Investment in cold storage had been gaining momentum for a couple of decades and has been propelled even further up the radar of investors in more recent times with investment increasing by 83% over the past 5 years. It wasn’t that it wasn’t an attractive asset class before, in fact it’s always offered premium rents and high rates of return compared to others, however the complexities that come along with it and the high capital requirements made it a difficult market to enter for non-institutional investors previously.
Barriers to entry
Relatively high cost of construction and operation
Compared to other industrial classes, including it’s less complex sibling asset in dry self-storage, construction of a cold storage facility is thought to cost around triple that of other industrial properties. Cold storage units generally demand a much higher ceiling height and energy consumption can be triple that of a standard warehouse or distribution facility. On top of this a new cold storage facility is likely to offer advanced features including heated floors, monitoring and control systems, high-speed doors and automated logistics and management, none of which come cheap. Income can be delayed too on a new build given there’s a much longer construction time.
Requires specialized industry knowledge
Different products have very different cold storage requirements and specialist knowledge will be needed for each sub-sector unless the plan is to outsource management of course. Storage requirements for meat will be very different to those for pharmaceuticals or wine and in addition to product-related knowledge, investors need to have in-depth expertise in cold storage technologies and the surrounding markets in which they’re operating.
Stringent government regulations
There are strict regulations governing the storage of perishable items and protecting public health and safety. Food safety regulations vary by province, however there are both federal and provincial food safety laws and local municipal legislation that must be complied with. Fulfilling these obligations can be a daunting prospect for first-time investors into the cold storage space.
Breaking down barriers to cold storage investment
Whilst running costs and sustainability remain key considerations for investment, as the online food industry continues to evolve, barriers are coming down and more and more private investors are looking to get a piece of the burgeoning cold storage market.
A few years ago, it would have been near impossible to build cold storage speculatively. Units were constructed to the exacting requirements of tenants that had been pre-secured or run the risk of under-utilization and stilted growth early on. These days however, speculative builds have started popping up thanks to advances in technology and a propensity for change that have led to ‘cold-ready’ speculative prototypes being advanced with a set of common features that can be adapted to tenant’s usages. This approach may also go some way to address build time on this asset type.
Build costs will continue to be high as consumers look for more advanced facilities however there are opportunities both in rural and urban areas as businesses seek ways to better connect with customers in rural locations and have smaller, cold distribution hubs close to densely populated areas. The mammoth out-of-town cold storage of old is making way for high-tech properties with a smaller footprint or even adaptation of unused sections of existing facilities to fit a new purpose. Tenants in the E-commerce arena are looking for micro-fulfillment cold-storage centers close to highly populated areas which allow them to realize last-mile delivery with efficiency and modern urban facilities offer them this.
It also appears to be getting easier to control costs in a cold storage business through new technologies that maximize utilization of space using high-density rack storage and enable increased efficiency in a number of areas including automated palletizing, remote monitoring and energy saving. Ontario boasts an immediate advantage to potential investors and developers as it can claim energy prices lower than anywhere else in North America through a particular program targeted at large consumers.
Food industry fuels cold storage growth
Despite the barriers to entry, cold storage represents an increasingly strong and resilient alternative investment opportunity. COVID-19 catapulted already emerging food industry trends into a period of intense growth as consumers shifted from eating out to eating in and filled their freezers to bursting as lockdowns set in. Subscription meal services are also reaching a pinnacle and require hubs in urban centers from which perishable goods can be shipped to the masses. As food retailers had to pivot quickly to provide an online channel for their products and startups offering grocery delivery entered the market at a staggering pace, cold storage distribution centers became an even hotter commodity.
According to Report Linker, the global online food delivery services market is expected to grow from $115 billion to $126 billion between 2020 and 2021 and reach $192 billion by 2025 - this can only be positive news for the cold storage industry and for developers and investors ready to enter the market.
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