The Rise of Cold Storage: How E-commerce Is Driving Demand

Published: 03-26-24    Category: Insight

Specializes in providing actionable insights into the commercial real estate space for investors, brokers, lessors, and lessees. He covers quarterly market data reports, investment strategies, how-to guides, and top-down perspectives on market movements.

A cutting board with fruits and vegetables.

Are you one of the millions who have traded grocery shopping for meal kits? This trend is one of several that are encouraging more investors and property owners to consider cold storage warehouses and facilities.

Cold storage keeps food, cosmetics, medications, and some household items at a carefully controlled temperature to maintain their quality.

Even though cold storage development hit an all-time high less than two years ago, this sector only accounts for 1.5% of total industrial development.

The current need for additional cold storage warehousing and facilities is being driven by several factors. The continued growth of e-commerce has translated into increased need of cold storage for a variety of products, from pre-packaged meals to cosmetics.

Investors looking for niche CRE with a dependable ROI will learn cold storage basics within this article, including reasons for the recent surge in demand for these facilities.

What's Driving the Cold Storage Warehouse Industry?

The arrival of the COVID-19 pandemic in early 2020 created massive changes in consumer behavior, including the meteoric rise in e-commerce. This trend is still alive and well, fueled by consumer trends and evolving supply chains.

Today, an increasing number of consumers depend on online shopping for everything from produce to pharmacy items. One highly visible area of growth is meal kit delivery.

While introduced over 10 years ago, global meal kit revenue grew to over USD $17 billion in 2023 and is forecast to exceed 25 billion by 2027.

As part of a national trend toward healthier lifestyles, consumers are improving their culinary options by incorporating freshly prepared meal kits delivered to their door.

These kits enable busy people to prepare meals without shopping for and preparing ingredients. This means they can enjoy healthier dining while saving hours in preparation time.

In addition to meal kits, cold storage is required for a variety of other products.

This includes:

  • Fruits, vegetables, and meats;
  • Medicines, vaccines, and other medical and dental materials;
  • Nutritional supplements;
  • Cosmetics, such as perfumes, colognes and lipsticks;
  • Flowers and plants; and
  • Furs, wool, and animal hides.

Next, we'll look at the types of cold storage warehouses and facilities currently in use.

Cold and Colder: Refrigerated and Frozen Storage

Cold storage facilities and warehouses are defined by their temperature, features, technology, and uses.

There are two main types:

  • Refrigerated storage is used to store fresh fruits, vegetables, meats, and dairy items. These goods are maintained at temperatures between 32° and 50° Fahrenheit (F).
  • Freezer storage maintains a constant temperature between 0° and -10°F. These facilities house goods frequently found for sale in grocery stores, such as ice cream, microwaveable meals, and frozen fruits and vegetables.

Refrigerated storage typically uses mechanical refrigeration systems, while freezer storage often uses blast-freezing technology to cool goods rapidly. Therefore, freezing equipment often translates into a larger investment requirement.

Since an investor will probably be required to develop a business plan for either refrigerated or freezer storage, let's review their differences.

Refrigerated Storage Features

These facilities store items such as fresh fruits and vegetables, flowers and household items like candles and cosmetics. Refrigerated storage generally maintains a non-freezing temperature of 33° to 55°F.

A refrigerated storage cooling system works similarly to some air conditioning units, such as those found in cars or trucks. The system's components include a compressor, condenser, receiver, and evaporator.

While the technology may be similar, a refrigerated storage facility requires considerably more components. For example, since goods are frequently delivered to storage while others leave, it's important for a storage facility to maintain low temperatures by preventing warmer air from entering.

Freezer Storage Features

While earlier versions of freezer storage worked in a similar manner to refrigerated storage, recent technology enables owners of the facilities to guarantee optimum results to clients, increasing ROI across the board.

A high-tech freezer storage facility often offers blast freezing to clients. The blast-freezing process helps preserve the taste and quality of frozen foods by arresting the loss of nutrients in fresh fruits and vegetables.

In addition, this process helps eliminate possible contamination of other items, such as pharmaceuticals.

Since creating and maintaining any type of refrigerated storage is considerably more complex, investors will need to carry out due diligence and review all costs, including the higher amounts of energy required.

Investor Financing Considerations

Investing in cold storage is not for the faint-hearted, as even converting an existing warehouse to handle refrigerated items is a complex and potentially expensive project.

Here are examples of three types of facilities, together with overviews of features.

Since these containers can be relatively small, they can be transferred between cargo facilities, dockyards, and the investor's warehouse. This makes them a good choice for investors making their first foray into this niche market.

  • Ultra-low temperature (ULT) cold storage is often required by pharmaceutical companies and medical research facilities. While smaller than other types of cold storage, these facilities are truly state-of-the-art, with data logging and alarm systems to protect sensitive materials, such as vaccines.

ULT storage provides a precise range of temperatures that can be as low as 122.8° F, with liquid nitrogen or carbon dioxide backup cooling systems that are activated if the primary cooling system fails.

These features tend to make ULT storage units a more complex and expensive investment.

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