By Brian Niven
As we begin to reopen most parts of our society following the COVID-19 pandemic that devastated our country and economy earlier this year, many in the commercial real estate industry are beginning to take stock of the massive shifts it may have put into motion.
While the pandemic has decimated many sectors — shuttering retail shops, leaving offices empty and setting off an exodus of urban apartment dwellers — prospects for industrial properties have remained strong. Demand for warehouses of all kinds has been soaring in recent years, largely on the back of the growing e-commerce industry, and the sidelining of brick-and-mortar stores has only strengthened those tailwinds. However, that does not mean that the sector will not face challenges in the years to come.
Brian Niven, Bridge Development Partners
While most of the country’s core markets have a healthy pipeline of dry warehouse development that will help meet demand from users, the same cannot be said for an increasingly essential part of our supply chain — cold storage facilities. Vacancy for cold storage was already at or near zero across the country, but the pandemic has set off a chain of events that is likely to place significant stress on our supply chain of food and other goods that require a controlled temperature environment.
As has been widely noted, lockdown orders and social distancing measures have caused more people than ever before to embrace home grocery delivery.
More than one-third of Americans bought groceries online during the first month of the national lockdown, according to a survey published by Gordon Haskett Research Advisors. That’s tens of millions for the first time. Should even a fraction of those first-time buyers switch to a delivery model for the foreseeable future, demand for cold storage facilities could rise even more quickly, and the commercial real estate and food industries will need to adapt quickly.
New regulations
One seemingly under-the-radar factor in this acceleration for the need in cold storage is the potential for new regulations around our food.
COVID-19 has already exposed many of the weaknesses in our food supply chain, and as we return to a more normal life, many newly health-conscious Americans may end up demanding more assurances about the way it is produced, stored and delivered.
A similar series of events played out a decade ago, when a prolonged spike in foodborne illnesses gave rise to the Food Safety Modernization Act in 2011. The cold storage and food industries are still adapting to the new regulations put into place as a result of the legislation, which applies to perishable food stored in open-air settings.
If many of the existing rules are expanded to include cold storage and the entire delivery process, it will create massive demand for new facilities that can meet those new requirements. The majority of current cold storage stock is outdated and would face a difficult path to meet any new standards, so any further regulations would need to be phased in over time to allow new supply to be developed.
Challenges ahead
Creating the necessary supply of cold storage will be a significant challenge. While many major industrial players have begun large-scale efforts to help keep up — including an estimated $400 million cold storage fund Bridge launched with Prudential last year — the construction of these kinds of modern facilities is extremely labor- and capital-intensive and is largely out of reach for small-scale developers.
Furthermore, the difficulties around converting currently dry warehouses would be similarly complex — essentially requiring the construction of a box within a box. On a more granular level, it would require a series of large-scale undertakings that include: the removal of floors; the installation of glycol lines that provide underfloor heating; upgraded dock doors with 360-degree dock seals to prevent vapor infiltration; extensive insulation; refrigeration equipment; structural steel racking; and an abundance of other conversions. Due to the complexity of construction, limited cold storage market data and immense costs, very few developers have and will undertake the task.
The COVID-19 pandemic has completely altered the fabric of the commercial real estate market we knew, leaving far more questions than answers. When it comes to the industrial sector, however, we are fortunate that it has largely accelerated the existing market forces that were creating already unprecedented need for modern warehousing space. No shortage of solutions have already been floated as the industry looks to rebound, but the current lack of cold storage space presents a much more difficult predicament.
As we face down rapid and stark changes in the way we work, shop and eat, we will need many voices to work in concert and pave the way to a more stable, healthy and prosperous future.
Brian Niven is vice president of cold storage with Bridge Development Partners. This article originally appeared in the July 2020 issue of Heartland Real Estate Business magazine.