COVID-19 changed everything about our day-to-day lives. Even our food habits.
We couldn’t dine in restaurants. Grocery trips were minimized. But we still had to eat, and we therefore, responded to the crisis the same way we always have. We adapted. Since we couldn’t go to the food, we leaned on e-commerce to bring it to us.
This, in turn, changed how producers reacted to production, which also caused a shift in supply and delivery. Restaurants had to get creative. Kitchens were not equipped to produce the sudden influx of carry-out, and businesses were left with no choice but to handle the heightened demand by storing mass-produced food — but they needed additional cold space to do so. Producers, in the same way, were bulk purchasing out of fear of shortages.
Demand far outweighed supply, though, and the equation looks the same today. Investment gold due to their resulting high price point, but uncertainty remains for other players involved.
There’s a lot to consider when building these facilities. Its higher barriers to entry make it a unique sector within CRE.
Location is especially important, as they must be built near population-dense metros with relative proximity to their end consumer. It’s too expensive to transport food long distances, and though the cost increases are starting to plateau, it’s not likely that they will reach normal levels any time soon, according to Kelly Disser, Executive Vice President, Industrial Services at NAI Hiffman.
“It remains to be seen, whether construction pricing will come back down,” Disser explained. “It is always hard to predict – but the recent increases and new levels create even more uncertainty. Demand is strong and clients who occupy these buildings continue to have record years, but heightened costs and supply chain concerns leave many questions unanswered. While it is very early (in regard to this change) we are starting to hear that some line item costs may start to come down, even if slightly, given some large projects which have recently been put on hold. Interest rate increases cause the cost of nearly everything to be more expensive – directly or indirectly, and those changes in valuations in the equity markets now as well. Put all that together, and there are more questions regarding the supply chain and broader economy now, in fact, than there were six months ago.”
Buildings also require a near substation or data-center grade power source to operate, reducing options further.
Cold storage must compete with other corners of the market for these appropriately located sites because of the general lack in available space. Even if there’s space to be acquired, building limitations make it a challenge to follow through.
Time is perhaps the biggest roadblock. Large-scale space is difficult to build quickly, especially factoring in today’s supply chain issues and inflated prices. Mechanical systems must also be reviewed and approved prior to beginning construction. They’re more heavily scrutinized, and Geoffrey Kasselman, Senior Vice President/Partner, Workplace Strategy at CRG, expanded on the various challenges.
“Buildings need chemical fire protection systems, rather than ones that are water-based,” Kasselman said. “A cooler/freezer fire cannot be extinguished with water. The fire department nearest the facility must have chemical training, which is not the case for all of them. The options are to either find a different site or pay to train the local fire department so they can provide service in the unlikely event it’s needed.”
Employee shortages are yet another issue across the board. Facilities are having trouble finding people willing to work in the cold, ammoniacal environment. Because of this, newer builds are utilizing automation, alleviating the need for a large quantity of workers, and resulting in more space for product. People are looking for creative solutions. Robots are doing the picking, much like a vending machine, but this is few and far between considering the lack of development caused by the current competition for building space.
Sometimes these factors align just right, all this said.
More buildings are being developed compared to past numbers. Major food retailers like Amazon/Whole Foods, Walmart, Target, and Meijer need sizeable amounts of space. But existing space is often outdated, energy efficient, and running on no longer legal, carbon-unfriendly coolant. The problem, again, is one of time. Does one choose an outdated building that’s ready for move-in? Or wait a year and a half for a new, and significantly more expensive, build-to-suit with automation and climate-friendly systems? These are hard choices for companies to make. And whatever their choice, it will have an impact on the market.
The Wall Street Journal, for example, announced that Bain Capital and Barber Partners LLC have formed a joint venture “aimed at spending $500 million to build 10 to 15 refrigerated warehouses across the U.S. over the next three to five years…with the average facility spanning roughly 300,000 square feet.”
This is expected to have notable effects on the market, as the U.S. is not accustomed to so much added supply.
Everything is interconnected, and many variables are largely unsolved.
There’s insatiable demand and tight supply, and both NAI Hiffman and CRG agreed that dynamic is not changing. CBRE found that 39% of investors seeking alternative investment sectors said they were interested in cold storage in 2022, up from 7% in 2019, according to WSJ. E-commerce is expected to continue to fuel the growth in cold storage, despite its many trials, and though consumer spending is starting to revert to pre-pandemic levels, spending habits are ever evolving.