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Greenberg Glusker’s Fields: E-Grocer’s Rise Drives Demand in Cold-Storage Sector

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?
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?
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?
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.

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About Dennis Kaiser

Dennis Kaiser is Vice President of Content and Public Relations for Connect Commercial Real Estate. Dennis is a communications leader with more than 30 years of experience including as a journalist and in corporate and agency marketing communications roles. He is responsible for Connect’s client content operations and is involved in a range of initiatives ranging from content strategy, message development, copywriting, media relations, social media and content marketing services. In his most recent corporate communications roles, he led a regional public relations effort across Southern California for CBRE, played a key marketing role on JLL’s national retail team, and was responsible for directing the global public relations effort at ValleyCrest, the nation’s largest commercial landscape services company. In addition to his vast commercial real estate experience, Dennis has worked on communications and launch strategies for a number of residential projects such as Disney’s Celebration in Florida, Ritter Ranch in Palmdale California (7,200 homes, 22,000 acres), WaterColor in Florida and PremierGarage in Phoenix. Dennis’s agency background included firms such as Idea Hall and Macy + Associates. He has earned an outstanding reputation with organization leaders as a trusted advisor, strategic program implementer, consensus builder and exceptional collaborator. Dennis has developed and managed national communications programs for Fortune 500 companies to start-ups, both public and private. He’s successfully worked with journalists across the globe representing clients involved in major-breaking news stories, product launches, media tours, and company news announcements. Dennis has been involved in a host of charitable and community organizations including the American Cancer Society, Easter Seals, BoyScouts, Chrysalis Foundation, Freedom For Life, HOLA, L.A.’s BEST, Reach Out and Read, Super Bowl Host Committee, and Thunderbirds Charities.

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