Cold Storage Heating Up The Real Estate Investment Markets

June 10, 2019 by Tae Kim, Esq.

When most investors begin thinking about entering the real estate market, they likely first look towards residential properties. There’s good reason for this – housing is in demand, and that translates into low vacancies and higher rent.

However, there is a sector of real estate that is increasingly getting attention, and that in the current niche market of commercial cold storage.

Recent e-commerce growth has resulted in a sudden high demand for distribution centers and cold storage facilities. With only a limited amount of cold storage space available, new food delivery services, such as Peapod, Blue Apron, and Amazon Fresh, are placing added strain on demand and making investment in this sector even more appetizing.

The sector is currently small, with only one public company, Americold Realty Trust, being the only temperature-controlled independent warehouse owner in the U.S. today. The constricted market has analysts predicting a jump in investment interest, as private equity and institutional investors begin to take notice.

Spencer Levy, the senior economic advisor for CBRE research, says that while food delivery is a niche market, with only about 2% to 3% of all groceries purchased online, “we expect the space could explode to 13% over the next five years because of the penetration of the Internet,” he added.

According to analysts, much of the cold storage sector’s growth is likely to occur in gateway markets such as metropolitan areas Los Angeles and New York. Food producing states like California, Washington, Florida, Texas, and Wisconsin are also likely to see a demand for more cold storage warehouses.

Based on a projection by the Food Marketing Institute and Nielsen, an additional $100 billion in annual grocery sales will be transacted online by 2022. That growth would require much more cold storage space than the current estimated 3.6 billion cubic feet currently available, which accounts for just a tiny fraction of the entire U.S. industrial and logistics real estate sector.

As the food delivery service grows, it won’t just be meal prep and grocery delivery services requiring additional storage. Farm-to-table food transport means that more fresh food is moving from the farms and into kitchens faster than ever before.

This emerging market will increase demand even more in agricultural areas throughout the grain belt; as people seek more fresh fruit and vegetables in their diet, flash-frozen foods will need to be transported and stored throughout the country.

According to CBRE, the warehouse supply real estate is aging, about 34 years on average, to be exact. While warehouse construction is growing, there is still a limited supply available, and even less allocated for cold storage, which makes it much more valuable than mainstream logistics properties.

The shortage of cold storage is going to be addressed shortly, as more money goes towards the design and development of modern cold warehouses. As additional institutional capital pours into the space, it brings more than simple construction. It leads to design enhancements that include modern technology, robotics, computer-controlled environments, and other advances that will take cold storage to an entirely new level.

As the online grocery sector grows, perishable producers stand to profit enormously, and so too will those who invest in the cold storage facilities that will become the lifeblood of their business model.