Demand for temperature-controlled warehousing space is expected to explode with growth in online grocery shopping, but challenges abound 

The cubic footage devoted to cold storage warehousing space for food in the United States—already experiencing robust growth thanks to increased consumer demand for temperature-sensitive perishable food products—is about to undergo major growth in absolute terms and in relation to other users of cold space. 

Consider the following facts. The occupancy rate for cold storage warehouses currently exceeds 85%, according to the Global Cold Chain Alliance (GCCA), a figure the industry considers to be full occupancy. Food manufacturers currently occupy 33% of refrigerated storage, according to a report from Blau & Berg, a New Jersey-based commercial real estate company, while wholesalers take up another 33%, retailers take 22%, and pharmaceuticals take 12%. 

But with Amazon, Walmart, Target, and other e-commerce companies entering the perishables space, those percentages will be changing as will the total area devoted to cold storage.

E-Grocery

The e-commerce grocery segment has lots of room to grow. Only three percent of total grocery sales were bought online in 2017, representing $19 billion in sales, but they are expected to increase to 13% of the total, or $100 billion, by 2024, perhaps sooner than that, according to a report from the Food Marketing Institute and Nielsen. That’s going to require adding 35 million square feet of industrial space to house cold storage over the next few years, according to a report from CBRE, a large commercial real estate services and investment firm. 

CBRE estimates that the U.S. market for food-commodity cold storage space spans around 180 million square feet of industrial space for refrigerated warehouses and an additional about 300 million square feet of space in grocery stores and other retail venues. Larger concentrations of food-grade cold-storage facilities are found in states with substantial agricultural production, large populations or both, according to CBRE’s analysis. California is likely to have the most industrial cold-storage space, at nearly 400 million cubic feet, followed by Washington state, with 271 million, Florida (260 million), Texas (231 million), and Wisconsin (228 million). 

 “The U.S. market for warehouses and distribution centers has been on a multiyear run, but there still are segments in the relatively early stages of their growth, like cold storage,” said David Egan, CBRE global head of industrial and logistics research. “As e-commerce expands further into the grocery business,” the result will be “growth of the food supply chain and demand for new climate-controlled warehouse space.” 

David Egan, CBRE global head of industrial and logistics research
David Egan, CBRE global head of industrial and logistics research

The ratio between industrial and retail cold-storage space will shift in the coming years as online grocery sales grow. Based on the FMI/Nielsen projection that those sales will account for 13% of total grocery sales by 2024, CBRE calculates that demand for as much as 35 million square feet of cold-storage space will shift from retail properties to the industrial segment. 

At this point, the top 10 cold storage, refrigerated warehouse companies control about 80% of the market. But these companies, which include familiar names like Americold, Lineage, Preferred Freezer, and United States Cold Storage, and others that might be tempted to enter the field, will face challenges building out a cold-storage infrastructure suitable for e-commerce deliveries. Like distribution centers for general goods that offer next day or same day deliveries, refrigerated warehouses will need to be located in or near densely populated areas. That translates to higher construction costs and land prices, noted Scott Geller, a supply chain specialist at Blau & Berg.

Those factors, as well as thermal considerations and electricity costs, will motivate builders of new cold storage space to go vertical. “New construction has a preferred ceiling height of between 36 and 40 feet, compared to the 22-foot average height for buildings over the last 20 years,” said Geller. “Also, because heat infiltration is greatest through the floor and roof, taller buildings tend to have better energy efficiency than lower or wider buildings of similar volume. The power to cool inventory can be more than 25 percent of a building’s ongoing operating costs for electricity.”

Public Warehousing & Cold Storage

Other challenges include the high barrier of entry and the lack of availability of real estate in many areas around the country, including California, all of which explains why developers have not been as aggressive in building cold storage warehouses, as they have dry storage facilities. Because of the greater risk involved, developers and investors look for longer-term leases and greater returns when dealing with cold storage, according to Alex Conte, executive vice president at Blau & Berg. 

“The construction costs for building cold storage facility can be 50% to 100% greater than that of a dry storage facility,” Conte added. “Cold storage buildings are generally not as versatile as a simple dry warehouse, leading them to take longer to lease when vacant.” On the other hand, “cold storage tenants tend to stay in a building throughout the useful life of the equipment.”

The risk factors involved with cold storage lead Art Rasmussen, CBRE’s industrial expert, to conclude that “growth companies will need to rely even more on public refrigerated warehouses.” “These facilities often do not require long-term contracts and can bridge the growth gap,” he said.

Of course, the challenges and risks come with rewards, and the rise in online grocery shopping has created increased opportunities at the U.S. ports, according to Geller. “Distributors require additional space to accommodate spikes and temperature-control smart technology to handle a wider selection of inventory,” he said. “Many U.S. ports are promoting the growth of large multi-temperature facilities that can supply smaller distribution centers that are located closer to consumers for fast last-mile grocery deliveries.”

Geller also believes the current crop of experienced cold storage companies will continue to dominate the market, even more so than currently, “as larger companies merge or acquire smaller cold storage operations.” “A number of food manufacturers are shifting from direct store delivery to warehouse ownership to take advantage of economies of scale,” he added.