Charting the Course | Navigating Cold Storage
WHAT’S THE FORECAST?
Our Cold team’s industry experts shed light on some notable headwinds, such as ultra-low vacancy, and tailwinds, such as the rise of E-commerce; which are currently shaping the cold storage industry.
The Cold Storage industry is currently experiencing a dynamic landscape characterized by a mix of headwinds and tailwinds. On one hand, the industry faces challenges such as ultra-low vacancy rates, which can limit the availability of suitable storage facilities. Price discovery becomes a crucial aspect as stakeholders navigate the market to determine fair values for these highly sought-after spaces. Additionally, limited labor availability adds to the complexity of operations within the sector. However, amidst these challenges, the Cold Storage industry is also witnessing notable tailwinds.
The rise of e-commerce has created increased demand for efficient and temperature-controlled storage solutions. The shift towards ‘just in case’ inventory models and the trend of reshoring manufacturing further contribute to the industry’s growth. Together, these factors shape the Cold Storage industry and create an environment of both challenges and opportunities for businesses operating within it.
DID YOU KNOW?
Did you know that the demand for cold storage facilities in the United States will exceed the current supply over the next 3 to 5 years. This significant disparity between demand and supply highlights the growing challenges and opportunities within the cold storage industry. The rise of e-commerce, changing consumer preferences, and the need for efficient temperature-controlled storage solutions contribute to the increasing demand, while limited availability and ultra-low vacancy rates create obstacles for businesses operating in this sector.
Headwinds
1. Ultra-Low Vacancy
With vacancies well below the national industrial average of roughly 4%, cold storage remains a competitive asset class. Traditionally, cold storage is purpose-built due to being 3x the cost of an industrial development; however, developers are now speculatively building cold storage, to capitalize on the post-Pandemic low-supply/high-demand dynamic.
2. Price Discovery
Cold storage in 2021 traded at an average sales price of $157 PSF, 40% higher than the overall national average price. Speculative cold storage leasing is transacting at an average rate of $16.60 PSF NNN in Q1 of 2023. As debt markets continue to dry up in today’s interest rate environment, buyers and sellers are farther apart in pricing, possibly leading to a correction in values for the sector.
3. Limited Labor Availability
Following the Great Resignation, companies have struggled to replace skilled workers and keep up with increased demand from food and beverage consumers. As manufacturing industries look to expand offerings and re-shore parts of their supply chains, labor pressures continue to rise. Unfortunately, the perception of younger generations does not help the problem; the majority believing that manufacturing jobs have limited career prospects.
Tailwinds
1. Rise of Ecommerce
Demand has shifted to more of an eat-at-home model due to the global Pandemic of 2020. Consumers ransacked the frozen aisle at grocery stores in an effort to store extra non-perishable food. In 2022, frozen food sales increased 8.6% and online grocery sales are expected to become 13.6% of overall grocery spending by 2027.
2. Inventory Model Shift
The reliability and predictability of the food supply chain broke in 2020. Companies have since moved away from the “just in time” model to the “just in case” model of inventory management. A 2021 survey of senior supply chain executives found that 61% of companies had increased inventory of critical products and 55% had taken action to ensure they had at least two sources of raw materials.
3. Reshoring Manufacturing
Offshoring has historically been used to cut costs for U.S. companies; however, the global impact of the Pandemic sparked reshoring and nearshoring activity to reduce shipping costs and increase speed to market by locating closer to the end-consumer. At the onset of the container shortage, food companies relying on raw imports from Asia had no choice but to pay up to a tenfold increase in shipping charges.
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