Cold storage forms a separate part of the logistics supply chain, with specialized facilities keeping everything from vegetables to vaccines at the correct temperature. Until fairly recently it was very much a niche part of the logistics market, dominated by specialists and owner/operators. However, the sector has seen substantial growth in demand and real estate investors see value in supplying it.

The covid-19 pandemic has, as in many other cases, acted as a catalyst for existing trends. It accelerated a pre-existing move to online groceries shopping, the growth of food delivery services and the emergence of ‘dark kitchens’ where food is prepared in industrial rather than retail locations.

The pharmaceutical industry, already set for rapid growth due to the aging population of developed nations, is another major user of cold storage space and demand for vaccines means demand for more freezer space.

Research company Forrester estimated that between 2018 and 2023, the percentage of overall grocery sales in major world markets accounted for by online shopping would more than double. Initial data from 2020 suggest that significant growth happened last year as consumers turned to online grocery shopping during the various lockdowns around the world.

“Food and medical storage is in high demand, particularly near densely-populated metropolitan areas. We believe that both of these sectors have resilience and good growth prospects”

Thorsten Kiel
Nuveen Real Estate

A CBRE report published last year estimated €755 million of cold storage space was acquired in Europe over the previous five years by investors including Tristan Capital Partners, LaSalle Investment Management and AXA IM – Real Assets. In the US, the market is dominated by the three large specialists Americold Realty Trust, Lineage Logistics and US Cold Storage.

Investor interest in these has been strong, with Oxford Properties and Cohen & Steers investing $360 million and $100 million respectively in Lineage Logistics recently. However, due to the sector’s growth potential, real estate investors are also active.

A sector of real interest

In December 2019, PGIM formed a joint venture with Bridge Development Partners to acquire and develop $400 million of US cold storage assets. In Asia-Pacific, the market tends to be more fragmented, however third-party logistics and logistics real estate specialists are involved and the operator market is seeing consolidation.

Darin Bright, senior portfolio manager for PGIM Real Estate’s US core-plus investment strategy, says: “Cold storage logistics space has benefited from many of the same consumer preferences, trends and market fundamentals that have driven heightened tenant and investor activity within the logistics sector overall.

“Food-related users are the largest tenants of cold storage space. Consumer interest in farm-to-table meals, demand for fresh produce (all seasons), and the advent of meal kits, as examples, lead to added space needs. Additionally, the increase in consumer utilization of online grocer services (accelerated by the covid-19 pandemic) is expected to add to future demand within the cold storage subsector.”

Thorsten Kiel, head of European logistics for Nuveen Real Estate, which has invested into food and pharmaceutical cold storage in all core European markets, says: “If we look at the current global context, food and medical storage is in high demand, particularly near densely-populated metropolitan areas. We believe that both of these sectors have resilience and good growth prospects, especially given the increasing need for pharmaceutical storage space, whether that is for vaccines or medical stockpiling.”

Cold storage warehouses tend to be purpose-built temperature-controlled freezer and cooler storage space, although Kiel points out that “with some logistics assets you can build a ‘box in a box’ and add or remove the cold storage element when necessary, allowing for greater flexibility of uses.”

Cold storage warehousing typically features higher ceiling heights, to allow efficient pallet stacking insulated walls, under-floor heating to prevent concrete floors heaving, condensers and sealed dock doors, among other features.

Due to the specialized nature of cold storage facilities and the more costly fit-out – which in some cases might be provided by the developer and in some cases by the operator – historically most development has been build-to-suit. However, this has not allowed the market to react swiftly to increased demand and caused “an extremely low vacancy rate and limited options for users seeking modern stock,” says Bright. There is an upside for cold storage owners, however.

Kiel says: “Tenants who need cold-storage have often invested capital in the complex fit-out and are therefore likelier to stay in the asset for longer to make the most of that investment. It is possible to attract strong returns for these types of assets based on the location and tenant profile.”

