The temperature outside may be dropping, but interest in cold storage has never been hotter.
Since 2018, online grocery sales have surged annually by 20 percent. This emerging sector got another boost in 2020 following stay-at-home orders associated with the COVID-19 pandemic. New research from Avison Young lays out how this growth is translating to demand for temperature-controlled warehousing.
At the beginning of the pandemic, sales activity for cold storage warehouses (of 50,000 square feet and larger) slowed slightly, with $120.4 million in sales recorded during Q2 2020, per CoStar statistics. This follows more than $1 billion in sales for all of 2019.
However, the sector bounced back in a big way by the third quarter of 2020, recording $300.5 million in sales of temperature-controlled facilities, suggesting that investors remain bullish on this niche segment.
“Demand for temperature-controlled warehousing, which encompasses everything from refrigerated, cold and/or freezer storage—or a mix with conditioned or ambient storage space—has grown substantially over the last few years,” said Erik Foster, Avison Young principal and head of industrial capital markets.
That nearly 150 percent increase in cold storage sales from Q2 to Q3 wasn’t just a regression-to-the-mean anomaly. Since this real estate segment is so inextricably tied to online grocery, predicted increases in the former should carry over to the latter. Sales of online groceries were $28.68 billion in 2019 and are estimated to top $34 billion for all of 2020. According to Statista research, that figure could reach $59.5 billion by the end of 2023.
“Given the demand for online grocery and any requirement for pandemic vaccine storage,” Foster said, “this growing product sector will continue to attract investors in 2021 and beyond.”
So who’s buying and who’s selling? iStar Inc. is responsible for the largest divestiture of recent years. The New York-based REIT unloaded a seven-property cold storage portfolio—all occupied by Preferred Freezer Services—to an undisclosed buyer for $442.5 million. A diversified trust, iStar still holds a 15.5-million-square-foot net-lease portfolio valued at approximately $1.7 billion.
Four major players have dominated the cold storage arena: Americold Logistics, Lineage Logistics, Preferred Freezer Services (recently acquired by Lineage) and United States Cold Storage. The top buyer over the 24 months preceding December 1, 2020 was Lineage Logistics (owned and operated by Bay Grove Capital), who acquired 15 properties for $648.5 million. Americold was also active, closing a $480 million, 1.6 million-square-foot temperature-controlled portfolio deal in New Jersey. The Atlanta-based cold warehousing and transportation company has no plans to slow down in 2021, with an announced acquisition of Agro Merchants Group from Oaktree Capital for $1.74 billion.
Other sellers in the past 24 months include Lanier Cold storage (since acquired by Americold), which sold two assets for $81.9 million and Blackstone and Clayco, which sold one property each for $68.7 and $61 million, respectively. Additional buyers during that time saw STORE Capital acquiring six assets for $77.2 million; KKR JPN, SHI International and Starwood Capital each acquired one asset for between $49 and $61 million.
Vacancy rates for temperature-controlled facilities are at near historic lows, declining steadily each quarter since Q1 2018. Concurrently, asking triple net rental rates have generally increased during that time, peaking in the third quarter of 2020 at $7.61 per square foot.
A survey by Supermarket News of 37,000 food retailers found that online sales rose by more than 300 percent, on average, during the first several months of the pandemic. Once COVID-19 is behind us, those new users aren’t going to give up this new-found convenience so quickly and return to their former shopping habits. Many, if not most, will continue to include online grocery shopping into their routine.
With a forecasted growth in online grocery sales—coupled with ever-decreasing vacancy and uptick in asking rents among temperature-controlled warehouses—cold storage has quietly become an attractive target for investors. These formerly niche assets present an opportunity for investors with dry powder to seek out exceptional yield.