Refrigerated storage is an expensive, high-risk speculative real estate product, but it represents potentially the best opportunity in commercial real estate today because of a massive supply-demand imbalance, industrial developers said.
"We won't spec it ... but my belief is that it's the biggest untapped sector of the market," Dalfen America Corp. President Sean Dalfen said at a CAPRE-sponsored industrial real estate conference Dec. 10 in Jersey City, N.J.
Dalfen's remarks crystallized the testimony of all who took the stage at the event. E-commerce, grocery stores' expansion and the explosion of on-demand food services and delivery have created unprecedented demand for cold storage, but the product can cost several times as much to build and maintain as dry goods logistics facilities and individual user requirements can range dramatically in size, layout and temperature requirements, panelists said.
A cold storage facility in North Charleston, S.C.
"Cold storage, unfortunately, is very unique. ... We'd rather avoid it, but from my perspective, it's a massive segment of the market that's untapped, and it's going to justify the rents because I just think people are going to need it," Dalfen said. "It's a supply-and-demand thing."
David Greek, director of acquisitions at Greek Development, described demand for refrigerated logistics facilities as "out of control," but said the market is still "a long way off" from standardization. There is no consensus about how to develop speculative product across markets so that it retains some flexibility while meeting individual tenants' requirements. Cold storage facilities are used not only by grocery and other food-oriented tenants, but by pharmaceutical and biomedical concerns.
"There's a lot of frustration from cold storage users ... because they are difficult buildings to underwrite and there's a squishy capital market for them after they're built — which is getting stronger every day but still harder to comp than a dry warehouse," Greek said.
Greek posited that major cold-storage operators likely will enter the real estate market themselves over the next few years to meet their own needs. Cold storage today has only a small number of dominant players, including Lineage Logistics and the sole public real estate investment trust in the space, Atlanta-headquartered Americold Realty Trust. Americold, notably, has returned 134.1% since its 2018 IPO and is among the top-third of public REITs performance-wise in 2019, according to S&P Global Market Intelligence data.
Several panelists at the event described the cold storage supply-demand imbalance in New York City, in particular, as acute. Adam Petrillo, head of the industrial services group at Savills North America, said supply within the city's five boroughs and in peripheral markets in New Jersey is at a "near-critical" level. Individual tenants' variable space and temperature needs — one quarter a tenant may need more frozen space relative to cool space, or vice versa — exacerbate the problem.
"When these active users have [needs] that require either the contraction or expansion of those current uses inside of those four walls, it can be extremely arduous ... or near impossible to meet their timing demands to find space, because the markets are not necessarily built out ... with enough supply to meet their requirements on a go-forward basis," Petrillo said.
In an interview, Steven Beyda, first vice president at CBRE, attributed the dearth of refrigerated space in New York City to the city's geography and lack of suitable land. Industrial sites within the city and its surrounds often do not meet environmental standards for cold storage products, he said.
Beyda told S&P Global Market Intelligence that he expects more consolidation among cold storage players in the near and medium term, given increased institutional attention on the space and the general awareness that supply is "so far behind" demand.
"There's going to be consolidation at the top," he said.
"There will be companies compressing and controlling the environment — setting the rates, becoming more efficient."