Investors are piling into an obscure property market as Amazon, Walmart, and more race to keep up with online grocery delivery

  • The country’s once obscure cold-storage property sector is beginning to garner attention from investors who see big demand for temperature-controlled spaces. 
  • The coronavirus pandemic prompted millions of Americans to shop for groceries online, creating demand for a new category of cold warehouses close to population centers.
  • Developers are building cold storage spaces on speculation, a leap of faith many have been wary to take in the past given the high costs of developing the projects. 
  • To deal with the financial risks of building on spec, builders are adopting new design techniques that allow them flexibly reconfigure spaces based on the needs of users.   
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What’s hot but can dip as low as -20 degrees?

The country’s cold-storage sector, long overlooked by real-estate investors, is getting fresh interest as the coronavirus pandemic has boosted online grocery shopping and millions of square feet of decades-old spaces reach the end of their useful life.

The Dallas-based industrial real-estate developer Hunt Southwest, finished a 300,000-square-foot cold storage warehouse it built on speculation in Fort Worth a little over a year ago and then recently leased to a large chilled-goods logistics tenant.

Another investor, Bridge Development Partners, headquartered in Chicago, announced late last year a $150 million partnership with PGIM Real Estate, the real estate investing arm of Prudential Financial, that will seek to build cold storage spaces nationally. The venture, which plans over $400 million of projects, recently broke ground on a new cold warehouse just outside of Miami that it is raising on spec.

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In southern New Jersey just across the Delaware River from Philadelphia, real-estate investor Scout Capital Partners purchased a 330,000 square foot warehouse last month that is under construction and that it says it will convert to cold storage. The company’s chief executive, Vincent Signorello, told Business Insider that the firm has already leased a portion of the roughly $50 million project to a large food tenant.

Signorello said the company, which presently owns about 1 million square feet of cold-storage space, plans to dramatically grow its portfolio to 5 million square feet within the next 3 years.

“The cold storage industry is at a bit of a tipping point,” Signorello said. “It’s the shift to e-commerce and also the fact that the average age of the existing cold storage warehouse is 30 or more years.”

Cold storage has long been dominated by specialized players

Cold storage has long occupied an obscure corner of the real-estate market dominated by specialized industry giants such as Americold and Lineage Logistics.

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Increasingly, investors see an opportunity to crowd in as demand for new space picks up.

Matt Walaszek, an industrial and logistics research analyst at CBRE who has studied the cold-storage market, projected there could be the need for 100 million square feet of new space in the next 5 years, a roughly 50% increase over the present inventory of about 220 million square feet across the country.

A report by Savills said the cold storage sector, presently valued at $98.11 billion globally, will expand 12.1% annually through 2025. The report pointed out that shares in 10 of the largest third-party logistics providers with cold-storage spaces in their portfolios outperformed peers without cold space by 12.1% from the end of 2019 to April 15 of this year.

Interest in cold storage spaces from both tenants and investors could be accelerated by the pandemic, which prompted millions of Americans to try online grocery shopping during recent lockdowns and supply shortages at local food stores.

Just as e-commerce touched off interest in warehouse spaces across the country, a shift to online food ordering, along with healthier eating habits that prioritize fresh produce and meats, could create the need for new cold warehouses, especially those close to or within major metropolitan centers.

“It’s all about access to the consumer and servicing that last mile,” said Tony Pricco, president of Bridge Development Partners, which is building the Miami project and is considering further development in places such as New Jersey, Los Angeles, Seattle, and Chicago.

Pricco noted that many online grocery services were overwhelmed by recent demand during the pandemic and are now eager to build out a better logistics network, including more cold storage sites.

“We have had inquires from Amazon recently where they have told us ‘if you have any available freezer spaces, we want to know about them,'” Pricco said.

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A look inside cold-storage spaces

Chilled by industrial-sized refrigeration units, encased with heavy insulation, and outfitted with other special features, such as temperature regulated floors that resist cracking from the extreme temperatures, cold-storage buildings cost about three times more to build than a conventional warehouse.

Those hefty expenses, along with what are often very specific user requirements, have made developers wary in the past to undertake cold-storage projects without a tenant in hand first.

“For value-add real estate funds there’s still money sitting there and they’re looking to invest in it, but they’re unsure of the returns,” said Adam Petrillo, who heads Savills’ industrial services group, speaking about the hesitation among some real-estate investors to undertake spec cold-storage projects. 

That too is changing as the benefits of new space have become increasingly glaring. New cooling technology is more efficient and newly built spaces often feature soaring ceilings of up to 50 feet that allow for modern vertical storage systems that maximize efficiency. 

“The third-party logistics companies that lease a lot of cold storage spaces are looking at how many pallets of goods they can stack and store,” Pricco said. “These news spaces can get you so many more pallets per square foot.”

Some design experts have begun to devise ways to build spec spaces that can then be flexibly customized depending on the needs of the user. Jay Todisco, president of the Irvine-based architecture firm Ware Malcomb, has recently focused part of his practice on cold storage design to address this need for modification.

Todisco said he designs spaces modularly, using a network of smaller cooling units rather than a large central refrigeration plant so that developers can select which spaces within a warehouse will be cooled and to what degree.

Fresh produce and flowers need cool temperatures that remain above freezing, while other products such as ice cream and meat need a deeper chill to stay fresh. Temperatures in the warehouses can range from the 50s down to an arctic-like minus 20 degrees.

Todisco said he is talks right now to design projects for four builders.

“The demand for cold storage is exploding,” Todisco said. “The barrier was the costs of building, but we’re figuring out a way around that.”

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