To say cold storage is heating up would be an understatement. Chicago possesses one of the largest cold storage footprints at 12.4 million square feet—and it’s expected to keep growing, led by three primary drivers: e-commerce, industry consolidation and aging inventory, based on Newmark’s March 2023 Industrial Insight Report.
It’s no secret that the pandemic accelerated the growth of e-commerce and last-mile operations, with many consumers turning to online grocery shopping and meal services. So much so, e-commerce grocery sales are expected to grow at a 6.5% CAGR over the next five years, outpacing the 2% expected for in-store sales.
But that’s just one piece of the pie.
Third-party logistics companies like Lineage Logistics Holdings and Americold Logistics LLC have increased their share of the market through mergers, acquisitions and new construction, sparking competition as new and smaller users unable to attain space. And these companies are only growing in popularity as major grocery retailers continue to opt to consolidate their products within an externally-managed existing facility.
“Lineage Logistics and Americold, the two largest cold storage users in the world, account for 71% of cold storage capacity in the top twenty-five markets and therefore have a lot of control over pricing and placing, which is definitely pushing demand drivers,” said Newmark Research Analyst Jared Morzinski.
Aging inventory is also driving the need for modern functional space. The average age of cold storage facilities is 37 years, presenting challenges due to systems that generate higher operating costs and increased risk for product spoilage, according to Newmark.
The problem is that a majority of desirable buildings are occupied, and the others are what Morzinski and Newmark Senior Managing Director Corey Chase call “functionally obsolete” meaning they don’t have the capacity to handle the desired cold storage product. It doesn’t help that the current speculative market is less active, with only a handful of projects under construction or planned in Chicagoland.
Developers are unwilling to take the leap on spec cold storage for two reasons, one being expense, as the cost for building cold storage is almost triple that of a standard spec warehouse, $250–300 compared to $100, according to Morzinski and Chase.
“If you’re building at $100 per square foot, you can risk having some vacancy,” Chase said, “but if you’re building cold storage building and it sits vacant, the developer takes a much bigger hit in terms of carrying costs.”
The other reason is the uniqueness of users’ requirements. Each users’ specifications will vary, like the amount of cooler or freezer space they require. Constructing building spec would involve finding the perfect user, which is highly unlikely, especially within a feasible timeframe.
To sum it up, despite record demand, cold storage accounts for only 1.5% of the total industrial development pipeline. Specialized costly construction, high operating costs and inflexibility for potential future conversion make spec construction risky, but port-serving and strong population growth markets are driving a notable amount of activity, and Morzinski and Chase predict that the number will jump exponentially over the next several years.
“Compared to other large cold storage markets, Chicago is slower growing,” Chase said. “That said, it’s a large market overall and we’re going to need to supply the population with sufficient e-commerce inventory.”
The overarching national resolve to strengthen and solidify the food supply chain after the pandemic is inducing investment to instill resilience in the industry, which, according to Newmark, will spur growth and innovation in the cold storage sector for years to come.
“It’s an exciting time for cold storage,” Chase said. “In a decade, we’ll look back in awe that the cold storage market accounted for just one percent of existing space. By that time, it could easily reach ten or fifteen percent.”
