDaniel and Company