Companies are seeking to build, buy or invest in the sector, despite construction costs that are roughly triple that of an ordinary warehouse. Consumers filled their freezers with staples and indulgences in the pandemic, leading to increased demand for cold storage for last-mile delivery.
Americans have treated their freezers a bit like security
blankets over the past year, stuffing them full of staples and indulgences, a
consumer behavior pattern that has had ripple effects beyond the walls of their
kitchens.
Developers that focus on cold storage facilities say they
are seeing growing interest from companies seeking to build, buy or invest in
the sector, despite construction costs that are roughly triple that of an
ordinary warehouse.
Americold, a logistics company focused on the cold storage
supply chain, reported that its revenue grew 11.4 percent in 2020 from the
previous year.
“We gave guidance pre-Covid for our 2020 year, and we’re one
of the few companies that didn’t lift or change that guidance,” said Fred
Boehler, chief executive of Americold, which added 46 facilities to its
portfolio through a $1.74 billion acquisition of Agro Merchants Group last
year. “What we eat and where we eat will change, but we’re going to eat.”
Where we eat has shifted overwhelmingly to our own kitchens
and living rooms, and what we eat increasingly comes from the freezer.
“People were very nervous not just about getting to a store,
but what was going to happen with the supply chain,” said Jill Standish, global
head of the retail practice at consulting firm Accenture. She added that a
survey in March 2020, the month the World Health Organization declared the
pandemic, found that about one-third of American shoppers were buying more
frozen food than normal.
Even though the food supply chain issues that characterized
the early days of the pandemic have largely abated, Americans are still
stocking up.
“Consumption of frozen or prepared meals was already on the
rise leading into Covid,” said Beth Bloom, associate director of food and drink
reports at the market research firm Mintel. The pandemic supercharged that
trend, as restaurants shuttered and Americans stopped commuting to work and
school.
Some people are motivated by the desire to avoid crowds: In
a recent Mintel survey, 57 percent of respondents said they tried to limit the
amount of time spent in stores — and 36 percent said they were still
stockpiling groceries or household supplies.
“They want to stock up more so they can go less frequently,”
Ms. Bloom said.
The widespread migration of the white-collar work force from
downtown office towers and suburban corporate campuses into their homes is
another key part of the dynamic.
“You’re talking about a lot of people that are going to need
to fend for themselves at home in situations where they haven’t before, mainly
lunchtime,” Ms. Bloom said.
The industry had to make large, rapid adjustments to
accommodate these changes taking place in millions of homes across the country.
“This whole idea of food handling and cold storage in an
e-commerce world is really different than it was in the past,” Ms. Standish
said. “Instead of central locations of huge warehouses that have a long way to
go to deliver, we’re seeing a lot of micro-fulfillment centers.”
Increasing demand for cold storage at the last-mile stage of
distribution — that is, near where people live — was rising before the
pandemic. It accelerated when lockdown orders shut restaurants and food service
operations, and Americans stuck at home turned to online grocery shopping en
masse.
“The immediate change in consumer behavior due to Covid has
caused companies to change how they service those demands,” said Art Rasmussen,
a senior vice president at CBRE, a real estate investment and services firm.
“Covid has accelerated the online growth by several years, and the
infrastructure wasn’t quite ready to take on that capacity.”
Building near population centers is logical, but not
necessarily easy or cheap. “Traditionally, people shied away from it because it
was capital intensive,” said Tim O’Rourke, managing director at real estate
research and services firm JLL.
“Supply and demand are very tight in this industry and
always have been,” said Mr. Boehler, the Americold chief. Demand in particular
for cold storage catering to the retail sector boomed during the pandemic.
“Overnight, it went up 40 percent in terms of demand,” he said.
Building cold storage space can cost $150 per square foot,
about three times as much as that of conventional warehouse space, so the “if
you build it, they will come” development model used for other types of
industrial real estate — typically referred to in the industry as building “on
spec” — has not been financially feasible. Shovels go into the ground only
after tenants have committed and leases have been signed. The upshot is tighter
supply, when companies need a lot more of this space quickly.
Converting existing warehouses generally is not an option.
Paradoxically, given that they are constructed to store goods in subzero
conditions, cold-storage warehouses need heated floors. Mr. O’Rourke said the
intensity of the cold generated by industrial-strength refrigeration equipment
can seep into the ground, creating an artificial permafrost. When that frozen
ground expands, it is likely to warp a building’s foundation.
Cold-storage facilities require numerous other specialized
construction elements to meet safety regulations and manufacturers’ quality
standards.
“If you have your ice cream you just bought and bring it
home, what happens at the end of the week to that ice cream?” Mr. Boehler said.
“It’s got crystals, it’s got a weird coating. The product itself starts to
break down.
“Your freezer at home is meant to protect those goods for a
couple of weeks,” he added. “Our freezers are designed and insulated to hold
those same products for months and months.”
This means keeping goods much, much colder than in an
ordinary household freezer. Roofs and walls are all heavily insulated. Doors
are all tightly sealed and fitted with high-speed motors to keep cold air from
escaping. As all of us who have been scolded for leaving the freezer door open
know, those moments of contact with the outside world drive up utility costs
quickly.
“It’s all about maintaining a very, very tight tolerance of
temperature around whatever we’re storing,” Mr. Boehler said.
In spite of the high capital requirements, Mr. O’Rourke of
JLL said more commercial real estate investors were embracing cold storage.
“There’s lots of capital flowing into the space,” he said.
Cold storage sales volume rose 22 percent in 2020 on a
year-over-year basis, while the broader industrial sector dropped 11 percent
and all commercial real estate plummeted 29 percent, according to data from
Real Capital Analytics.
The category is becoming more popular because operators can
charge a premium, and sector performance has weathered the coronavirus storm
better than other types of properties like hotels, offices and malls.
That, in turn, is leading to more developers bucking
convention and building cold storage facilities on spec, Mr. O’Rourke said.
“There are actually more speculative cold storage projects in the U.S.,” he
said.
“A lot of the speculative cold storage projects are being
built in population growth centers because they’re highly divisible,” he said.
Subsections can have varying temperature ranges so fish sticks, fennel and
fresh flowers can all be stored under the same roof.
“We’re all getting used to convenience now, and the way we
think about e-commerce has now entered the food world,” he added.
