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Hot for Cold Storage: Niche Attracting Speculative Development, Capital

Hunt Southwest is Building a 300,000-SF Warehouse in Texas as Vacancy Strengthens Nationwide
August 10, 2018


Dallas-based Hunt Southwest is building a 300,000-square-foot freezer and cold storage warehouse in Carter Industrial Park near Fort Worth, TX. Planned for a site of nearly 19 acres, the project is the first cold storage facility in Texas being developed on a speculative basis.


Real estate industry watchers say cold storage, traditionally a niche asset class, is beginning to attract speculative development and institutional capital fueled by a growing population, new eating habits and shifting trade routes.

A subset of industrial warehouse space, cold storage facilities are kept at near-freezing to sub-zero temperatures in order to store and preserve perishable products. Typically located along logistic supply chains for the food industry, spaces range from small portions of existing warehouses to massive cold-storage specific operations spanning several thousand square feet.

"The demand for cold storage has never been greater in my history as a real estate professional," said Transwestern senior vice president Steve Kozaritz, who specializes in the product type.

Investment in cold storage has been particularly strong recently, according to CoStar Market Analytics, registering $500 million or more in sales in each year from 2014 through 2017. That level has already been surpassed in the first half of 2018.

The average sales price has soared from $60 per square foot in the fourth quarter of last year to $147 this year.

Fundamentals in the sector are also strong. The vacancy rate currently stands at about 6.5 percent, down from a high of 9.4 percent in the first quarter of 2014.

Hunt Southwest, a Dallas-based development firm founded by the Lamar Hunt family, has begun construction on a new 300,000-square-foot freezer and cold storage warehouse in Carter Industrial Park near Fort Worth, TX. The project is the first cold storage facility in Texas being developed on a speculative basis.

Dustin Volz, executive vice president at Jones Lang LaSalle, estimated less than 500,000 square feet of cold storage space has been built on a speculative basis in the U.S. over the past decade.

The new facility, called DFW ColdSpot, is designed to be flexible enough to meet the demands of a variety of industrial food occupiers in the region, said Kevin Kelly, a senior vice president in CBRE's Dallas office.

DFW ColdSpot is also hitting the market at a time when decades-old existing cold storage facilities are beginning to hit their shelf life.

"Many of these facilities are 30-plus years old, and their major systems are beginning to fail, which users have to invest substantial amounts of capital in to keep going," said Preston Herold, a vice president at Hunt Southwest.

If all goes well, Herold said Hunt Southwest could broaden the speculative construction of cold storage and freezer warehouses to other major markets throughout the United States, especially port markets.

"Cold storage demand is all related to population growth – we can't build it fast enough," said Robert Kramp, CBRE's director of research in Texas.

With 10 million to 15 million new residents expected in Texas over the next 30 years, demand will remain strong, Volz added.

Changing eating habits are also heating up demand for cold storage space. Transwestern's Kozaritz said people are buying more frozen food, and e-commerce food delivery tends to involve frozen items.

Moving and storing fresh food is a factor too. Historically, produce routes from south of the border have mostly been directed through South Florida, but Mexico's rapidly growing produce exports, along with improvements in logistics technology and Texas' rapid growth, has many producers rethinking their operations.

From 2006 to 2017, the total value of food and beverage trade between the U.S. and Mexico doubled, Kramp said.

"McAllen is the most active produce market in the country. The majority of produce in the U.S. is coming over the McAllen-Hidalgo international bridge," Volz noted.

Close to 20 percent of McAllen’s industrial leasing has been in cold storage, according to Kramp. Across McAllen’s 400 industrial properties, 75 are cold storage, of which only four have available space.

"It’s such an active market. If you need cold storage space, you’ll have to build it yourself," Kramp said.

Speculative development of cold storage can be risky.

Development of cold storage can cost three to four times as much as traditional dry space. In addition to insulation and infrastructure that make precast walls unfeasible, special care has to be taken to ensure the floor doesn’t freeze by either adding coats of chemicals or heating the floor, or both. Each facility has to have an engine room to house all the equipment used for freezing.

All that cost translates into higher rents. Second-generation space goes for two to three times the asking rent of traditional dry warehouse space. New build-to-suit space can be as high as four or five times standard rents.

The industry can be tricky because penciling out the financials isn’t a simple square-foot equation. Cold storage profitability is defined by cubic-foot efficiency. To that end, cold storage warehouses often have much higher clear heights, often as high as 50 feet. The height allows tenants to stack more, maximizing the cubic foot efficiency.

The significance of cubic-foot efficiency makes the sector hard to track.

In historic meatpacking districts like Chicago’s Fulton Market, businesses with cold storage have been pushed out of their desirable inner-city real estate and have had to replicate their facilities further out of town.

Google’s move into the area displaced roughly 1.3 million square feet of cold storage, but that wasn’t exactly absorbed elsewhere, according to Volz. Larger facilities with larger clear heights absorb the product, raising the cubic foot efficiency, but lowering the total square footage.

"You can imagine what that does to tracking the space," Volz said.

As the investment market for cold storage space is reaching new peaks, a duo of private capital funds is investing $700 million into Lineage Logistics, the country's second-largest owner and operator of refrigerated warehouses.

"We see significant long-term value potential in this industry and specifically at Lineage," said Stonepeak Senior Managing Director Luke Taylor in announcing the investment. "Stonepeak has been following the cold storage industry very closely for many years, and we've admired the tremendous success Lineage and Bay Grove have had in such a short period of time, growing from a single warehouse in 2008 to more than 100 locations across the world."

Stonepeak and D1 Capital Partners aren't the only investors taking an interest in the product type. Goldman Sachs and Blackstone backed recapitalization efforts of Cloverleaf Cold Storage, now the eighth-largest public refrigerated warehouse company in North America. And Ameri-cold, the largest refrigerated warehouse operator in the U.S. with 158 facilities, recently posted strong gains with operations growing 2.8 percent and profit margins expanding by 150 basis points.

Part of the reason investors are keen on cold storage is how out-of-control speculative development of dry space has become after years of a near-nationwide hot industrial market. Investors and buyers are attracted to the sector's growing demand and higher cap rates.

"Institutional investors love this product, they’re focused on tracking it down and buying it," Kozaritz said. "The reason they love it is because the cost to reproduce it is so high, and once they have a tenant, it’s difficult for them to leave. It’s special purpose, so it scares off typical investors. If you understand it, this is a great investment class."

Increasing interest from institutional capital and growing demand are laying the groundwork for more growth.

"I think cold storage warehouses are a business that will grow by 4-5 percent for the foreseeable future," Volz said. "Demand from food and e-commerce currently exceeds supply. It’s a good space to be in. We’ll continue to see more institutional capital."


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