The pandemic has produced two forces pressing on the demand for cold storage real estate.
On the positive side, most experts believe that food and medicine are going to enter the direct-to-consumer supply chain at greater levels than ever before, and those products will need conditioned way stations. However, even as restaurants begin to reopen, they will serve a fraction of their typical capacity and many will close by the end of the year, depressing demand for cold storage space.
On paper, these seem like opposing forces that will limit any growth in the sector. But while there will likely be disruption in the food industry over the next six to 12 months, people still have to eat. By whatever method consumers receive their food, along the way it will have to pass through a cold storage facility.
“Food is food. Population growth continues and with that comes higher consumption of food,” said Brian Niven, senior vice president, cold storage, Bridge Development Partners. “With that in mind, vacancy rates for cold storage have maintained pretty much zero percent in most core markets and we see the demand continuing to go up.”
Another factor, also borne out of the pandemic, is rising inventories. Many firms are likely to keep their stocks at above-average levels to ward off any supply issues should there be another COVID-19 flare up, let alone any future pandemics.
“When we bought our first cold storage asset, it was because Bridge realized that vacancy rates continued to go down, but rental rates continued to go up,” said Niven. “It’s kind of a recession-resistant product in my eyes.”
Last year, Bridge and PGIM Real Estate launched a $150 million national cold storage investment program, targeting $400 million in assets. The goal of the fund is straightforward: acquire and redevelop/reposition—or build from the ground up—Class A cold storage facilities in markets all around the country.
The seed of the new portfolio includes 480,000 square feet of freezer/cooler space at Bridge Point Northlake in Northlake, Illinois. Formerly a Dominick’s grocery storage facility, Bridge acquired the property in 2014 and made capital improvements including a 170,000-square-foot expansion of freezer storage space.
The success of that facility, this new fund with PGIM and cold storage in general is largely due to a better understanding among investors as to how these spaces operate and generate income. Many facilities are owned and occupied by long-term users. Though other manufacturers and distributors also need and lease cold storage space, it can be difficult to put comps together when these firms comprise a smaller market share.
“I’ve spent the past three or four years really educating the capital markets and the industry on what this product type consists of,” Niven said. “For the dry space, you know what lease rates are, you know what the cost to construct is. But it’s really difficult to gather data for the cold storage space.”
Bridge Point Northlake represents a shifting trend on the development side. Because the cost to construct a cold storage facility is higher than a dry facility, many have in the past been reluctant to build these sites on spec, regardless of demand. Just as investors have become more educated on the product, so too have developers with their growing understanding of what end users need.
Both direct users and 3PLs generally want 50-to 60-foot docks so they can stage full load trucks. They require as much cubic square footage as possible—but without using expensive automated high-racking equipment. Typically, cold storage tenants also want to maximize the column distance for maximum efficiency of racking within the space.
Owner-occupied facilities make up the majority of cold storage facilities, but Niven believes that smaller users looking to lease space may account for 40 to 50 percent of the market. If the pandemic were to result in a prolonged recession, there would be a lot of consolidation and that market share would shrivel. On the other hand, owner-occupiers may look at sale-leasebacks as a way to free up funds, placing more of these facilities on the market.
“Direct users and 3PLs that don’t have the capital to build their own buildings want to be competitive against the larger guys in the newer, state-of-the-art facilities,” Niven said. “You’re going to start to see more of these spaces come online from a spec standpoint and those players will be eager to get in.”