Niche But Nascent Cold Storage Sector Sees Investors Seize On The Freeze

When cold storage real estate investment trust Lineage’s stock market debut became the year’s biggest initial public offering in late July, it confirmed something that some industrial investors had suspected for quite a while: Keeping things cold is a hot business.

Cold storage is the latest specialized asset class to climb up CRE's most sought-after ladder, with existing facilities aging out and unable to meet the needs of today’s supply chain. Demand is only likely to grow further as global warming begins mandating changes to food systems across the planet, adding to optimism for developers and investors in the sector.

“What Covid did [was it] threw a massive spotlight on the need for better-working supply chains across the globe, but obviously, the need for new cold storage facilities,” Saxum Real Estate founder and Managing Principal Anthony Rinaldi said at Bisnow’s 2024 National Cold Storage Summit. “Then, obviously, a lot of capital followed.”

Just under 73M SF of cold storage exists nationally, according to a May report from Colliers. The asset class has a 3.4% vacancy rate — 3 percentage points below the 6.4% national vacancy rate for industrial assets, another recent report from the brokerage found.

Industrial players have been studying demand and investing in cold storage since 2019 when they realized how big the gap in the market had grown.

“The aha moment for us was actually right before the pandemic,” CMC Design Build President Mark Moore said.

In 2019, CMC Design Build began seeing letters of intent go out for ghost kitchens in office basements. It also started to see companies like Amazon Fresh look for space. 

“It was this whole dynamic of what was happening with the food supply chain — that last-mile delivery, what was happening in restaurants — mainly driven by what you could do with your phone,” Moore said. “The aha piece of it was we started looking at the average age of buildings in the marketplace.”

Industrial buildings overall have an average age of between 40 and 43 years, Moore said. For cold storage, that average drops to 31 years old, Colliers found. But the world has changed a lot since the 1990s, and so have the needs of cold storage occupiers and the tech that powers those spaces.

“Think about walking inside of a 40-year-old industrial building, and now think about walking inside of a 40-year-old cold storage building,” he said. “We did. And the switch went on pretty quick that you needed that modernization in the supply chain.”

Aging buildings and a changing supply chain are altering the ways that companies think about their cold storage needs, RL Cold Chief Operating Officer Josh Lewis said. And it is changing the types of properties they are interested in leasing.

“You see these buildings that just don't really meet today's supply chain needs,” he said. “Brand-new, world-class, state-of-the-art buildings — I mean, that's the need out there today.”

RLCold began to notice the dearth of newer, Class-A cold storage between 2016 and 2018. While there are more cold storage properties now than in that era, demand is even stronger, Lewis said.

“If you just look about what's available out there in the marketplace today, even if all of us have been working on this for a few years now, it's still nowhere near what's needed,” he said. “There's just continued opportunity here.”

But retrofitting older cold storage or industrial facilities isn’t likely to plug the demand, largely because the supply chain infrastructure, labor requirements and energy requirements are different than they were decades ago, requiring different building specifications.

“Even if you get a nice, clean, dry box, it doesn't pencil out,” Moore said. “Try to retrofit an old freezer building. Again, you're not going to change the clear height, and that's the biggest thing that's going to crush you.”

At the same time, many developers are uncomfortable with building in the asset class speculatively. The pandemic may have seen demand for warehouse space grow, but a few years later, demand and rents are both softening.

“I think that the large majority of projects are still being built as built-to-suit versus speculatively when it comes to cold storage,” said Matt Schlindwein, a managing partner at Greek Real Estate Partners.

Leasing up build-to-suit cold storage properties takes longer than regular industrial, BGO Managing Partner Jonathan Epstein said. That can add to developers' hesitancy to commit to construction.

But even with those hesitations, the last few years’ experience and Lineage’s July IPO helped investors understand the demand and potential value of cold storage, paving the way for developers to accelerate their plans, Epstein said.

“We've seen the level of knowledge base in the credit markets and the lending markets dramatically improved just in the last three, four years,” he said. “Having another public company, particularly given their size, gives a lot of confidence to that market. That knowledge base is beneficial to everybody, both on the equity and the debt side.”