An example of a speculative cold storage facility is this 205,796-sq-ft project by Karis Cold Storage in Lebanon, Tenn., just east of Nashville. Construction began in 2022, and the building is scheduled to open in Q1 this year. The location near a major city and proximity to Interstate 40 puts this project in a prime logistical location for potential tenants.
CBRE
Food processors that manufacture perishable goods rely on cold storage to house their finished products before distribution. That cold storage can be attached to a company’s manufacturing facility, but onsite capacity is often limited. Having access to independently operated offsite cold storage—preferably in regions where a company’s food and beverage can be further distributed—is essential for manufacturers to successfully grow their customer base.
As a result, more and more processors that can’t build self-owned, offsite cold storage distribution facilities (like J&J Snack Foods has, for example) rely on third-party cold storage as a crucial link in their outgoing supply chain.
Speculative cold storage construction is a sliver of the overall industrial construction equation: 479.1 million total sq ft are under construction, and only 2.5 million of that is tabbed for speculative cold storage in 2024, according to commercial real estate firm CBRE’s National Food Facilities Group. However, cold storage continues to show year-over-year growth, up from 2 million sq ft in 2022 and 2023. Will that continue? To find out, we spoke with Lucy Durbin, senior vice president of CBRE’s National Food Facilities Group to see what’s next and why processors of perishable items should pay closer attention to cold storage availability in relation to their own business goals.
PFW: Cold storage seems to be a ubiquitous term these days with multiple definitions. How is cold storage defined from an industrial real estate standpoint?
Durbin: Cold storage as a generic term can mean many things. In the food sector, the proper use of the term cold storage means public refrigerated warehouses or dedicated onsite cold storage attached to a plant. You will hear the real estate community sometimes mix apples and oranges with the term cold storage, when the intention is to say a refrigerated facility, but cold storage for whatever reason has become a pervasive term that sometimes gets used too broadly.
PFW: Some processors might not pay attention to the cold storage construction market because they’re more focused on the business of manufacturing food. Why should food processors care about trends in cold storage construction?
Durbin: Cold storage construction has recently entered the speculative market, which means developers are building vacant facilities without a tenant. That has opened the door for more opportunistic, public refrigerated warehousers to react to the short lead time requirements food manufacturers have for cold storage.
Cold storage availability allows manufacturers to expand their inventory and distribution rapidly as needed, as they take on new customer contracts. Just for perspective, it takes 12 to 18 months to build a cold storage facility. So, food processors can’t be very nimble or reactive to their customers without this speculative real estate product being available. Speculative cold construction is really designed around short-term requirements from food companies as well as their distributors and cold storage partners.
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Generally speaking, there’s always been a tight supply of existing refrigerated inventory on the market. They’re expensive to build and tenants like to stay in the long term. If a food company has a requirement in Chicago, for example, there’s only going to be a handful at best of options at any given time on the market of existing [refrigerated] available product where they could move in and get something close to what they need quickly. So, they’re beholden to whatever happens to be available at that time, and that might mean, if supply is insufficient in Chicago for their needs, they would look at Indianapolis or another regional market instead if there’s a building available right now.
A food company will say, ‘Hey, we just got this contract and need to be up and running in the next few months. Where can we put [our products]?’ That’s where the speculative cold developers come in and offer a brand-new, state-of-the-art facility that was just built in the same market. With brand-new cold product ready to go or delivering in short order, it solves a need for [food companies] that couldn’t otherwise have been addressed historically.
Most of the speculative cold facilities are typically in the middle-size range, around 200,000 to 400,000 sq ft. That’s designed to capture the broadest subset of demand from various types of users across the food sector. Cold storage is never going to be one-size-fits-all for food users, but in that size range, you can capture some overlap within some of the subsectors.
PFW: What current trends are impacting the industrial cold storage market?
Durbin: I would not attribute the construction of third-party, speculative cold storage to one particular trend. For years developers were too afraid to build cold storage because it’s a complicated product that is very expensive, very specialized, and can be a big swing and miss if not carefully planned, with the right thought around location and demand for products. I would say the demand for speculative cold storage space is not massive, as some industry articles claim, but it is healthy, and right now the volume of deliveries is leveling off to a healthy pace that can continue to capture those kind of need-it-now contract opportunities for occupiers.
While these projects are tricky, there are a select few developers dedicated to developing cold product that have a rhythm going to be able to pre-plan projects and consistently deliver what I would call a modest but necessary amount of cold product nationally every year. I think they are going to continue that trend.
‘Food processors can’t be very nimble or reactive to their customers without this speculative real estate product being available,’ says CBRE's Lucy Durbin, about third-party cold storage facilities.CBRE
PFW: How has the rise of e-commerce for food and beverage affected the cold storage construction market?
Durbin: The e-commerce phenomenon as a driver for the growth of speculative cold storage development is a bit over-inflated. That really pertains most specifically to the retail element of the food sector. There’s been some transformation in the way the grocery category in particular handles product amongst the largest players. But generally speaking, I would not say e-commerce is a big watershed game changer here amongst the many other sectors of the food industry.
PFW: What are some of the cities or regions in the U.S. that are growing for cold storage construction?
Durbin: Cold spec is popping up across the country in many major industrial markets, such as Dallas and Chicago, as well as growing secondary industrial markets like Columbus and Nashville. We’re also seeing growth near ports. For example, in Wilmington, N.C., there’s a new project under construction.
Generally speaking, these trends follow broader industrial market trends. At the core of it is where the populations are located, followed by where the interstates are located, and where the product is coming from. That really leads you to most of what we would call primary industrial markets, which are major cities in the U.S., as well as some of the secondary [markets] that may not be in your top-five cities, but maybe within your top 10 to 15 for overall regional and national distribution. The ports capture the import and export markets when it comes to cold product as well.
When our team works with cold storage speculative developers, long before we get anything off the ground, we’re working with them to assess the demand in their target market specifically for food companies, and we ask: Where are the goods coming from? Who is manufacturing nearby? Where are goods being distributed? What are the consumption zones? How many and what type of food deals are in that market? And are all those factors a fit for the type of building that we’re planning? There’s a lot of analysis that goes into being certain that, if you build it, they will in fact come.
PFW: Any insight where the cold storage construction market might be headed beyond 2024, based on current trends?
Durbin: The demand for cold spec is established and healthy, but I would say a glut of oversupply, if, for example, annual cold spec deliveries went up by several multiples, could be a challenge for developers, but based on where the pace has been consistently now for the past two years, and where we are pipeline-wise for 2024, I would say I feel pretty good about the supply/demand being steady and healthy.
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