December 3, 2019
By Dennis Kaiser
The cold-storage sector has benefitted from the recent growth of online grocery store shopping. That trend has translated into new demand for more cold-storage warehousing space across the U.S. Yet there are a host of considerations involved in this asset class that owners, investors and their brokers must weigh when opening the door on a cold-storage facility. Connect Media asked Greenberg Glusker’s Ken Fields to share a few insights about this distinct product type in our latest 3 CRE Q&A.
Q: We understand the cost, complexity and timeframe of constructing cold-storage facilities presents challenges for owners, investors and operators. What are some of the tips you have for those interested in pursuing a cold-storage deal?
A: The cold-storage sector includes “chilled” facilities, with temperatures ranging from above freezing to 32-33 degrees and “frozen” facilities in the 10-20-degree range. Some facilities may contain one or both types of products. Cold-storage is not a one-size-fits all type of decision.
When pursuing a cold-storage investment, it is important to team up with a local broker who both understands the product type and has a pulse on demand. That broker can help direct the investor/developer to locations and product types that work best within available budget, timing and other transaction constraints.
Cap rates are lower for cold-storage facilities versus traditional warehouse space, which certainly helps to drive demand for this product type. Bidding for these types of projects can be fierce, and investors should be prepared to pay top dollar for good assets in this product type.
Q: What are some of the things you look for when analyzing a cold-storage deal?
A: One consideration is size. A facility’s dimensions and layout directly impact construction costs, price points and the market of potential users. Is an investor/developer looking for a “pure” cold-storage facility with minimal office and/or traditional warehouse, or a more diverse facility which includes both cold-storage and a material amount of traditional warehouse and distribution space?
We need to understand what our client is looking for. For example, is our client an owner-user or an investment buyer? If an investment buyer, does it want a single tenant user or does it prefer to diversify risk with a multi-tenant facility? Knowing what our client wants will help us configure the transaction team. One should involve a contractor that is familiar with refrigeration equipment, and also understands what kind of operation the space is likely to be used for. That contractor must thoroughly inspect the existing equipment to insure that it is in good operating condition and repair, and that the building can, for example, support potential floor loads. Odors can permeate coils and other refrigeration systems, which can significantly reduce an asset’s utility and value. For example, we’ve experienced situations where existing systems had to be significantly rehabilitated or even replaced to remove odors associated with a prior operation
If our client is converting a non-cold-storage facility into a cold-storage facility, the client must consider the original construction methods. Will the building require structural work and/or material changes to its MEP (mechanical, electrical and plumbing) systems? For example, a cold-storage use may require significant upgrades to a building’s electrical system. Clear height can also be an issue, as is the case with most repositioning projects. Having original construction plans and as-built drawings will help our client prepare a more accurate budget for its conversion project.
Q: The cold-storage sector has risen in demand. What are some of the reasons why and how has the e-grocery sector impacted market?
A: Demand for cold-storage space has increased significantly, and that demand will continue to increase in the future. For example, grocery anchored retail centers have long been viewed as a very safe asset class. However, consumers will become more comfortable buying groceries online over time, and that will undoubtedly drive up e-grocer demand for cold-storage product.
The need for traditional large grocery store space is likely to decline, and e-grocers will need more facilities to cover the “last mile.” This will create an interesting dynamic. For instance, the need for last mile cold-storage sites may cause investors and developers to consider smaller facilities than they have in the past. That could lead to more self-storage types of cold-storage facilities with subdivided spaces configured for different users.
I was recently involved in a transaction in which a consortium of grocers were leasing a single approximately 500,000-square-foot cold-storage facility for joint use. This proposed use would necessitate re-configuring the space to allow for varied temperature requirements, odors and other operational issues within the building. However, the tenant was prepared to perform and fund the work itself, which would allow my client to avoid a very capital intensive project. This type of shared cold-storage operation made for a more complicated transaction.
For comments, questions or concerns, please contact Dennis Kaiser