In the first article of our series exploring trends in each property sector, we take a look at Cold Storage and explore the reasons behind this sector’s growth, and where the future opportunities in this space are.
Cold Storage, Hot Sector
The COVID-19 pandemic has helped make the Cold Storage sector a very hot property investment.
Cold-storage warehouses are similar to standard industrial warehouses but are refrigerated to store perishable goods that need to remain fresh or frozen for food producers, food wholesalers and retailers such as supermarkets, restaurants and other bulk buyers.
According to a CBRE report on their survey assessing the impact of COVID-19 on the cold storage sector:
As countries witnessed consumers panic buying food products and an increase in online food retail, this was inevitably going to affect the food supply chain. This appears to have positively impacted the cold storage sector as 100% of respondents agreed that they have witnessed an increase in demand for pallet space in their facilities as a result of the pandemic.
The report further notes:
A number of operators answered that they plan to continue growing their business in new markets, as well as expanding relationships with existing customers to meet changing consumer and retailer demand….We expect continued investor interest in to the sector as it provides robust returns and growth opportunities.
But the accelerated demand for cold-storage warehouses during lockdowns isn’t being pushed by the increase in online grocery shopping alone.
There are reportedly dozens of coronavirus vaccines in various stages of clinical trials, with a handful almost ready to apply for approval.
The race is now on to secure the temperature-controlled spaces required to enable the safe and secure storage and distribution of the expected millions of vaccine vials.
Vaccine warehouses have specific requirements, including spaces that allow for hundreds of the large custom-made, wheeled freezer boxes capable of maintaining the ultra-low temperature of -180 degrees Fahrenheit.
According to the JLL Industrial team:
The pending vaccine is vital to save lives and help facilitate economic recovery. We expect to see an increase of hundreds of thousands of square feet of cold storage space in strategic locations across the globe in order to meet demand. Some groups are building new assets, but construction has been limited historically.
An approved vaccine will require an immense global rollout, requiring coordinated efforts across the entire cold storage chain, including warehousing and transport, to finally getting the fragile goods in hand.
Given the news in recent days this need may present itself sooner rather than later; with pharmaceutical firms Pfizer and Moderna seeking regulatory approval for wider use of their vaccines late of this year. There are already reports of hospitals, states, and cities across the US buying freezers to store the vaccine.
According to JLL:
Automation plays a key role in maintaining these very specific conditions with sensors needed on each freezer box to monitor and ensure consistent temperature. This removes the need for employees to constantly check temperatures, reduces the number of hands-on workers needed for each facility, and, ultimately, gets the vaccines where they’re needed most.
Two of the world’s largest players, who combined “have 59% of the cold-storage market share in the U.S. and are growing quickly” are Lineage Logistics LLC, the world’s largest landlord of temperature-controlled warehouses, who in September closed a $1.6 Billion raising to drive business growth and support further investment in technology and automation, and Americold Realty Trust, who recorded a second quarter 6% NOI increase.
In the Australian cold storage space recent notable transactions include the Industrial property landlord Centuria Industrial REIT purchase of a Gold Coast cold storage warehouse leased to Jack Cowin’s Competitive Foods Australia group (owner of fast food franchise Hungry Jack’s, and the largest franchisor of restaurants in Australia). The purchase price was $43M with an initial yield of 5.5%.
The agents noted that:
this transaction was testament to the “unprecedented demand” for modern, well-located cold storage facilities and was further evidence of the strength in the local industrial market.
In August, Singapore-listed Frasers Logistics and Commercial Trust sold its half stake in a Brisbane cold storage facility for $152.5 million. The distribution facility was purpose-built for Coles in 2008. (Leased with a WALE of 12 years).
JLL agents brokered the deal and stated:
"The cold storage sector is really high on the agenda. This deal reinforces the yield compression story for prime core bankable covenants in the current environment"
Experienced Cold Storage warehouse developers, owners, and occupiers are increasingly coming up with creative solutions to improve efficiencies in the space and improve cost controls:
With prime locations becoming scarcer and scarcer, along with a focus on ‘last-mile delivery’ capability, redevelopment, conversion and repurposing of existing or older sites vs ground-up construction may increase value for owners/investors.
New technologies improving safety allowing for an increase in warehouse heights.
Given that refrigerated warehouses are one of the highest electric consumers in the commercial property space, owners and users may increase CapEx to lower energy usage costs and improve emissions via installation of alternative energy solutions, advanced sealing materials, and water use reduction.
Increased use of “cobots” (collaborative robots) that operate in conjunction with, and in close proximity, to humans. Cobots can increase efficiency and provide a safer workspace for employees. This is amplified today where employee social distancing is standard.
Take Away
With the booming expansion of grocery ecommerce, specifically for perishables and refrigerated/frozen foods, along with consumers increasingly seeking fresher, more natural product, demand for cold storage warehouse space will continue to increase. Yes, this was heightened by the pandemic but it is here to stay.
Most investors in this space are seeking facilities with strong tenants and long-term leases in place, located in core markets. Cold storage often demands higher rent premiums than ‘dry’ warehouses.
Opportunities in the space include joint ventures with experienced cold storage operators, sale/leasebacks, and build-to-suit developments in or near major population centres.
As always we’d love to hear your feedback!
CapStack
CapStack is a real estate capital advisory firm offering a wide variety of commercial property finance solutions.
We leverage market insight and unique lender relationships to source solutions across a wide array of property types, including: Multi-Family Residential, Retail, Office, Industrial and Mixed Use Properties, Development, Construction, and Joint Ventures.
If you looking to develop, purchase, or refinance commercial or industrial property and require financing please reach out to see if we can help. By working alongside Australia's most active bank, non-bank and alternative lenders we help developers, owners and investors fill their capital stack by providing access to the capital puzzle piece they are missing by actively sourcing and negotiating commercial property finance terms from our extensive network of bank and non-bank institutions.
Comments