there more demand
for cold storage space?

Changing consumer preferences over the last decade, accelerated by COVID-19, have increased the demand for cold storage space

September 29, 2020

Cold storage space has historically been well leased. Now, more than ever, as consumer behavior is shifting, this space is seeing an influx of demand, accelerated by the COVID-19 pandemic.

People are changing the way they locate, buy and consume food items and the entire supply chain must adapt. More manufacturers are pushing their product into the cold storage network as a result, causing increasing demand for this asset type.

In this episode, James Cook sits down with Tim O’Rourke, a Managing Director with the Industrial Services Group, and Trevor Ragsdale, Executive Managing Director with JLL’s Industrial Integrated Portfolio business service. The three discuss the nuances of the cold storage sector and how the space is changing.

James Cook: [00:00:00] Sometimes I like to have French fries for dinner. And I never think about how it gets from the potato in the ground to the frozen French fry in my grocers freezer. And I never think about how the demand for cold space that those frozen French fries are stored in might be changing right now. But today I'm ready to learn.

[00:00:19] All about it. This is building places where we look at the world of commercial real estate through the eyes of the experts that study it every day. My name is James Cook. I research real estate for J L L. Today, I'm going to check in with two experts, Trevor Ragsdale and Tim overall.

[00:00:37] Tim O'Rourke: [00:00:37] I am Tim O'Rourke and I'm managing director with JLL and help lead our food and beverage group.

[00:00:42] The cold storage industry is around the process of storing perishable foods that we consume every day in the U S from production to processing to storage. To the grocery store, to the restaurant. That's the flow of the goods in America.

[00:00:58] James Cook: [00:00:58] Let's say I buy, what's a good thing that I buy. I like to buy frozen French fries in the freezer section, uh, at my grocery store.

[00:01:07] Is there a step where those are in like freezer, cold storage, somewhere in some big storage facility?

[00:01:15] Tim O'Rourke: [00:01:15] Yup. Those would be up in the state of Washington.

[00:01:17] James Cook: [00:01:17] Oh, interesting.

[00:01:18] Tim O'Rourke: [00:01:18] If you know the brand  and the others, they're all up there. All the French fries from McDonald's are in that Idaho Washington, Oregon area where they're processed and their store before being distributed to either the retailers or to the grocery stores.

[00:01:33] James Cook: [00:01:33] That's fascinating.

[00:01:34] Tim O'Rourke: [00:01:34] Poultry tends to be in the Southeast. You know, pork tends to be in the Midwest, the Midwest through the West coast.

[00:01:41] James Cook: [00:01:41] Is there a change in demand for this cold storage space? Has it changed?

[00:01:47] Tim O'Rourke: [00:01:47] It's been changing over the last five to 10 years as consumer preferences have changed, mainly the need for fresh, healthy and organic foods is probably the biggest driver.

[00:01:59] James Cook: [00:01:59] And I, I see that in my own life. I like more fresh things. When I say that I like more fresh things though. It's not frozen.

[00:02:06] Tim O'Rourke: [00:02:06] A lot of fresh items were previously. Y yes.

[00:02:10] James Cook: [00:02:10] Uh, Oh, this sounds like a trade secret that I should know

[00:02:13] Tim O'Rourke: [00:02:13] about. Yeah. Well, unless you're living in Alaska and pulling salmon straight from the sea, typically it's going to be frozen before it gets to your table.

[00:02:22] Trevor Ragsdale : [00:02:22] My name is Trevor Ragsdale. I'm the executive managing director and head of JLLs industrial occupier

[00:02:28] Tim O'Rourke: [00:02:28] services business.

[00:02:29] James Cook: [00:02:29] So our preference for fresh produce and fresh foods has increased. Is there anything else going on? That's increased demand for cold storage.

[00:02:37] Trevor Ragsdale : [00:02:37] A lot of what we're seeing is the result of consumer preferences that changed during the COVID-19 stay at home economy.

[00:02:45] We are seeing consumer preferences leading to what will be a sea change as it relates to the way that people are consuming food items and the way that they buy them. And that. They are distributed, which will lead to more and more manufacturers pushing their product into the cold storage network to be fulfilled through an eCommerce platform,

[00:03:08] Tim O'Rourke: [00:03:08] as opposed to shipped directly to grocery stores.

[00:03:10] James Cook: [00:03:10] So there's all this increased demand from all these people buying groceries online for the first time. So is there enough cold storage space to meet all this new demand?

[00:03:21] Tim O'Rourke: [00:03:21] Now, in terms of the U S cold storage industry, maybe there's about 250 million square feet in the entire us. And when you look at that compared to the overall industrial stock in the U S which is 13 billion square feet, it's still a very small percentage of the overall U S industrial stock.

[00:03:37] So some people have suggested that we need them another a hundred million square feet of cold storage over the next five to seven years. So we'll see how this plays out over the next five years.

[00:03:47] Trevor Ragsdale : [00:03:47] Cold storage is a relatively small percentage of the overall. Industrial base. However, that segment of the industrial base has historically remained very well leased.

[00:03:58] And so you don't see typical levels of vacancy in urban cold storage. As we are seeing consumer behavior shifts. And an increased demand for cold storage space. We believe that speculative investment in that space is going to increase to meet, can meet that increased demand.

