Demand for Cold Storage Hits Point Where Spec Projects Make Sense

The logistics of vaccine distribution are drawing more attention to cold storage. But demand for this asset class is still primarily driven by grocery deliveries.

Patricia Kirk

Recent reports in mainstream media might be misleading potential investors about how much the distribution of COVID-19 vaccines will impact demand for cold storage space. As the vaccines will not be stored for any length of time, they will not increase demand enough to move the market, say cold storage brokers and advisors.

“Vaccine logistics is a flow-through process—shippers aren’t stocking and sitting on it,” says Tray Anderson, logistics and industrial lead, Americas, with real estate services firm Cushman & Wakefield. While governments may begin stockpiling vaccines in the future for booster shots or to be ready for another outbreak, that’s not happening right now.

“Vaccines are going straight to administration sites, so it doesn’t require 50,000 square feet of storage space,” Anderson continues, noting that thousands of vaccine doses occupy a relatively small amount of space compared to stored grocery products, but require extremely cold temperatures to preserve medical efficacy. As a result, vaccine-handling facilities might need to utilize multiple rooms within rooms. The vaccines are stored in custom, wheeled freezer boxes capable of maintaining temperatures up to minus-180 degrees Farenheit, according to a recent report from real estate services firm JLL.

Vaccine-handling facilities must be purpose-built, as standard floors in cold storage freezer facilities cannot withstand such an extreme temperature, according to Tom Griggs, who heads industrial and logistics for Hines’ East Region. He explained in a recent Bisnow interview that this use is not expected to attract investors as it costs $200 to $300 per sq. ft. to build those kinds of assets and they may end up only being needed for two to three years.

Instead, vaccine distribution is raising Wall Street’s interest in various aspects of cold chain and cold freezer logistics around the packaging, handling, and transporting vaccines at extreme sub-zero temperatures to administration sites, according to a recent New York Times article.

Still attractive

However, last year’s surge in online grocery sales has made cold storage a popular alternative investment type. While the extreme temperature requirements of the vaccines may have focused attention on cold storage, Anderson says “food supply in proximity to people” is what’s driving investment in this property type.

A boom in cold storage investment is already beginning to take shape as a result of both increasing demand for cold storage space and replacement of the industry’s obsolete facilities with new, state-of-the art, high-bay spaces. Dustin Volz, senior managing director, capital markets, in JLL’s Dallas office, notes that the average age of the industry’s 250 million sq. ft. of cold storage space is 37 years.

And with certain core asset classes, including retail and hotels, now out of favor, Volz says investors are now seeking alterative opportunities, with cold storage, truck terminals and data centers as top choices.

Demand for modern, automated cold storage space is being driven by both online grocery retailers and tenants upgrading from older, obsolete facilities to more efficient space, Volz notes. Cold storage speculative development is a newer phenomenon brought about by pandemic-influenced demand; he adds. He notes that there are 12 to 15 cold storage spec projects with a total of 4 to 5 million sq. ft. of space currently underway in densely populated coastal, Southwestern and Southeastern markets nationally.

The spec projects currently in the works do not involve “last mile” distribution facilities, but rather 200,000- to 300,000-sq.-ft. facilities in major logistics hubs or close to major ports.

Anderson says that an increase in vertical farming to provide locally grown fresh foods in urban areas is partly responsible for the uptick in spec cold storage development and will continue to create demand for space.

The cold storage development projects are attracting equity capital from a variety of sources, ranging from institutional investors and investment managers to high-net-worth and family office investors entering this product type for the first time, according to Volz. He says that equity investors like cold storage because it generates higher returns and better margins than “dry” industrial assets, with existing cold storage assets generating returns of 50 to 100 basis points basis points greater than traditional industrial facilities.

Noting that cold storage is a very capital-intensive product type, he says the biggest obstacles for investors right now involve finding quality opportunities and understanding how this space works, as well as the risks it involves. He notes that nationally, there only three to five brokerage firms with expertise in cold storage and 15 to 20 experienced cold storage developers.

Vacancies in the cold storage sector have remained below 10 percent for nearly 20 years, according to JLL researchers. They suggest that going forward, vacancy may get even get tighter, spurring more spec construction and investor appetite for this asset type. This will be largely as a result of reshoring of essential sectors like food production and pharmaceutical manufacturing; the increased importance of last-mile delivery; and consolidation of the public refrigerated warehouse sector.