Logistics + yield = cold storage

Yields for logistics properties in developed markets have compressed to record lows, in many cases they are lower than office yields. In this respect cold storage offers a bonus to investors as yields are higher, typically 50-100 basis points, than dry goods warehousing.

“Because cold storage warehouses have operational intricacies and are more costly than traditional warehouse facilities, yields on cold storage properties are higher than equivalent non-temperature-controlled facilities,” says Bright.

Higher yields are not simply a curiosity; they do reflect higher risk, notes Jeffrey Shen, co-founder and co-CEO of Asian logistics specialist ESR. “Returns are higher than for dry warehouses, but you must remember that it is a niche and so there is a smaller pool of alternative tenants if you lose a cold storage logistics client. For investors like us, the challenge is to work with cold chain logistics firms as they evolve and support their evolution.”

Cold storage tenants may be the specialist divisions of third-party logistics companies, however many are specialists. The tenant market is fragmented but consolidating, says Shen. “There has been some consolidation in the cold chain logistics business, especially in China, and people are building bigger and more efficient platforms. Having larger, more secure tenants is attractive for investors.”

Investors in the sector tend to agree that specialist knowledge is required to succeed in cold storage real estate. “Cold storage facilities are more operationally intensive than traditional warehouses because of the specialized systems they contain,” says Bright. “Operators with expertise in these facilities are adept at running building components, addressing issues, and managing the facilities efficiently.

“Yields on cold storage properties are higher than equivalent non-temperature-controlled facilities”

Darin Bright
PGIM Real Estate

“Moreover, it’s crucial for owner/developers to have specialist expertise in order to understand the changing demands of the tenants in the market. Understanding what the user is trying to achieve and how it will operate allows owner/developers to build a flexible facility allowing for either multiple tenants in one building or the capability to segment the building into different temperatures based on the specific product being stored.”

Cold storage investors might look to access the market via build-to-suit development, or by acquiring and converting existing dry goods warehouses. Another avenue could be a joint venture with a cold storage logistics operator.

As a number of cold storage logistics operators own their own facilities and will be looking to expand, there ought to be potential for sale-and-leaseback deals. At present, there is little in the way of commingled real estate funds specializing in this niche. However, this is likely to change in the future.

For potential investors in the sector, the key challenges – aside from the operational needs of cold storage warehouses – are much the same as for dry warehousing. Land is in short supply, especially in Europe and developed Asian markets.

Additionally, cold storage has substantial power demands, which means it needs to be located in areas with a sufficient and reliable electricity supply, something that is becoming an obstacle in developed as well as developing markets. In this respect it is also similar to data centers, raising the possibility of two popular real estate niches competing for the same sites.

Overall, however, the prospects for cold storage real estate appear strong, with supply and demand fundamentals other sectors can only dream of. Bright says: “While tenant demand is expected to accelerate, there is a dearth of available modern cold storage space, and the speculative development pipeline for new product is muted. Taken together, the fundamentals surrounding the cold storage subsector should lead to strong performance over the near-term.”


Asia’s potential

The world’s most populous continent has enormous potential for cold storage logistics due to a combination of rising wealth and relative undersupply compared with North America and Europe.

CBRE research estimates that more than 400 million cubic meters of cold storage capacity would need to be built in Asia for the continent to have the same quantity of cold storage per head as the US. Meanwhile, regardless of the pandemic effect, consumers in developed Asian markets do more of their shopping online, meaning more demand for cold chain logistics space. Lack of cold storage space means the yield premium to dry warehouses can be as high as 150 basis points.

In developing markets, building cold chain logistics is important in reducing food spoilage in transit, which can be substantially higher than in developed markets, as much as 20-50 percent.

China offers significant potential as it has cities with large and wealthy populations as well as a relatively fragmented cold storage logistics market, which is consolidating rapidly. Jeffrey Shen, co-founder and co-CEO of Asian logistics specialist ESR, says: “We see significant growth potential in China particularly, because the business is relatively new there, but also in Korea and Japan too.”