Investing in Cold Storage

Alternative Investment Spotlight: Cold Storage

Warehouses are a hot real estate investment right now, with more and more companies looking to meet customer demand by increasing their number of regional hubs. Many eCommerce businesses require not only warehouse space but also cold storage space for storing refrigerated items. Naturally, food comes to mind when thinking about cold storage, but there are many types of businesses that rely on temperature control when caring for their products.

Table of Contents - Investing in Cold Storage

Investors have noticed the increased demand for cold storage facilities and are seizing on opportunities to be part of the industry. Private equity firms, real estate investment trusts (REITs), developers and even retailers are discovering the profitable potential of cold storage real estate investment.

The booming cold storage industry

The cold storage industry has seen impressive growth in the past two decades, but especially in the last couple of years. As the number of Canadians continues to rise, there is an increased need to transport, store and distribute fresh food to more people.

There are many reasons why cold storage warehouses are such a hot investment right now. Consumer demand for fresh and frozen perishable items like meat and produce continues to drive the need for cold storage in the supply chain. Subscription meal kit services have taken off in the past few years, requiring a central hub for shipping food directly to consumers. Many stores and startups are offering online grocery delivery, which also requires central distribution for perishable goods.

In addition to food, other types of popular consumer goods require cold storage, including:

  • Specialty pharmaceuticals and supplements
  • Flowers and plants
  • Artwork
  • Biological samples such as blood
  • Petrochemicals
  • Electronics

A variety of businesses are capitalizing on the increased demand. Real estate investment trusts have increased investment in cold storage facilities and are reaping the rewards. Warehouse owners who find themselves with more space than they need are getting in on the action through sale-leaseback agreements in which they sell their existing space and only lease what they need. Other businesses are leasing their unused space directly and start their own logistics business in the process.

Previously, smaller companies owned and operated cold storage warehouses. Private equity investors have seen the potential for the industry’s growth, and now large companies own many of the nation’s cold storage facilities. VersaCold is a Vancouver-based company specializing in handling temperature-sensitive products and is one of the largest cold storage companies in North America. In 2018 they opened the largest cold storage facility in Canada. With only two of the first three phases complete, the warehouse already totals 9,366,408 cubic feet.

Anatomy of a cold storage warehouse

Cold storage facilities are not one-size-fits-all. There are specifically designed to meet the particular needs of the tenants. There are two types of cold storage warehouses, which have more to do with their leasing structure than their design:

Private or semi-private warehouse

One business constructs and/or owns the warehouse to store its merchandise at the facility.

Public warehouse

This typed of warehouse operates as an independent business and leases storage space to other companies. The company operating the warehouse might offer additional services such as handling and transportation.

Cold storage warehouses can be either chilled or frozen. Chilled warehouses maintain a storage temperature around just above 0 degrees Celsius. This is ideal for refrigerated items such as dairy, produce and dehydrated foods. Frozen warehouses maintain a temperature of minus 23 to minus 28 degrees Celsius to store frozen items, such as meat and produce.

Many older cold storage facilities (pre-1980) are still in operation but are much less efficient than their newer counterparts. They have twice the footprint of new facilities with the same amount of storage space. They also require much more labour. Anyone who owns an older storage facility is having to make major structural changes to stay relevant amid increasing demand.

New cold storage facilities are built with state-of-the-art technology, including energy-efficient walls, high-speed doors and cascade refrigeration systems. These technologies are meant to increase efficiency and lower operating costs, as cold storage facilities are expensive to maintain. Cold storage uses three to four times more power than a non-refrigerated warehouse. Ongoing costs and sustainability are both issues to consider.

Cold storage facilities are primarily concentrated near large population centers and in coastal markets. Locations near ports allow warehouses to receive and distribute shipments, while warehouses near urban centers are important for bringing items to consumers.

Investment in cold storage

Cold storage presents a promising opportunity to investors: return on investment has increased by 83 percent in the last five years. Investment has been fueled by the demand for larger and more technologically advanced warehouses. The increased operating costs of cold storage facilities have also encouraged investors to get involved in taking over or building facilities.

Despite the enticing ROI, entering the market can be quite complicated. It requires extensive knowledge of cold storage technology, local markets and government compliance. Many regulations are surrounding both the construction of the facility and the requirements for keeping perishable items safe.

Speculative development is not an option with cold storage, as these facilities are rarely constructed without a tenant prepared for move-in. Because tenants require exact specifications to protect their products, the warehouse must be designed with that tenant in mind. Tenants are typically high-quality and sign long-term leases.

Investors interested in getting into the cold storage market can turn to REITs whose portfolios contain cold storage facilities. Americold Realty Trust is a specialty REIT focused specifically on cold storage. They completed an $834 million initial public offering on the New York Stock Exchange in January 2018. They are the largest global REIT focused on owning, operating, developing and acquiring cold storage warehouses. They own and operate 156 warehouses in Canada, the United States, Australia, New Zealand and Argentina. This REIT is a conservative pick for real estate investors.

Expect to see continued growth in this industry as demand rises. New construction will allow for more space – and more income-generating potential. As eCommerce continues to dominate, cold storage investment will be anything but chilly.

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