Cold Storage Demand Grows as Consumers Expect More From Their Grocers

We all know that e-commerce has become a significant driver of the industrial market. It now fuels activity that moves beyond clothes and books to the food supply chain, and the associated complexities of meeting consumer demand for food preparation and delivery.

Increasing numbers of consumers have shifted to buying prepackaged meals, shopping for organic foods or ordering groceries and meal kits online. This expansion is translating into significant demand for industrial warehouse and distribution space to accommodate the food industry. One sector of this robust market is facing challenges, however, as demand for cold storage warehouses has skyrocketed in recent years.

Todd Heine, Avison Young

These facilities are used to store fresh and organic produce and to create and distribute processed foods. Food businesses are typically looking for spaces near large population centers as they seek to tap into demand for last-mile delivery.

The cold storage shortage is playing out in many markets across the country, but is particularly problematic in New Jersey due to a low vacancy rate and the construction challenges in this sector.

Driving Location Decisions

Food businesses are looking for spaces near their customer bases to reduce travel times, so they often choose infill locations. The scarcity of land in those locations drives up construction costs, however. This, combined with the specialized building needs required to store different foods at different temperatures, can make building a cold storage facility up to three times as expensive as a standard “dry” warehouse.

The cost-prohibitive nature of constructing such warehouses prevents many developers from building them on a speculative basis. This translates to a limited supply for tenants.

The space shortage has shifted somewhat in recent months, however. According to CoStar Group’s research from late March 2019, the New Jersey market has 4.2 million square feet of cold storage space, with limited availability in some submarkets and some new space coming onto the market. Recent existing space coming on the market includes 338,000 square feet spread throughout Clifton, Williamstown and Penns Grove.

Market rents for cold storage facilities in New Jersey overall were recorded as $10.16 per square foot in late March 2019. Sales of cold storage facilities showed pricing at $107 per square foot, with cap rates around 6.8 percent, according to CoStar.

New Tenant Leases

There are also some new developments in the market. One of New Jersey’s largest industrial leases in the fourth quarter of 2018 was a 140,000-square-foot lease at 233-287 Miller St. in Newark’s Portside Distribution Center to Refrig-It-Warehouse. The new tenant was the first major tenant to commit to the newly constructed property, which was developed as a joint venture between Penwood Real Estate Investment Management and Penford Group.

According to a 2019 market outlook by Avison Young National Food Services Group, the food industry uses 4 to 8 percent of the 888.6 million square feet of industrial space added nationally in the U.S. each year since 2016. This includes space for warehouse, distribution and fulfillment.

To recap, changing trends in the way Americans buy groceries have helped food companies expand and have increased demand for cold storage space in recent years. Amazon’s acquisition of Whole Foods Market in 2017 has impacted grocery delivery nationwide.

Just as Amazon’s retail customers expect next-day — or in some cases same-day shipping — its grocery customers also have high expectations for speedy delivery.

As e-commerce continues to change the way consumers expect goods to be delivered, cold storage facilities will need to evolve and grow to accommodate new trends. Growth in population and higher demand for fresh, high-quality food in urban and suburban centers is likely to push the demand for more cold storage facility space in New Jersey and New York for years to come.

— By Todd Heine, Principal, Avison Young. This article originally appeared in the May 2019 issue of Northeast Real Estate Business magazine.

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