The next red-hot storage market might be very, very cold.
Cold storage can be thought of as a subset of the industrial category that includes buildings with inventory that needs to be kept in a temperature-controlled environment. Yes, that includes vaccines, but it is predominantly food.
With the underlying trends of home shopping and grocery delivery already well underway, the COVID-19 crisis expedited the process dramatically as people stayed in their houses more frequently and had groceries delivered. A study by Forrester Analytics suggested that global online grocery sales would see a compound annual growth rate of 23.4% from 2018 to 2023. Changing the supply chain and logistical framework of the grocery industry is no easy task and will require a massive influx of cold storage space in order to be able to deliver groceries where they are needed quickly.
Farm-to-table dining and the advent of home-delivered meal kits have also been increasing cold storage demand.
The pharmaceutical industry was already benefitting from long-term tailwinds in the form of an aging population that would naturally increase the demand for cold storage of certain medications and vaccines. This was also accelerated greatly when the COVID-19 crisis hit.
What is cold storage?
Cold storage facilities are not your typical industrial buildings. These buildings are typically purpose-built, but can be converted from existing assets. They’ll contain freezer and cooler storage with the ability to adjust temperature and humidity settings based on what is being stored. Obviously, energy requirements are higher than normal and the logistics and planning take on greater importance.
There’s currently an estimated 214 million square feet of cold storage space in the country. While that may sound like a lot, it isn’t enough to keep up with the rapidly growing demand.
While you may see several different options for who pays for the additional cooling and storage equipment and how it is structured, typically the tenants of the building will invest millions of dollars into the buildings. This makes cold storage tenants more “sticky” than other industrial tenants, who may be able to find a big open box somewhere else and easily shift operations down the road. This stickiness is an attractive feature and may give investors comfort that tenants will renew their lease when it expires.
Higher risk, higher returns
Generally speaking, cold storage tends to provide investors with a better return profile than typical dry storage warehouses. Those returns are only available due to the higher risks being taken. There is a smaller pool of cold storage tenants, and if yours were to leave, you’d either need to find another that can use the space with little reconfiguring or spend a ton of money and effort retrofitting the building for a more typical industrial tenant.
Location needs are also very specific, and tenants’ need for the flexibility to adjust to changes in consumer demands requires landlords to really understand the industry and what their tenants want.
Higher costs to enter and construct, as well as compliance with government regulations on food storage, also add risk to the space.
What to look for
If you decide to look into cold storage investments, you’ll want to broadly understand the dynamics at play in the industrial space, and then drill down further into what makes cold storage unique.
One key difference to understand is location dynamics. While location is always important, it is somewhat less important for certain types of logistics and warehouses. For example, if a tenant wants access to a given market, they are going to want a certain amount of space, ceiling heights, and loading docks. They’re also going to want to be located directly on a major highway and potentially close to rail lines as well, depending on their supply chain.
It doesn’t necessarily matter if they’re close to a given demographic, or what side of the city they are on. The important thing is that they can get their product near the city and distribute it efficiently.
If they’re negotiating a lease renewal with you, they may be fairly price-sensitive, as they can easily move to another building on the other side of town or simply have a developer build to suit for them right down the road, as land in rural areas outside of town is pretty affordable.
With cold storage, the end user of your tenant’s product needs to be considered in greater detail. Delivering groceries straight to customers means the tenant will want to be in specific areas throughout a city, where they know their customers live and can be reached quickly.
You’ll also want to look for buildings that have a flexible layout and equipment setup so that reconfiguring and potentially subdividing the space won’t be cost-prohibitive.
Cold storage is a good example of identifying big-picture trends taking place and using them as a tailwind for your investing. This strategy allows you to really win big if you get the asset and execution right, and also to limit your downside as a rising tide lifts all boats.
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.