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Cold-Storage Far From Going Cold

June 30, 2022

Investor interest in cold storage increased during the pandemic and continues to rise. CBRE reports that 3.3 million square feet of “speculative cold storage development” was underway nationwide as of the second quarter of 2022. That number was only 300,000 square feet in 2019.

Why the increase? A major driver is e-commerce. During the onset of the pandemic, many consumers had their groceries delivered as a means of avoiding physical contact involved with in-store grocery shopping. Online sales of food items like frozen snacks and meat require temperature-controlled spaces, thus increasing the need for cold storage. According to data provider IRI, online purchasing of refrigerated and frozen foods rose by 58 percent year-over-year as of October 2021.

Online grocery shopping has evolved from a matter of safety during the pandemic to being a routine part of consumers’ shopping habits as suppliers refine their processes. A recent McKinsey & Company survey found that 63 percent of consumers who shop for groceries online prefer home delivery over click-and-collect service, up 48 percent in 2021.

Another driver is population growth. Cold storage demand typically follows demographic changes. Recent patterns in migration have generated more food and drink demand in states like Texas, Florida, and Arizona. This has resulted in the need for more cold storage capacity to store and distribute perishable items.

Grocery and restaurant sales have also recently exceeded pre-pandemic levels. Whether food’s destination is the grocery store, restaurant, or directly to consumer, food products still need to go through warehouses. Because of this, cold storage benefits from a steady demand.

What does this mean for commercial real estate? Demand for cold storage space is expected to continue outstripping supply over the next three to five years. According to CBRE, cold storage real estate leasing and sales activity rose by an average of 43 percent from 2017 to 2021. Investors find cold storage attractive given its higher yields and growth prospects compared with the traditional warehouse sector. Further, nearly 40 percent of respondents to CBRE’s 2022 U.S. Investors Intention Survey say they are pursing cold storage assets this year. This is up from 22 percent in 2021 and 7 percent in 2019.

This momentum is anticipated to persist as the online grocery segment grows, particularly in demographically strong markets.

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