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The Catch (22) of the Day: Cold Storage

Industrial Societal & Environmental Issues

Let’s face it: COVID-19 is a once-in-a-century phenomenon that has caused unprecedented chaos and disruption to nearly every person and company on the planet. And we’re still in the midst of it now.

One of the few benefits of this awful pandemic has been the embracing of technology and innovation, whether by choice or survival. There are many examples of this pivot, big and small, with some having a positive impact on the commercial real estate industry. Nearly all facets of e-commerce have been supercharged by the pandemic’s impact on consumption patterns across nearly all demographics and geographies.

Perhaps the most notable impact is the creation of high-effectiveness vaccines at a global scale, in record-smashing time. The lab testing, manufacturing, and distribution of these vaccines for Pfizer, Moderna, Johnson & Johnson, Oxford AstraZeneca, and others, plus their respective supply chain partners, has also had a positive impact on the real estate market in spot instances. This is especially true of Pfizer and Moderna which require cold storage of their vaccines.

Wikipedia defines cold storage as “a large, refrigerated room or building designed for storage of goods in an environment below the outdoor temperature. Products needing refrigeration include fruit, vegetables, seafood and meat. Cold storage is often located near shipping ports used for import/export of produce.”

On a more personal level, pandemic or not, most people continue to eat at least two, if not three meals a day. This steady, recession-proof reality, in conjunction with stay-at-home and work-from-home dynamics, means that how and where we get our meals and food supplies have changed.

Likewise, the entire food supply chain, from growers and producers, to transport and storage, to grocery stores and retailers/e-tailers, have struggled to meet the acute demands of the homebound consumer. This in turn has exposed a supply/demand imbalance of commercial-grade cold storage space in almost every market.

Developers and investors alike are trying to capitalize on this supply/demand opportunity. For the first time in memory, there are approximately a dozen different speculative large-scale cold storage facilities under construction around the U.S. with several more planned or announced.

Speculative cold storage construction has long been taboo in the mainstream marketplace as the gambit was seen as too capital intensive with far too many design variables and end-user unknowns. Plus, the data points (or lack thereof) for such rare spec cold storage facilities have historically made underwriting and risk mitigation challenging for most capital partners. Consequently, other than a few build-to-suits for or by cold storage end-users, and an occasional conversion of an existing industrial “box,” cold storage supply has been largely stagnant for years.

But these are COVID times. Demand for cold storage is up sharply by almost every metric. Capital is plentiful as the industrial asset class has rarely if ever seen better times. Additionally, there are substantial new industrial capital in-flows from international investors and those that have pivoted away from retail, office, hospitality, etc. And supply is tight everywhere.

“Can’t miss a develop and investment opportunity” you say? Therein lies the “Catch 22.” Does your site have enough power to support heavy-duty cold storage usage (think large-scale freezer and coolers running 24/7/365)? Should you build to 50’ clear as many end-users specify? Will the local municipality even let you? The entitlements process can be long and arduous for such special-purpose facilities, yet the demand is now.

To what R-Factor (insulation) should you construct the deck and walls? Should you pour the floor or wait to see who the end user is? Will you have moisture or mold issues in the interim? Should you design for 100% freezer usage? What if you get a 100% cooler tenant? Include rail service? Pre-cast, tilt-up or insulated metal panel? What impact will that have on you exit cap rate? What data points are you using to assure your capital partners and other stakeholders of success? And so on.

Suffice it to say that constructing speculative cold storage facilities is not for the faint of heart. If the market shifts and you are left with an over-insulated, over-powered 50’ clear box with no floor, what will a non-cold storage user pay for it? What does that do to your pro forma?

We should all watch closely as this initial wave of speculative cold storage facilities are delivered and leased up. What best practices might emerge? What rents, TI packages, and exit cap rate data can be gleaned? Are the end-users tenants or buyers? Is this wave of cold storage spec buildings ushering in a new era of specialized speculative development, or this purely a short-lived reaction to pandemic-induced demand that may subside later this year or in 2022?

With all of these dynamics and variables in mind, grab a front row seat and enjoy the ride. For those that have taken on such speculative cold storage projects, we are rooting for you!