Cold Storage's Explosive Growth Hasn't Removed Its Risk
The growth in the cold storage sector of industrial real estate over the past 12 months has been simply staggering.
Average rent for U.S. cold storage space increased about 15% from the first quarter through the end of last year, CoStar Group reports. Since 2017, rent in the sector has grown by 29%, easily outpacing the still-impressive 21% growth in industrial properties overall over that time period.
The pipeline of new cold storage facilities under development is in the tens of millions of square feet, led by veterans of the industry like Americold Realty Trust, which developed $461M worth of cold storage space last year, or more than double what it had forecast for investors at the start of 2020, The Wall Street Journal reports.
Lineage Logistics, which owns the most cold storage space in terms of square footage in the world, is developing 21 new facilities this year, more than double the 10 it delivered last year, the WSJ reports. Cerberus Capital Management has agreed to back Provender Partners' plans to develop a multibillion-dollar cold storage pipeline in the coming years.
The explosion in popularity of online grocery delivery during the early days of the coronavirus pandemic has led to the mad dash for cold storage, as did the panic-induced shortages last spring that caused the grocery industry to rethink its supply chain at a fundamental level, the WSJ reports. But as grocery delivery has become commonplace, it hasn't yet revealed a path to profitability.
Supermarkets often run on thin margins as it is, so they haven't given delivery apps like DoorDash, Grubhub and Uber Eats the same commission that those services have drawn from their restaurant partners, the WSJ reports. Even taking in 30% of an order price as those apps do with restaurants, food deliveries still operate at a loss, while grocery deliveries often top out at 20% commission.
A typical way to improve that equation is through markups, but how much of an appetite consumers will have to pay extra for delivery is not as certain as pandemic fears ease.
The increased cost of developing, maintaining and staffing the cold storage facilities required for online delivery that skips picking in grocery store aisles — a key piece of the industry's scalability — has kept the largest logistics real estate owner in the world, Prologis, decidedly against entering the sector, the WSJ reports.
