For years investment in the cold storage sector has been overlooked.  This has started to change in recent years, primarily driven by more consumers ordering their groceries online instead buying them in-store.  The Food and Marketing Institute and Nielsen project that groceries ordered online will make-up 13% of total grocery sales by 2022, up from 3% in 2018.[1]  Traditionally cold storage was a fragmented property sector, with small operators relying on a single customer to provide the majority of revenue at their warehouses.  Recently the three strongest players in the market, Americold, U.S. Cold Storage, and Lineage Logistics, have acquired portfolios previously owned by smaller competitors.  These three players now make up around 70% of the market.[2]

While e-commerce has changed how Americans buy most consumer items, it has just over the past few years started to disrupt how people get their food.  Food in the U.S. is about a $2.5 trillion industry and grocery sales make up approximately 40% of that number.  The Food Marketing Institute predicts that over the next ten years, 70% of Americans will do at least some grocery shopping online. 1  Grocery stores are a low-margin business.  To integrate e-commerce capabilities, grocers are going to have to add more inventory, more overhead, and hire a larger workforce in their stores, further squeezing margins.

As more people start to shop online, there will be growing momentum to move food storage out of grocery stores and into efficient and cost-controlled warehouses.  Warehouses also have cheaper rent compared to retail space near population centers.  According to CBRE, 1.25 million SF of new cold storage distribution space will be needed to support every $1 Billion in sales that moves from brick-and-mortar grocery stores to e-commerce platforms. 

If e-commerce sales make up 15% of all grocery sales in the U.S., that would equate to $150 billion in sales moving from in-store to online.  At the moment, e-commerce transactions across all sectors add up to about $500 billion in sales, so just $150 billion in grocery sales would radically change how and where food is stored.  CBRE also predicts that because of the growing need to store food for e-commerce orders, that demand for cold storage space will rise by 100 million SF over the next five years, 47% above current levels.[3]

The biggest challenge for the industry is that demand is significantly outpacing supply, a good conundrum for developers.  78% of the cold storage facilities in the U.S. were built before 2000 and lack modern refrigeration technology.[4]  Current cold storage tenants need 40-to-50 foot ceilings, something that is absent in much of the obsolete space that is currently in service.  Cold storage warehouses are more expensive to develop than traditional warehouse space.  A cold storage facility costs about $130-to-$180 PSF to build compared to $70-to-$90 PSF for a traditional warehouse.[5]  Though, when cold storage facilities are leased out, they typically fetch rents that are two-to-three times higher than what traditional warehouses get.

While demand for cold storage space was expected to increase before the pandemic, Covid has accelerated its adoption.  The cold storage industry was not ready for the surge in online grocery shopping that was prompted by Covid.  More than 130 million new online grocery shoppers made at least one grocery purchase over the internet in 2020, up 42.6% from 2019.  By the end of 2021, online grocery sales are expected to exceed $100 billion, equating to 12.4% of all e-commerce sales in the U.S.  The need to store Covid-19 vaccines, which are often stockpiled at these facilities, has further constrained the current supply of cold storage space. 

Another driver for cold storage demand is America’s ageing population.  An ageing population means a larger need for pharmaceutical items, where cold storage facilities will play a crucial role.  Temperature-controlled storage and the shipping of pharmaceutical products is known as the “cold chain.”  The recent growth in biologic drugs, medications that are made from livings organisms or its products and  need to be stored and distributed at low temperatures, has also contributed to growing demand for cold storage. 

All of these demand drivers are expected to produce a 13.5% compounded annual rate of return in the space over the next seven years.[6]  While North America currently accounts for 36% of global cold storage revenue, countries like China that are transitioning from supply to consumer driven economies, should lead growth in the space over the coming years. 

On the development front, the emergence of single-envelope construction should drive down costs and completion times for projects.  Single-envelope construction also helps to reduce operating costs once buildings are complete and is more eco-friendly than traditional construction methods, which should help drive some E.S.G investing dollars to the space. 

Cold storage is a particularly attractive property type because it generally generates yields that are 50 to 100 basis points above traditional warehouses.  This is due to the operational intricacies of cold storage facilities.  Though, the credit profiles of companies that rent cold storage facilities are generally on-par with the credit profiles of companies that rent traditional warehouse space.  This allows investors to generate additional yield with a similar risk-reward profile that they would get investing in a traditional distribution center.

The growth of online grocery shopping and the increased need for temperature controlled storage for pharmaceutical products should continue to drive opportunities for developers and investors in this burgeoning property type.