September 24, 2019

In an increasingly uncertain global economy, investors are looking to cold storage as a safe haven for stable returns, as the growing demand for online grocery delivery shines a promising light on the sector.

The cold storage industry is an integral part of the food supply chain, as the cold chain process involves any perishable food product stored or transported from refrigerated warehouses or manufacturing plants to distributors, grocery stores, restaurants or direct to the consumer. That key role makes it less vulnerable to cyclical impacts.

“The frozen food industry benefits from being rather inelastic, as the demand for food products remain relatively stable regardless of the country’s economic condition,” says Alec Haley, a director and cold storage investment advisor in JLL’s San Francisco office. “The steady demand through various economic cycles and long-term commitments from tenants mitigates the potential risks of owning and operating cold storage facilities.”

Investors are particularly interested in such stability as global economic uncertainty grows. Although economic growth in 2019 seemed set to slow after a growth spurt in late 2017 and 2018, it was fear, more than any metric, that exacerbated the loss of momentum in the first half of this year, according to JLL’s Chief Economist Ryan Severino.

“The culprit behind these fears remains geopolitical risk, notably global trade,” Severino says. “Global trade, already falling amid the backlash against globalization, is faltering under the weight of trade tensions, particularly tensions between the U.S. and China.”

But cold storage is not just stable – it’s growing as consumer demands change, including the adoption of online grocery delivery. By 2025, Grand View Research projects the global cold storage market will reach US$212.54 billion, expanding at a CAGR of 12.2 percent. The USDA reports the U.S. currently has approximately 3.6 billion cubic feet of food-commodity cold storage capacity, making up roughly 214 million square feet of industrial space. According to Haley, that isn’t nearly enough.

“There is a major imbalance of supply and demand right now with an aging and insufficient supply of space,” he explains. “And, at the same time, there’s been a massive uptick in demand due to changing consumer preferences, the adoption of e-grocery, natural growth in population and strong consumer spending.”

This rise in online grocery purchasing alone will result in increased need for cold storage space by up to 100 million square feet over the next five years. Additionally, as consumers embrace online grocery shopping, the demand for frozen goods rises, resulting in increased demand for cold storage facilities to house those frozen goods.

More product needed
The industrial property sector has emerged as a favored asset class among institutional and private investors in recent years. But many investors are feeling priced out of the quality offerings that enter the market, says Haley.

“Institutional investors that are under-allocated to industrial but having a hard time deploying into the space are beginning to explore non-traditional industrial assets like cold storage, which offers less competition, and higher yields than traditional logistics warehouses.”

This is leading investors to increasingly look at retrofitting existing facilities or build new state-of-the-art product to meet the demand. According to a recent study by the Food Marketing Institute (FMI) and Nielsen, within the next seven years, up to 70 percent of U.S. consumers will regularly purchase consumer packaged goods online, turning the online grocery business into a $100-billion-a-year business.

According the Haley, there is virtually no speculative construction market for cold storage, so when developers build new temperature-controlled warehouses, they will find a user or third-party operator to do a build-to-suit with a long-term lease that could be up to 30 years. Furthermore, most tenants will sign absolute triple net leases, so the tenant pays for all operating expenses and structural repairs.

This means developing or investing in cold storage can be a “safe haven” for investors at this point in the economic cycle, as these properties provide “a stable, reliable, long-term cash flow with limited capital expenditures along with demand that doesn’t fluctuate,” he says.

Click to find out how caution impacted global commercial real estate markets in H1.


Alec Haley

Director and cold storage investment advisor, JLL San Francisco

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