Surging Demand For Grocery Delivery Shrinks Available Cold Storage Space

Late last year, Dedeaux Properties sold a four-building cold storage and food processing portfolio in the LA area totaling 290K SF for $87M.

“Changing consumer behaviors for grocery and prepared food delivery have resulted in an escalating demand for a product type that rarely has any vacancy,” said Paul Jones, vice president of investments for Brookfield Asset Management, whose subsidiary purchased the portfolio.

Brookfield Property Partners has been scooping up temperature-controlled buildings across the country and by its own accounting has spent $1.7B buying Southern California logistics and industrial properties in the last 12 months.

“We have conviction that the long-term cold chain evolution will result in outsized risk-adjusted returns,” Jones said.  

Demand for industrial real estate has increased due to elevated e-commerce volume during the coronavirus pandemic, and the same is true for the cold storage submarket, which is making the move from the sidelines into the mainstream.

“Central Los Angeles’s industrial market boasts extraordinarily strong market fundamentals with 72 consecutive quarters of sub-3% vacancy, and a current vacancy rate of less than 1% for similar food processing and cold storage facilities,” Newmark Capital Markets' Bret Hardy said in a statement.

Newmark marketed the portfolio for Dedeaux.

Los Angeles' overall cold storage vacancy rate was 4% in January 2020, according to CBRE, and cold storage sales have been building up steam for years. Greater Los Angeles Basin cold storage industrial sales volume went from $183.8M in 2018 to $202.3M in 2019 and rounded out 2020 with $223.8M in sales, according to data compiled by Savills. 

But the rise in online grocery shopping really kicked things into high gear, experts say. Generally speaking, grocery distributors and wholesalers are the largest users of these cold storage facilities. Experts say meal-kit delivery companies have also been drivers of demand in Southern California and the LA area. 

Meal-kit company HelloFresh reported that the number of active customers in its U.S. market rose 68.7% in Q3 2020 compared to the same quarter the previous year. Blue Apron, which was on a downward trajectory and possibly going up for sale, reported a 13% increase in revenue in Q3 and projected that revenue would continue to grow, with Q4 sales between $108M and $112M.

The pandemic saw overall online grocery shopping adoption go from 28% in 2018 to 43% in 2020, according to a study from Mercatus, a company that connects food retailers to customers online. Grocery stores were classified as essential businesses during the pandemic and were able to remain open when many other retailers were periodically closed. The connection of cold storage to these essential services has made the asset class seem like an extra-safe bet for investors, experts say.

Even when the pandemic ends, cold storage facilities “provide a very safe income stream,” in part because tenants tend to stay in their space for long periods of time because their needs are so specific, Savills Director of Research for Southern California Michael Soto said. 

Another reason institutional investors have shown a growing interest in cold storage is that the sector is still moving out of that niche status, Soto said. It presents a possibility for finding assets that are undervalued, and “that's where you can really look for long-term returns and really outperform your peers.”

One of the buildings that Brookfield purchased in its LA-area portfolio transaction has already been rehabbed and returned to the market for lease.  

“We’ve got tenants coming out of the woodwork,” said Trevor Gale, senior vice president at Kidder Mathews, which is marketing the space. 

The building is one of probably three on the market right now that is fully updated and turnkey, he said.

The list of prospective tenants offers a snapshot of the market from an occupier perspective, Gale said. One possible tenant is looking for space because it is expanding and needs additional space. Another was paying a third-party logistics company to use its cold storage space, but the renting company has seen its need for space swell to the point where it makes more sense to lease its own space — if it can find any. Both are food-related businesses. 

These companies are facing a new level of demand for their products and need space to keep up, but physical expansion potential is limited in the well-located central LA area, Gale said.

From a developer's perspective, there are challenges to building cold storage facilities on spec. The facilities are expensive and complicated to build, and the needs of a tenant can vary vastly from user to user. When new facilities are built, they are usually built for a specific tenant, as the requirements for each type of tenant can vary depending on the type of products being housed. 

In the Inland Empire, there are a fair number of newly built cold storage facilities, but in the central Los Angeles area, most of the cold storage facilities are older and in need of updating. The average age of cold storage facilities nationwide is 34 years, but especially in the central LA area, they can be even older, said Gale, who specializes in that area. 

Brookfield’s decision to refurbish an outdated facility and lease it out is something that is likely to become more common in the near future. An Avison Young forecast for Southern California in 2021 expected construction, especially rehabs of older facilities, to be robust in the coming year.