Grocery e-commerce has continued to accelerate through 2020, with COVID-19 boosting demand for cold storage facilities throughout the country.

Grocery e-commerce has continued to accelerate through 2020, with COVID-19 boosting demand for cold storage facilities throughout the country.

Institutional Investment

With rising online grocery deliveries, developers and investors see an opportunity for a high-yielding bet.

Patricia Kirk | Oct 15, 2020

U.S. online grocery sales continue to accelerate amid escalating COVID-19 cases, and this trend is likely to continue long after the pandemic subsides, boosting demand for cold storage facilities nationwide.

“COVID has accelerated and catalyzed that sector and is a huge point of growth for the industrial cold storage sector and remuneration of retail,” says Chicago-based Peter Kroner, research manager for industrial capital markets with real estate services firm JLL.  The pandemic changed the perception of online shopping for many consumers who were formerly reluctant to shop online or unfamiliar with the process, such as the elderly, he notes.

Online grocery sales represented just 3.9 percent of all grocery dollars spent at the end of 2019.  By May 2020 that figure had increased significantly, says Kroner. He predicts that in response to rising demand, grocery chains’ supply-chain infrastructure will evolve, mirroring many of the lessons e-commerce direct-to-consumer, supply-chain models have developed since 2010. These lessons include establishing separate facilities for merchandise going to physical stores and those operating as e-commerce fulfillment centers. This will have a significant upward impact on demand for cold storage space, Kroner says.

Long before the pandemic arrived at U.S. shores, in May 2019, real estate services firm CBRE estimated that the number of consumers buying packaged food items online would rise from about 50 percent to 70 percent, creating demand for an additional 75 to 100 million sq. ft. of cold storage space over the following five years. That estimate did not reflect the current surge in online grocery sales, nor did it take into account the need to replace obsolete cold storage facilities. The average age of U.S. cold storage buildings is 42 years, with more than 78 percent of the total inventory built prior to 2000.

Meanwhile, the current typical grocer supply-chain network involves a hub-and-spoke system that consists of cold storage distribution centers with pallets of food for delivery to grocery stores, according to Kroner. This doesn’t work well for e-commerce order fulfillment, in which food products are packaged according to individual orders and delivered to consumers living in proximity to each other, similar to parcel carrier distribution models.

As a result, Kroner notes that developers are beginning to build speculative projects—a rare occurrence in the past due to the high cost of construction. However, most new projects rising still have a prelease or at the very least, a handshake promise.

Matthew Walaszek, associate director of industrial and logistics research at CBRE, agrees, noting that of the seven to nine million square feet of new cold storage space currently in the pipeline only a handful are spec projects, with the large majority comprised of build- to-suits. “User requirements are very specific, making it difficult to build on spec,” he says. “With that said, there are definitely more spec projects this year than last year, especially as architects get more sophisticated designing for cold storage.”

Because they are highly automated, energy efficient and feature clear heights above that of traditional warehouses, the cost to build a cold storage facility today is about double that of conventional warehouse space. On average, it costs between $130 and $180 per sq. ft, compared to $70 to $90 per sq. ft. for traditional warehouses, according to a recent JLL cold storage report.

The majority of new cold storage construction is taking place in port-centric and coastal markets, often referred to as the Elite 11 markets, notes Lori Zuck, managing director for the industrial group in the New Jersey office of real estate services firm Transwestern. This includes the New York metro area, Northern California, Dallas-Ft. Worth, Houston, Texas, South Florida and Pennsylvania’s Lehigh Valley.

According to Walaszek, however, cold storage construction is happening in major metros nationwide. Most projects are ground-up, as opposed to conversions from other uses. New facilities are being located in proximity to highly populated metro areas, but many developers are also seeking infill sites even closer to consumers.

The capacity for cold storage construction is currently limited, according to Zuck, due to the scarcity of land in highly populated metros, development challenges, and the high cost of these projects due to user automation requirements. Even so, she says, “With changing market dynamics that were occurring before COVID-19, coupled with the impact of the pandemic, we anticipate accelerated growth in (new cold storage construction) in the near term.”

Driving investment

The surge in demand for cold storage space is also driving investment in this sector. Two of the country’s largest cold storage owner/investors, for example—Lineage with nearly 32 percent of total inventory and Americold with 29 percent—are both acquiring new cold storage portfolios and developing new assets.

Lineage Logistics recently raised $1.6 billion in new equity to drive growth and support future investment in tech and automation for its properties. The firm also recently completed 10 acquisitions totaling 153 million cubic sq. ft. of cold storage in 24 locations throughout North America, including acquisition of assets owned by Southern Cold Storage, Allied Cold Storage and Western Distribution Services, reports SupplyChainDive.

Americold, the world’s largest REIT focused on cold storage, has invested nearly $2 billion in cold storage acquisitions during the last two quarters, according to company press releases. This includes this month’s acquisition of Agro Merchants Group for $1.74 billion. Agro Merchants is the fourth largest temperature-controlled warehouse owner and operator globally, with 46 facilities totaling 236 million cubic feet in 10 countries. Americold also plans to invest $400  $500 million in new construction.

Some industry experts maintain that the e-commerce surge of 2020 will level out in 2021, but Walaszek suggests that COVID-19’s disruption has accelerated the predicted five-year, upward trend in online grocery sales. “This, coupled with the sector becoming more institutionalized, may put upward pressure on (cold storage) values,” he notes.

As recently as a few years ago, cold storage assets in most markets would trade at a discount of 150 to 200 basis points compared to convention warehouse properties, notes Kroner. That discount has now dropped below 100 basis points. While few transactions have closed since the beginning of the pandemic, there are indications that pricing for any cold storage assets coming on the market will be higher than pre-COVID-19 levels, noted the JLL report.

Cold storage rents tend to be significantly higher than those for dry warehouse space, but Walaszek says that there’s not enough transparency in the market to know what the rent premium is on average. He maintains, however, that rent growth will be robust over the next few years, in line with the overall industrial market.

As a result of growing demand for cold storage space, there are now more investors, including both institutional and private players, interested in this asset class, which traditionally had a very limited buyer pool.

Authors of Transwestern’s recent cold storage Insights report noted, “More institutional investors feel that cold storage is a safe bet for their capital, and occupiers are clamoring for modern space in key geographies.” Zuck, the report’s co-author, says that the institutional investor pool now includes Prudential and Angelo Gordon.

Walaszek adds PGIM Real Estate to the list of new entrants. The firm has partnered with Bridge Development to invest in and develop cold storage facilities. Grove Capital (owner of Lineage Logistics), Blackstone and New Mountain Capital are on the list as well.

Even Sam Zell has been making bets on cold storage logistics. His Chicago-based Equity Group Investments purchased a majority stake in Able Freight, a Los Angeles-based, international cold-chain logistics provider specializing in the transport of perishable goods, reported Freightwaves. According to Freighwaves, this is Equity Group’s fourth logistics investment in two years.

CLICK HERE to read the full article in The National Real Estate Investor.

CLICK HERE to view our latest industrial space which features over 10,000 SF of cold storage or contact Conrad Boylan at 904.515.2590 for more details.


Related Team


Conrad Boylan