With the growth of online grocery sales, investors are starting to show more interest in the cold storage sector.
A report from real estate firm CBRE shows that nationally, capitalization rates for Class-A temperature-controlled facilities are now closer to those of the traditional high-quality warehouses. These rates measure a property’s annual income as a percentage of its price. A lower cap indicates a higher price, according to the report.
“As the need for cold storage increases, many investors in the Lehigh Valley are becoming more comfortable with the specialized use,” said William Wolf, executive vice president of CBRE in Upper Macungie Township. “There is even discussion about speculative construction of cold storage which was never contemplated a few years ago. The main investors, they are in the Lehigh Valley.”
These sites in the Lehigh Valley include U.S. Cold Storage and Americold Logistics, he added.
“A lot of these are run by third party logistics companies,” Wolf said.
CBRE’s report, the third and final installment in its Food on Demand series about cold storage outlines how trends such as the anticipated growth of online grocery sales have narrowed the gap in cap rates between cold storage warehouses and dry storage warehouses to 75 basis points from 200 basis points in the past three years.
“They demand much higher rent,” Wolf said. “As cap rates do come down it becomes a much more viable development.”
In the Lehigh Valley, warehouses sell for $100 to $120 per square foot, while cold storage sites sell for $150 to $200 per square foot, he said.
Interest in these facilities is growing, as investors see the need to meet the demand from consumers. Much like the rise of e-commerce over the years, the need for facilities that can store food and pharmaceuticals is growing.
“It’s definitely growing and getting noticed,” Wolf said.
However, the construction of these specialized facilities is not without its challenges.
Land of course, is in short supply and every developer wants to build these sites close to major highways and not far from where consumers live.
For investors looking to enter the cold storage market, there are several factors to consider.
“It has barriers of entry because of supply infrastructure,” Wolf said.
For facilities that need products to stay at specified temperature range, a power outage could be costly. While a warehouse with regular storage could simply shut down, a cold storage facility could have all its products destroyed, Wolf said.
Aside from high operating costs, the construction of these sites often requires insulated metal panels, different types of floors, tightly sealed doors or quick freezer sections, which places increased demand on electricity, he added.
He views grocery delivery to be a major growth area and one that companies won’t be able to run out of supermarkets any longer.
How that plays out in the industrial market is unknown but the report offers several potential solutions.
Favorable investment methods include build-to-suit developments or partnerships with cold storage operators, in addition to sale/leaseback arrangements, conversions of older buildings and renovation projects.
Furthermore, as the demand for direct-to-consumer services increases, these cold storage sites will become more valuable, offering opportunities for multi-tenant urban infill development, the report said.
CBRE research nationally forecasts an up to 13 percent rise in online grocery sales by 2022. That would bring more demand for infill cold storage space as grocers and logistics operators strive to serve their customers in urban areas.