Why Cold Storage Rental Rates Are Heating Up

Published: 05-10-24    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.

The outside of a cold storage facility.

The world of commercial real estate is experiencing a curious phenomenon: while traditional warehouse space might see fluctuations in occupancy and rental rates, the cold storage sector is experiencing a boom.

Rents are steadily climbing, driven by a confluence of factors that have created a situation some experts are calling a "cold storage space race."

Here, we'll delve into the reasons behind this surge, exploring the rising demand from the food & beverage industry, the e-commerce revolution's impact, and the challenges on the supply side that are limiting the construction of new cold storage facilities.

Demand From the Food & Beverage Industry: A Growing Appetite for Cold Storage

The food & beverage industry has always been a significant player in the cold storage market. However, several trends are driving an even greater need for temperature-controlled storage space:

  • Shifting consumer preferences: The demand for fresh, healthy, and organic food is on the rise. Consumers are increasingly interested in locally sourced produce, meats, and dairy products, all of which require proper cold storage throughout the supply chain.
  • Growth of prepared meal services: Meal kit delivery services and prepared food subscriptions are experiencing explosive growth. These services rely heavily on cold storage to maintain the freshness and safety of ingredients until they reach the customer's doorstep.
  • Expansion of online grocery shopping: The convenience of online grocery shopping has become a mainstream trend. Grocers need efficient cold storage solutions to fulfill online orders that include temperature-sensitive items.
  • Increased focus on food safety: Regulations and consumer expectations around food safety are becoming more stringent.

Cold storage plays a critical role in maintaining proper temperatures throughout the food processing and distribution chain, minimizing spoilage and potential health risks.

E-commerce Revolution: A Chilling Effect on Cold Storage Availability

The e-commerce boom has had a transformative impact on nearly every aspect of retail, and the cold storage sector is no exception.

Here's how e-commerce is contributing to the rise in cold storage rental rates:

  • Faster delivery expectations: Consumers have come to expect rapid delivery times, even for perishables. This puts pressure on e-commerce companies to have strategically located cold storage facilities that can expedite delivery while maintaining product quality.
  • Direct-to-consumer (D2C) models: More food & beverage brands are bypassing traditional distribution channels and selling directly to consumers online. This necessitates dedicated cold storage space for D2C fulfillment.

E-commerce grocery platforms are also expanding their offerings to include a wider variety of perishable goods, from frozen foods and meats to fresh produce and dairy products. This necessitates additional cold storage capacity.

Limited Supply: The Chill in the Construction Pipeline

While the demand for cold storage space is skyrocketing, there are significant barriers hindering the construction of new facilities:

  • High construction costs: Building a cold storage facility is significantly more expensive than constructing a traditional warehouse. Specialized insulation, refrigeration equipment, and energy-efficient systems drive up the initial investment. Estimates suggest that cold storage construction costs can be two to three times higher than dry warehousing.
  • Lengthy development timelines: Cold storage facilities require specialized engineering and construction expertise. The permitting process can be complex, and the construction itself can take longer than traditional warehouses due to the unique technical requirements.
  • Land availability: Cold storage facilities are often ideally located near transportation hubs and population centers, where land costs tend to be higher.

Finding suitable land for new construction can be challenging, further limiting the expansion of cold storage capacity.

The Perfect Storm: Rising Demand Meets Limited Supply

The factors discussed above have created a "perfect storm" in the cold storage market. Soaring demand from the food & beverage industry and e-commerce giants is colliding with a limited supply of new facilities, leading to a significant increase in rental rates.

This trend is expected to continue in the foreseeable future, making cold storage a lucrative investment option for real estate developers with the resources and expertise to navigate this specialized market.

Navigating the Cold Storage Market: Strategies for Businesses

For businesses that rely on cold storage space, the rising rental rates present a clear challenge.

However, there are several strategies companies can employ to optimize their cold storage needs and minimize costs:

  • Right-sizing cold storage needs: Businesses should carefully assess their storage requirements and avoid renting more space than necessary. Optimizing storage density and utilizing vertical space can help maximize efficiency.
  • Negotiating lease terms: Negotiating flexible lease terms can provide some protection against future rent increases. Shorter lease terms or clauses that limit rent escalations can be beneficial for businesses.
  • Location considerations: Choosing a cold storage facility that is strategically located near transportation hubs or customer bases can reduce transportation costs and expedite delivery times.
  • Exploring value-added services: Many cold storage providers offer value-added services such as pick-and-pack fulfillment, inventory management, and temperature monitoring. Utilizing these services can streamline operations and potentially offset some storage costs.
  • Collaboration and partnerships: Companies can explore partnerships with other businesses in the same industry to share cold storage resources and negotiate bulk discounts with providers.

Implementing cold chain monitoring and tracking technology can help businesses reduce spoilage and optimize their use of cold storage space.

The Future of Cold Storage: Innovation and Efficiency

The rising demand for cold storage space is driving innovation across the industry. Here's a glimpse into some of the trends shaping the future of cold storage:

  • Automation and robotics: The use of automation and robotics in cold storage facilities is increasing, improving efficiency and productivity while minimizing human error.
  • Advanced temperature control systems: New technologies are emerging to optimize temperature control within cold storage facilities, reducing energy consumption and maintaining consistent product quality.
  • Sustainable building practices: The environmental impact of cold storage facilities is a growing concern.

Developers are increasingly focusing on sustainable building practices, such as energy-efficient refrigeration systems and solar power generation, to reduce the carbon footprint of cold storage operations.

A Golden Age for Cold Storage

The cold storage market is experiencing a period of unprecedented growth. Driven by the rise of e-commerce and evolving consumer preferences within the food & beverage industry, the demand for temperature-controlled storage space is outpacing supply.

While this trend presents challenges for businesses relying on cold storage, it also creates exciting opportunities for real estate developers willing to invest in this specialized sector.

As innovation continues to reshape the industry, the future of cold storage promises to be a period of efficiency, sustainability, and technological advancement.

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