CIRE Podcast Industrial

The Hot Topic of Cold Storage

The supply chain proved resilient amid myriad challenges in 2020, with cold storage developing into an especially promising sector of the industrial market in the years to come.

Tim O’Rourke

Commercial real estate professionals are only beginning to decipher the long-term impacts of a once-in-a-century black swan event. Now roughly a year after COVID-19 swept across the U.S., the industry must adapt to widespread social changes to people’s behaviors — like where they work, how they shop, and whether or not they travel. While we may all prefer this pandemic to be a temporary detour from “normal,” fundamental aspects of everyday life will be forever altered.

But it’s the job of the commercial real estate industry and its professionals to understand and adapt to a changing world. In this case, the industrial sector has seen strengthening demand, with cold storage a particular property type that has a promising future.

To take a closer look at cold storage, we spoke with Tim O’Rourke, managing director at JLL, who is also a team leader for the industrial services group in Los Angeles and a member of JLL’s Supply Chain & Logistics Group. O’Rourke details the important driving factors, including population and production, as well as the impact of infrastructure, ESG, and technology.

CIRE: You’ve often cited three main drivers of cold storage — the three Ps of ports (meaning imports and exports), population, and production. Can you unpack this concept a bit?

Tim O'Rourke: Basically, if you don’t have one of these three Ps, there’s no reason to have a cold storage facility. When we talk about production, we’re talking about the Midwest and pork and beef, the Southeast with poultry, and potatoes in the Pacific Northwest. The ports are all about the import and export of food, so it’s keeping that supply chain moving quickly. And finally, the last is population. We all like to eat, so it’s all about major population centers having fresh food available to their residents.

Listen to the full podcast episode.

CIRE: The industrial warehouse sector has been such a bright spot in commercial real estate during COVID-19. How has the outlook for cold storage changed in the last year? What role has cold storage played in the e-commerce boom?

Phillips: Like you said, industrial is the darling of commercial real estate right now, so everyone has been looking at cold storage for the last five years or so — mainly due to its investment spreads. Cold storage tended to be 150 to 200 basis points above dry warehousing in the same market, making it an avenue for an investor to get additional returns. But looking at the situation in early 2020, whether it’s February or March, we saw issues within the food supply chain when COVID-19 started.

We saw a lot of impact on the grocery chains and on wholesale distributors. Half their customer base had been restaurants, which were immediately shut down in a lot of states. That led to changes in consumption and distribution too, because 60 to 70 percent of our dollars had been spent outside the home. But now that we were all stuck at home and eating in, those dollars remained inside the home.

CIRE: Did you find that the boom in e-commerce grocery sales offset the dip in restaurant sales?

Phillips: It definitely did. The latest numbers I’ve seen for online grocery sales were up six-fold since 2019. That’s a huge increase. And that was part of the cold storage solution we were trying to find over the last nine months. The other issue is the consumption patterns that were changing. Technically, we weren’t eating and drinking more — it was just where we were consuming the product that changed.

CIRE: Has cold storage played a role in the rollout of the various COVID-19 vaccines?

Phillips: The vaccines have had a minimal impact on the cold storage supply chain, mainly because of temperature requirements. The Pfizer vaccine, I believe, needs to be kept at -80 degrees Fahrenheit. The Moderna vaccine needs to be at -20 degrees Fahrenheit. Typically for cold storage facilities, the coldest temperatures are -20 degrees for ice cream. In these sites, you can have blast freezing, but that wouldn’t be appropriate to store pharmaceuticals. What we’re seeing with the vaccines are mobile freezer units. This system is separate from the existing stock of 250 million square feet.

One instance that was highly publicized a few months ago was in Louisville, Ky., where UPS took a 4,000-sf warehouse to install mobile freezer units. That single building is capable of holding 14 million vials of the vaccine. That’s a ton of storage when you can hold 1,000 vials in something the size of a suitcase. Right now, it’s really an issue of distributing the vaccine and administering it.

CIRE: For commercial real estate professionals, what do they need to know about this sector compared to dry warehousing? Cold storage can cost nearly twice as much, and cap rates have been compressing. What other challenges and opportunities exist in this market?

Phillips: The real challenge is that it’s not one-size-fits-all when talking about cold storage. Like I mentioned before, you’re talking about -20 degrees for certain ice creams and -10 degrees for others. Proteins are 0 to 10 degrees, and then you get into some liquids that need to be 36 to 45 degrees. There are a lot of temperature ranges, so it’s really all about flexibility.

One of the biggest opportunities we’re seeing is in spec storage projects — right now, we’re tracking 28 projects totaling 6.3 msf. All the spec we’re seeing is in centers where population growth is the strongest, like in Arizona, Texas, and the Southeast [U.S.].

CIRE: Are you finding opportunities outside the primary urban markets? Is demand growing in secondary and tertiary markets?

Phillips: Demand is growing in those markets, but the biggest consideration is transportation because that’s the largest cost bucket when looking at these facilities. Many of these sites are located where transportation costs for the client are minimized — whether that’s a producer, a grocery chain, or a wholesale distributor. If we look at the supply and demand, there’s overall about 250 msf of cold storage in the U.S., with 78 percent of that cold storage built before 2000, with an average age of 42 years old. Looking at that, there’s definitely opportunities to tear down and improve locations that can produce significant savings in energy.

CIRE: In developing new cold storage facilities, what technological advances are you seeing in the industry?

Phillips: There’s definitely an emphasis on automation. When you talk about the workforce, automation, of course, reduces the need for hundreds of bodies in a facility, which helps keep down costs. The upfront investment is higher — an automated freezer building could be eight or nine times the cost of a dry building. But if one of your larger cost buckets is labor, you can save in the long term.

You can also improve efficiency in cooling systems, including low-charge ammonia systems and CO2 cascade systems that use different refrigerants. We’ve moved away from the freon systems for the most part, which tend to be less efficient. Ammonia systems are also better environmentally, although they are poisonous to humans so there’s always a concern for safety in handling.

CIRE: Speaking of environmental concerns, what other improvements can be made in the sector? What investment opportunities are out there in the coming months?

Phillips: All the new projects will be better for the environment than old, out-of-date systems. They will reduce energy consumption. As we are retiring some of the older facilities in the U.S., with some more than 50 years old, these sites will be much better in terms of the impact that they have on the environment. New construction is going to address a lot of the environmental issues going forward.

If you’re in Los Angeles, Atlanta, Dallas, or Chicago, these older freezer buildings lend themselves to being upgraded, both in terms of energy consumption and from an operational standpoint. A lot of these facilities may not be great for storing product in the long term, but there may be opportunities for short-term storage and delivery of product to large population bases.

We’ve seen over the past nine months or so that there’s a ton of capital looking at this sector right now — and for good reason — and it’s not going away. Since the pandemic began, we’ve really discovered the resilience of the industrial sector, so there’s strong investment interest going forward.


Editor's note: This article is an adapted excerpt from a full-length Commercial Investment Real Estate 
podcast. Visit www.cirepodcast.com to listen to the full episode or stream wherever you listen to your favorite podcasts. 

Nicholas Leider

Nicholas Leider is senior content editor for Commercial Investment Real Estate. Contact him at nleider@ccim.com.

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