The cold storage business is hot and money is flowing into companies and warehouse development.
Some serious money is flowing into cold storage.
In July, Lineage Logistics, North America’s second largest cold storage operator, announced a $700 million acquisition of minority ownership by two private equity firms. This followed the $360 million initial public offering by cold storage market leader Americold Realty Trust early this year.
In addition, private equity giant Blackstone, after being thwarted in an attempt last year to buy Americold for $3 billion, in November 2017 paid an undisclosed amount to acquire a majority stake in Cloverleaf Cold Storage, ranked seventh or eighth, depending on the source. (An International Association of Refrigerated Warehouses list of the top 25 refrigerated warehouse and logistics providers in the US and Canada released May doesn’t include Preferred, while a list cited by the real estate brokerage and advisory firm HFF does.)
Meanwhile, competitors such as third-ranked Preferred Freezer Services and American newcomer and European mainstay NewCold are sinking hundreds of millions of dollars into mammoth, new, state-of-the-art warehouses.
Capital Rush into Cold Storage
All this activity demonstrates that America’s cold storage industry, once the domain of smaller operators, is rapidly gaining scale. There are hundreds of cold storage companies in North America. However, the largest ten companies control some 70% of total capacity, with the top three accounting for 48%.
“There’s a tremendous consolidation taking place,” said Jonas Swarttouw, NewCold’s US country manager. “There are less and less one-off cold storage operators.”
Americold alone owns 109 cold storage warehouses and leases 50 more. That’s a total capacity of 945 million cubic feet, the equivalent of 3.2 million pallet positions. (The cold storage industry tends to use these two measurements as key metrics, rather than square footage.) Americold, isn’t standing still, either, and is investigating upgrades, expansions and new facilities. “As of June 30, 2018, we had identified and were either actively underwriting or otherwise evaluating a range of expansion and development opportunities with an estimated total investment in excess of $1.2 billion,” the company said in an offer document.
“It’s a market that is very much in flux,” said Scott Pertel, HFF senior managing director. This transition from mom-and-pop to large institutions will continue. “There has been a drastic shift in the last 18 months in the amount of inbound inquiries we’ve received from developers and money sources trying to determine how to enter,” offered Pertel.
The rush of big capital into cold storage reflects several factors. They include the investment opportunity this particular kind of industrial property offers, the pressures by customers and operators alike for much larger, more technologically advanced facilities and the growing cost such buildings bring with them.
A traditional industrial warehouse now costs anywhere from $80 to $120 per square foot to construct, according to Pertel. Building a cold storage facility, by contrast, will run on average $250 per square foot, so as much as three times as much. The cost differential reflects not only sophisticated equipment required in cold storage, but also the expense associated with insulation, reinforcement and construction materials, including enhanced rebar. (With tariffs on steel, these will likely rise in the months ahead.)
New Criteria for Cold Storage Buildings
The quality of the buildings themselves is gaining ground, a function not just of the requirements of customers, but those of owners as well. “Overall standards and offerings are becoming more uniform and robust as [a] smaller pool of owners seeks to streamline and standardize operations,” wrote Joseph Bove, vice president of business development at Steller, a Florida-based construction firm that specializes in refrigerated warehouses.
A new development can now run upwards of $100 million. NewCold is now constructing a building in Idaho, with a price tag of $90 million. In 2015, Preferred constructed what was then claimed to be North America’s largest cold storage warehouse in Richland, Washington, with 455,000 square feet, and 120,000 pallet positions. Its price tag was $115 million. The privately held company in June opened an even larger facility in a Los Angeles suburb. This warehouse has 491,000 square feet, or 24 million cubic feet.
New cold storage warehouses are being built larger. They’re also being constructed much higher as well. In the early 2000s, said Pertel, developers began to build cold storage warehouses with ceilings 36 to 40 feet high. Preferred’s Richland, Washington warehouse has a ceiling height of 116 feet, or the equivalent of eleven stories. Both fully automated, NewCold’s US facilities are even taller. The company’s Tacoma, Washington warehouse, which opened earlier this year, tops out at 140 feet, as will its Idaho facility, now under construction.
The reason for going up and not out is simple: energy costs. “You’re already spending the money to cool the building, an extra 20 feet of building height doesn’t cost that much,” said Pertel. “The higher the building they can build, the more efficiencies they can create, the more margin, ie., profit that they’re able to drive.”
Also, newer facilities tend to be highly automated, with driverless pallet or reach cranes easily, more accurately and rapidly capable of grabbing pallets stored at far greater heights than manned forklifts.
Consumer demands for more and varied fresh foods fuel this building spree, as do the food industry’s requirements for frozen food storage and distribution. Add to that a desire to reduce high labor costs and a labor shortage.
The growth of fresh-food related ecommerce, with its own blueprint for distribution, drives the need for cold storage. So, too, does more and more imported produce. Food processors demand an increasingly more sophisticated supply chain and distribution system, one that’s capable of delivering food fresher and faster.
Newer warehouses are crowding out older facilities, which can’t adhere to the increasingly exacting standards of big food distributors. “The large supply of cold storage space constructed over the past decade is putting older facilities at the risk of obsolescence,” warned MetLife in an industry outlook report last year.
“The buildings that are the most functional, in the best locations, that have the lowest operating costs, are starting to take tenants from the older antiquated buildings,” said Pertel.
Revenue Up, Capacity Growing
Cold storage industry revenue in the US last year reached close to $5.3 billion, according to estimates provided by Americold in its IPO offer document. That reflects a modest gain over the past decade, with revenues increasing about $1 billion over ten years.
Capacity has grown by almost half since 2000. But the new warehouses command higher storage and handling fees. Margins tend to be higher.
A cold storage warehouse promises a bigger payout than does a traditional warehouse, and that’s a big inducement for investors. “The industrial landscape is so competitive, yields have compressed,” Pertel said. “You can get more return in freezer buildings than in traditional industrial buildings.” According to Pertel, an ordinary warehouse yields about 4% a year, whereas a cold storage facility can yield 5.5%.
A 4% yield isn’t enough to attract a lot of institutional capital.
Blackstone isn’t the only private equity seeking to gain a toehold in the industry. Several PE firms are circling the industry, but because they sit on so much money, tend to be most interested in an established operation than building one from scratch. “It’s also very hard to aggregate a cold storage portfolio in one-off acquisitions,” Pertel pointed out.
Private equity firm Bay Grove Capital owns and manages Lineage, for example, and has become an active acquirer of smaller cold storage companies that are folded into the Lineage corporate umbrella. The latest came in June, when Lineage acquired Wisconsin-based Service Cold Storage for an undisclosed amount. A month later, fellow private equity firms Stonepeak Partners and D1 Capital Partners, as well as current Lineage shareholders, invested $700 million in the company, signaling Lineage’s buying spree will likely continue.
Another major PE firm, Yucaipa Companies, owned outright Americold until it went public. KingSett Capital owns a large stake in Canada’s largest cold storage company, VersaCold Logistics Services. Westport Capital Partners owns NewCold.
Historically, developers have built cold storage warehouses for specific operators who sign a 20- or 25-year lease. The operators may be in-house or, more commonly, outsourced 3PLs, who, in turn, lease sections of the building or pallet positions to third parties.
However, even that so-called “purpose built” model is beginning to change, Pertel said. He cited the country’s first-ever speculative cold storage warehouse being built in Fort Worth, Texas. Hunt Southwest Real Estate Development is constructing the 300,000 sq./ft. building. The warehouse is scheduled to be completed next year.