Flexible Space Warehousing for the Cold Storage Market

When something like COVID-19 hits, cold storage capacity also transforms to become a more flexible solution for all the industry’s ever-changing demands.

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The United States has approximately 3.6 billion cubic feet of food-commodity cold storage capacity covering 180 million square feet of industrial space, and 2 billion cubic feet of similar capacity covering 300 million square feet of retail space.

But, when something like the Coronavirus disease (COVID-19) hits, thus transforming the grocery retail market, that cold storage capacity also transforms to become a more flexible solution for all the industry’s ever-changing demands.

Here are six trends impacting today’s—and tomorrow’s--cold storage market.

Vaccine distribution drives additional investment opportunities in cold storage

Historically, pharmaceutical companies have required cold storage conditions that are more precise than those for most food products. Their storage environment requirements often involve very precise temperature and humidity controls and sometimes light sensitivity controls as well. With the rollout of the COVID-19 vaccines, the complicating factors continue to grow. Each manufacturer’s vaccine has a different temperature storage requirement with the most extreme being Pfizer’s, which requires storage between -76°F and -112°F -- temperatures that are simply not attainable with traditional, existing cold storage warehouses.  

COVID-19 vaccine distribution certainly presents opportunities for the cold storage sector, but the most important element of the supply chain may very well be cold chain logistics rather than warehousing. Some pharmaceutical cold storage capacity will be needed as pharmaceutical cold storage volumes rachet up the more available the COVID-19 vaccine becomes. The cold chain around vaccine production, warehousing and logistics will likely require annual administration, but the scale of the long-term need is far from clear at this stage. While the emergence of the vaccines and their ultra-cold requirements has drawn global attention, pharmaceutical cold storage is a very small subset of the overall industrial cold storage sector, so the investment opportunity will naturally also be rather limited.

New opportunities for real estate investment

The logistics cold chain will continue to see tremendous investments in mobile cold storage units, and smaller but still significant investment in additional pharmaceutical cold storage facilities. It is also important to appreciate the difference in scale between a traditional cold storage warehouse, which typically would be between 150,000-400,00 square feet, while a pharmaceutical cold storage facility would typically be between about 20,000-60,000 square feet. Therefore, even if pharmaceutical cold storage facilities expand their footprints significantly, the overall impact to the broader sector will be relatively minor. Nevertheless, given the higher costs of pharmaceutical cold storage construction and operations beyond already high costs of traditional cold storage warehouses, vaccine storage demand should present opportunities for those not intimidated by high costs per square foot for critical facilities.

Meeting the need for new facilities

New facilities, or at least a large number of expanded facilities, will be required to handle the new vaccines. These facilities may not differ too much from existing pharmaceutical cold storage facilities for most vaccine manufacturer’s products. It is hard to imagine that storage for those products, like the Pfizer vaccine, which requires “ultra-cold” temperatures, can be economically stored in warehouse environments, unless they are in mobile, ultra-cold freezer units. The new batch of pharmaceutical cold storage warehouses are expected to be a little larger than the 20,000- to 60,000-square-foot range that has been common, but still fairly small as compared to traditional cold storage warehouses.

Capital sources targeting cold storage sector

There is an abundance of capital interested in cold storage warehouse investing. Sources vary from real estate investment trusts (REITs) that have historically dominated the sector to institutional investors, private equity, family offices, high net worth individuals and foreign investment. The additional interest in the cold storage sector seen over the past few years is truly staggering. Prior to COVID-19 coming to the United States, interest in cold storage had already increased, but acceleration witnessed in e-commerce, online grocery and meal kit sales created very visible needs for additional and more modern cold storage facilities.

While capital markets have become more interested in cold storage than ever before, most investors are still primarily focused on buying buildings in core industrial markets with strong credit tenants and long-term leases.  This somewhat coincides with overall industrial rental rate growth, which is near record-high due to industrial demand and strong absorption rates. In addition, yield margins for cold storage have narrowed tremendously in recent years, while maintaining a reasonable premium over dry industrial warehouses with similar term and tenant credit profiles.

Interest in developing or owning “cold storage” has become a key focus by many developers over the last couple of years, and has been magnified during the pandemic with a tremendous push by developers to learn how to build “cold storage” on speculative basis. For many, it will be their first development of this type of product, finding themselves in a place to learn about the cold chain, the industry and the ramifications of the risk involved.  Many developers are evaluating markets across the country for their first potential projects in this arena. The analysis, when done properly, is complex and exhaustive. Cold storage buildings are costly, often 3-4 times the cost of dry warehouses to build, and the returns can be slightly less than dry warehouse buildings, while the risks are higher.

Available returns for investors

Investors/developers in cold storage are seeking higher, double-digit returns to compensate for the perceived additional risk associated with more complex and costly assets. These higher returns may become more difficult to achieve as competition has certainly increased in the cold storage sector. As more investors have entered the space, the yield premium associated with stabilized cold storage warehouses has certainly narrowed.  Similar credit used to return a premium of about 200 basis points over dry industrial warehouses, but the gap has narrowed quite bit in recent years.

Obstacles to investing in cold storage facilities

The first and most significant obstacle to investing in cold storage is scarcity. The sector is relatively small, and a large percentage of cold storage operators insist on owning their own facilities. Additionally, cold storage warehouses only comprise 1-3% of industrial warehouses within most parts for the United States. Opportunities to invest are correspondingly few.