[00:04:16] James Cook: [00:04:16] Are you seeing sort of a growing investor interest already?

[00:04:19] Tim O'Rourke: [00:04:19] Yeah. Yeah, probably the most current example of that is the partnership between PJM and bridge development, Chicago. They, they didn't invest at 150 million in joint venture. And they're looking at doing speckles or in various markets in the U S

[00:04:34] James Cook: [00:04:34] I would have thought that cold storage was a kind of thing that was built for a specific use.

[00:04:39] But so what I'm hearing is there's a way where you can build it speculatively, where it could be used by whoever decides to lease the space.

[00:04:48] Tim O'Rourke: [00:04:48] When you look at spec cold storage, The key thing is flexibility in temperature ranges. Ice cream tends to be stored at minus 10 degrees produces. That'll be in the high thirties and forties RSUs.

[00:04:59] That'd be at 36 degrees. So you have to build a facility that is flexible to meet the various demands of the product that's being stored there.

[00:05:08] Trevor Ragsdale : [00:05:08] We do a lot of work for lineage logistics, which is one of the largest public refrigerated warehouse operators in North America. We see them rapidly expanding across the United States.

[00:05:20] A lot of the issues relative to the cost of investment to build cold storage on a speculative basis are being met by that TRW

[00:05:30] Tim O'Rourke: [00:05:30] marketplace.

[00:05:31] James Cook: [00:05:31] So there, there are these companies that you outsource your cold storage to let's say, operate a fast food chain. Would I outsource to a company like this to handle my cold storage needs?

[00:05:43] Tim O'Rourke: [00:05:43] Yeah. Typically, if you're a, um, a restaurant chain, you have a broad line food service distributors such as Cisco USB service or performance food group. And they're supplying your restaurant on a daily or weekly basis. Now, those guys will use the PRW that Trevor mentioned earlier for overflow space stuff that will not fit in their facilities on a regional basis.

[00:06:07] James Cook: [00:06:07] And the term you said is PRW is that

[00:06:11] Tim O'Rourke: [00:06:11] public refrigerated warehouse? And what that simply means is it's a public warehouse. So there's multiple clients in there. Whose product is stored in there. It's not just one group who's storing their product. And then building, you know, as I like to explain it, it's really the three P's in cold storage.

[00:06:27] It's production, it's poor 10 population. Those are the three drivers. So production. If you think about it is the potatoes and the French fries that we talked about earlier, the poultry, the beef, et cetera, the ports are the important export, the refrigerator product. And the last one is the population base.

[00:06:45] When you have 10, 15 million people in a certain MSA, there's a lot of food that's consumed in that embassy. So when we talked about the spectrum earlier, that's really being driven by the population side of equation. Full source is really about speed to market and location. Cause it was solely like this could take two years to develop and if you're a large producer, Do you want to wait two years or do you want to get to that market quicker and to speed the market?

[00:07:11] James Cook: [00:07:11] What should we expect for the future? It sounds like more speculative construction, more investment transactions too. I imagine

[00:07:18] Tim O'Rourke: [00:07:18] I think the biggest thing that we've seen over the last five to 10 years consolidation in the PRW industry. When you look at lineage in America, they control roughly 65% of the U S market.

[00:07:30] And they're just two of the top 10 players in the U S

[00:07:33] Trevor Ragsdale : [00:07:33] we are seeing more and more institutional investment capital showing a willingness to invest in multi temperature, cold storage buildings. There has historically been a pretty wide spread between a class, a ambient warehouse cap rate, and a multi temperature class, a building in the same market.

[00:07:53] But in the last 12 months, we've seen that those cap rates really come in. And we're seeing, you know, less than a hundred basis points spread and cap rate between those types of transactions, which is indicating that more and more traditional investors are getting comfortable with the

[00:08:08] Tim O'Rourke: [00:08:08] asset class. The next big thing in cold storage is really the automation of these facilities.

[00:08:14] A lot of these newer facilities may be all the way up to 110 foot or 30 foot clear and highly automated. Obviously the average worker doesn't necessarily love working in a freezer environment. That's minus 10 degrees. So if you can automate the facility, it becomes much more efficient if you create a cube.

[00:08:31] And what I mean by cube is a clear height, the cubic feet, then that makes it much more efficient from a land standpoint, less land is require, but also from a utility standpoint,

[00:08:42] James Cook: [00:08:42] What would you look to as an indicator for the plateau of this growth? How will we know? And we've got enough cold storage

[00:08:50] Tim O'Rourke: [00:08:50] when they're, they can see the buildings that are vacant in the U S tend to be very old facilities.

[00:08:56] You know, we're talking 30, 40, 50 years old. And that's the other trend that we're seeing is that a lot of that 250 million square feet is older, vintage, cold storage, which tends to be very inefficient. One of the biggest costs. Buckets are utilities, obviously. And so a more modern building is going to be much more efficient from a utility

[00:09:16] James Cook: [00:09:16] standpoint, guys, thank you so much for joining me today.

[00:09:19] I learned a whole lot about a topic that I really didn't know anything about. So thanks so much.

[00:09:25] Tim O'Rourke: [00:09:25] Thanks James.

[00:09:28] James Cook: [00:09:28] I'd be curious to hear what you think about today's episode, or if there's a topic that you think we should tackle on this show, you can tell me all about it by leaving a message on the podcast hotline.

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