Why Investors and Lenders Are Warming to Cold Storage

Opportunities abound for those who understand the special characteristics of this property type, according to JLL’s Melissa Rose.

Melissa Rose

The industrial real estate market has been growing exponentially and accelerating rapidly in the past few years, and the global pandemic has only highlighted its resilience. 

During the last year, sharp increases in online shopping made e-commerce a significant driver of tenant demand, and the momentum continues to change the game. The growth of e-commerce has not only impacted warehouse values but also significantly expanded online grocery store purchases. Online grocery sales grew by 54 percent during the pandemic, reaching $95.82 billion in value, and propelling it to 12 percent of the total U.S. e-commerce sales. 

By 2022, more than half of the U.S. population, some 51.3 percent, is projected to be digital grocery buyers.  This consumer trend, coupled with the strain on the supply chain triggered by COVID-19, has fueled tremendous demand for traditional industrial warehouse facilities and cold storage spaces.   

Increased food sales, online grocery shopping, an appetite for healthier food choices (including organic alternatives), and “farm-to-fork” options have resulted in a surge of interest from opportunistic investors into the cold storage space. Still, this asset class has its challenges. Investors looking to acquire existing freezer/cooler assets face limited supply, higher operational costs, and the need for specialized knowledge to run facilities. Notwithstanding these obstacles, sophisticated investors recognize that cold storage commands higher rent and has very high tenant retention compared to traditional warehouses. Increased demand for cold storage has compressed investment cap-rate spreads, closing the gap between ambient warehouses and cold storage buildings.

Growing interest in the cold storage market has changed the landscape of equity investors entering the space, as well. There is a clear demand for updated and new refrigeration warehouses, as the majority of exiting product across the country is aged. Building ground-up is difficult, however, and new cold storage construction in the U.S. is limited due to the relatively small number of developers that understand the complexities of constructing specialized freezer product and the underlying demand metrics. Therefore, we are seeing skilled cold storage operators spin out of larger companies to develop new spaces. As a result, institutional investors, traditional private equity, and family offices are partnering with a small group of best-in-class operators to get into the space.

Just as the equity investor pool has grown, the availability of debt capital for cold storage acquisitions, as well as construction financing is at an all-time high. Insurance companies, banks and debt funds are all actively chasing cold storage opportunities—especially in major markets—and last mile assets with best-in-class sponsorship. 

As competition amongst lenders has become incredibly fierce on traditional industrial assets, the lending community has become more and more proficient in how to value cold storage. This makes it easier to get lenders comfortable with the higher rent and expenses. Assessing profitability on a per pallet basis as opposed to per square foot is the new accepted rule of valuation. Also, understanding the importance of racking systems and blast freeze components are some of the unique attributes lenders are learning to underwrite.

As the demand for e-commerce and online grocery increases, the demand and necessity for cold storage will continue to rise. From an investment perspective, the storage sector appears to be on the cusp of a rapid expansion, which will quickly attract more investors and lenders to cold storage facility opportunities. Expect to see rent increase in vintage product and new developments focusing on the use of technology to create flexible and efficient cold storage warehouses.

Melissa Rose is a managing director at JLL Capital Markets.

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