Behind the Cold Storage Boom
High costs and low availability make this specialty industrial property sector shine as demand for refrigerated storage explodes.
Start Your Application and Unlock the Power of Choice$5.6M offered by a Bank$1.2M offered by a Bank$2M offered by an Agency$1.4M offered by a Credit UnionClick Here to Get Quotes!Over the past few years, there have been innumerable articles from innumerable commercial real estate publications highlighting how cold storage is “heating up” or “cooling down,” and this piece promises to steer clear of temperature-related idioms.
That said, cold storage really is the place many niche investors are looking. With the incredible rise of online grocery shopping that started before the pandemic — and only accelerated during — cold storage is in high demand. Only a handful of specialized developers had paid much attention to the sector until recently, including Americold, the largest REIT involved in the asset type.
The pool of investors looking to cold storage has exploded in the past year. Wealth Management highlighted how vacancy fell from 4.7% to 3.8% nationwide in only a year’s time. And different kinds of companies are getting into the space: A 2021 CBRE report on investor intentions showed more than triple the number of organizations were considering cold storage investment compared to two years before.
Frozen Assets
I know. Sorry about the idiom. But the main roadblock to investors and developers getting into the cold storage sector isn’t finding land, or finding tenants. It’s the cost of building the structures. Cold storage is expensive. Costs average between $250 and $350 per square foot. That's around two to three times higher than a traditional logistics center.
But for those with the money — or solid financing options — the rewards are clear. Cap rates for cold storage hit 7.65% at the end of last year, according to SRS National Net Lease Group, far higher than any other industrial property type. The trouble is, few cold storage investors are looking to sell. This results in bidding wars and astronomical prices when a property does hit the market.
Developmental Challenges
But it’s not just the costs; it’s also finding the expertise. While cold storage is expensive, it’s also complicated, and there are proportionally fewer cold storage-specialized lenders, brokerage firms, developers, general contractors, and architects qualified to assist tenants, investors, and other groups interested in utilizing or owning the space.
As a result, the development pipeline has been slower to respond than most other sectors — even accounting for building material and labor shortages. At the same time, the current inventory is notoriously dated: A JLL report from late 2020 estimated that 78.2% of the U.S.’s inventory was constructed prior to the year 2000, and the average cold storage structure is 42 years old.
Related Questions
What are the benefits of investing in cold storage real estate?
Investing in cold storage real estate can provide a number of benefits, including increased cash flow, a reliable asset class, and reduced tax burdens for beneficiaries. Cold storage facilities are in high demand across the country, and can generate strong cash flow and ROI. Cold storage is also a recession-resistant investment, meaning that it will not be dramatically impacted by economic downturns or market fluctuations. Furthermore, if an investor buys a cold storage property for a certain amount and its value increases before the investor passes away, the investor’s beneficiaries will only need to pay taxes on the amount that the property has appreciated, not the entire sale price. This can save an investor’s heirs hundreds of thousands or even millions of dollars.
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What are the challenges of financing a cold storage facility?
The main challenge of financing a cold storage facility is that it is a specialized type of real estate investment that requires a unique set of financing options. Conventional loans may not be available due to the specialized nature of the investment, and the terms and interest rates may be higher than those of other types of loans. Additionally, lenders may require a larger down payment and may require additional collateral to secure the loan. For more information, you can read our blog post on Financing a Cold Storage Facility.
What are the key considerations when evaluating a cold storage investment?
When evaluating a cold storage investment, it's important to consider the local market conditions, the level of competition within the market radius, and the saturation level of the market. It's best to look at these metrics within a 3- to 5-mile radius of a facility. The saturation level of an area is measured by the gross square feet of storage space available per person. Currently, the average self-storage inventory per capita across the country is around 7 to 8 net square feet. A market with a per-capita inventory above the U.S. average is usually considered oversupplied, whereas anything below is undersupplied.
What are the most important factors to consider when selecting a cold storage lender?
When selecting a cold storage lender, the most important factors to consider are the lender's experience in the cold storage industry, the terms of the loan, and the lender's reputation. It is important to make sure that the lender has experience in the cold storage industry, as this will ensure that they understand the unique needs of the business. Additionally, it is important to review the terms of the loan, such as the interest rate, repayment terms, and any other fees associated with the loan. Finally, it is important to research the lender's reputation to ensure that they are reliable and trustworthy.
What are the advantages of using a commercial real estate loan for cold storage investments?
The advantages of using a commercial real estate loan for cold storage investments include access to long-term financing, lower interest rates, and the ability to leverage the property for additional capital. Additionally, commercial real estate loans can provide more flexibility in terms of repayment options, allowing investors to tailor their loan to their specific needs.
Long-term financing is one of the primary benefits of using a commercial real estate loan for cold storage investments. Commercial real estate loans typically have longer terms than other types of financing, allowing investors to spread out their payments over a longer period of time. This can help to reduce the overall cost of the loan and make it easier to manage cash flow.
Commercial real estate loans also typically have lower interest rates than other types of financing. This can help to reduce the overall cost of the loan and make it more affordable for investors. Additionally, commercial real estate loans can be used to leverage the property for additional capital. This can be beneficial for investors who are looking to expand their cold storage investments.
Finally, commercial real estate loans can provide more flexibility in terms of repayment options. Investors can tailor their loan to their specific needs, allowing them to choose the repayment schedule that works best for them. This can help to make the loan more affordable and easier to manage.
What are the best strategies for managing a cold storage facility?
When managing a cold storage facility, it's important to consider the operational costs associated with the facility. Cold storage facilities typically require more staffing and security than other types of self-storage facilities, so it's important to factor in these costs when budgeting. Additionally, it's important to consider the local market conditions when investing in a cold storage facility. It's best to look at the population and job growth within a 3- to 5-mile radius of the facility to get a better understanding of whether or not buying a particular property would make sense. Finally, it's important to consider the potential for revenue growth when investing in a cold storage facility. By understanding the local market and the potential for revenue growth, you can make an informed decision about whether or not to invest in a cold storage facility.
For more information, check out this net operating income calculator and this article on the top 3 traits for a self-storage property manager.