As bars and restaurants struggled to adapt in order to stay afloat during the peak months of the pandemic, namely by changing business models either to a dry good shop or focusing entirely on delivery and carry-out, grocery stores throughout Chicago were experiencing high volumes of sales and demand as customers ditched going out and chose to cook from home.
Then from a retail and consumer goods perspective, e-commerce and home delivery became essential for millions of Americans. And when you combine grocery and e-commerce, you now have apps and services where shoppers are paid to fetch and deliver groceries to folks who are working from home. Naturally, the pandemic also kicked this trend into high gear as we were asked to stay at home for months on end.
But further up in the supply chain are the cold storage facilities where our food is delivered to before ending up at grocery stores, wholesale clubs, and even our front doors. As the nature of retail has changed in recent years, so has the demands on cold storage infrastructure and development. And as time moves forward, grocery delivery is likely to gain even more momentum.
Speed to market is now the primary focus for retailers and logistics groups. And for food delivery, it’s even more important that these products get to consumers as quickly as possible. This changes the way developers and brokers think about where to put new cold storage and refrigeration facilities.
So, where should new cold storage facilities be built?
“You want to locate closer to where the bodies are,” says Steve Livaditis, a SVP with CBRE. “Why? Because I have a product that can’t sit and it can’t sit in a truck.”
And the pandemic only further emphasized this need.
“We saw a really big push towards urban density and speed to market and ability to get this product to the widest range of folks,” Livaditis adds.
Under normal circumstances, it wouldn’t seem like a revelation to situate cold storage in or near urban centers, however there are a series of layers that add complexity to the equation. The biggest issue is the cost to build cold storage and refrigeration facilities, making the prospect much more risky than your standard spec or build-to-suit industrial project. And then in previous years, Livaditis says, developers had built these types of developments further out in the metro.
And because it’s pricey to construct, there isn’t going to be nearly as much — if any — regularly available inventory of cold storage space. Livaditis guestimates that there may not even be 50,000 square feet of cold storage space available in the Chicago area at the moment.
“Historically, [when it comes to] speculative development — where people take a lot of risk — people didn’t build cold buildings for several reasons,” Livaditis says. “One, is that it’s just very expensive to build. And as the pandemic moved forward, what became a big priority? Location. And what comes with good locations? Higher prices.”
While there’s demand for more cold storage space, in order for these deals to make sense, developers need to have an assurance that there will be immediate cash flow.
“We’re seeing people plan spec, but I think it’s challenging to finance and underwrite these without a tenant in hand,” explains Livaditis. “So we’re seeing a lot of these planned developments, talking to a lot of users, and hoping to get someone in the preliminary stages, cut a deal, then build a building.”
But in situations where proximity to density isn’t as much of a priority, costs play a bigger role. With land values in the Chicago area increasing, especially in good locations, some developers and end users are looking to Indiana, Wisconsin, or even Iowa to construct new projects, Livaditis suggests.
Ed Wabick, principal broker and consultant with TCN Worldwide, says that competition with Indiana is stiff, particularly as the residential markets continue to flourish in the northwest section of the state bordering the Chicago region. And a big reason why is that the rules and cost of doing business are a bit more predictable, he suggests.
“The business atmosphere in Indiana is very positive,” Wabick says. “Unlike Cook County and other places, real estate taxes are mandated by the state of Indiana, which means that they remain pretty consistent and don’t go from one extreme to the other.”
For some users, the problem with steep taxes far outweighs the issue of cold storage just generally being expensive to develop and lease, Wabick suggests. The costs that go into a building makes a case for equity, as where an exponentially increasing property tax bill is more difficult to rationalize.
“I’ve always worked with developers and institutional groups to make more of an investment in Northwest Indiana and I can tell you that over the last six months, my phone is ringing off the hook with developers and institutional money that want to get into Northwest Indiana,” Wabick says.
Another way to help offset risk and make these projects more viable is the theme of flexibility. Developers who can provide a little bit of everything to an end user may likely be in a better situation than those who are delivering one type of product. And with the way that distribution, warehousing and logistics are evolving, flexibility is even more important.
“We have a project at 3900 S. Normal that we’re developing with the Missner Group — it’s a great location, the marketing is food focused, and we could build a 172,000 square foot facility,” Livaditis says of a new development underway. “We have plans to build either an entire freezer, a freezer with cooler, or even a tri-temp building. [A user could] bring some cold storage in-house, some refrigeration if they want, some production, and then a dry area so you can private label and package your goods all in the same location and distribute.”
Offering a prospective tenant the options for flexibility and the ability to consolidate different needs under one roof is what developers might need to do to stand out, Livaditis suggests. But then we’re adding yet more layers of complexity on a product that’s already expensive and challenging to build. And this is why having partners is important.
“We’re seeing developers willing to take a risk to a degree but what we’re finding is that they’re trying to find a partner,” Livaditis says. “Flexibility is key, but also having someone who knows how to build these buildings is hugely important at this point. Costs can get away from you very quickly.”
This article also appears in the May 2021 issue of Chicago Industrial Properties.