Americans have treated their freezers a bit like security blankets over the past year, stuffing them full of staples and indulgences, a consumer behavior pattern that has had ripple effects beyond the walls of their kitchens.
Developers that focus on cold-storage facilities say they are seeing growing interest from companies seeking to build, buy or invest in the sector, despite construction costs that are roughly triple that of an ordinary warehouse.
Americold, a logistics company focused on the cold-storage supply chain, reported that its revenue grew 11.4% in 2020 from the previous year.
“We gave guidance pre-COVID for our 2020 year, and we’re one of the few companies that didn’t lift or change that guidance,” said Fred Boehler, CEO of Americold, which added 46 facilities to its portfolio through a $1.74 billion acquisition of Agro Merchants Group last year. “What we eat and where we eat will change, but we’re going to eat.”
Where we eat has shifted overwhelmingly to our own kitchens and living rooms, and what we eat increasingly comes from the freezer.
“People were very nervous not just about getting to a store, but what was going to happen with the supply chain,” said Jill Standish, global head of the retail practice at consulting firm Accenture. She added that a survey in March 2020, the month the World Health Organization declared the pandemic, found that about one-third of American shoppers were buying more frozen food than normal.
Even though the food-supply chain issues that characterized the early days of the pandemic have largely abated, Americans are still stocking up.
“Consumption of frozen or prepared meals was already on the rise leading into COVID,” said Beth Bloom, associate director of food and drink reports at the market research firm Mintel. The pandemic supercharged that trend, as restaurants shuttered and Americans stopped commuting to work and school.
Some people are motivated by the desire to avoid crowds: In a recent Mintel survey, 57% of respondents said they tried to limit the amount of time spent in stores — and 36% said they were still stockpiling groceries or household supplies.
“They want to stock up more so they can go less frequently,” Bloom said.
The widespread migration of the white-collar workforce from downtown office towers and suburban corporate campuses into their homes is another key part of the dynamic.
“You’re talking about a lot of people that are going to need to fend for themselves at home in situations where they haven’t before, mainly lunchtime,” Bloom said.
The industry had to make large, rapid adjustments to accommodate these changes taking place in millions of homes across the country.
“This whole idea of food handling and cold storage in an e-commerce world is really different than it was in the past,” Standish said. “Instead of central locations of huge warehouses that have a long way to go to deliver, we’re seeing a lot of microfulfillment centers.”
Increasing demand for cold storage at the last-mile stage of distribution — that is, near where people live — was rising before the pandemic. It accelerated when lockdown orders shut restaurants and food-service operations, and Americans who were stuck at home turned to online grocery shopping en masse.
“The immediate change in consumer behavior due to COVID has caused companies to change how they service those demands,” said Art Rasmussen, a senior vice president at CBRE, a real estate investment and services firm. “COVID has accelerated the online growth by several years, and the infrastructure wasn’t quite ready to take on that capacity.”
Building near population centers is logical, but not necessarily easy or cheap. “Traditionally, people shied away from it because it was capital intensive,” said Tim O’Rourke, managing director at real estate research and services firm JLL.
“Supply and demand are very tight in this industry and always have been,” said Boehler. Demand in particular for cold-storage catering to the retail sector boomed during the pandemic. “Overnight, it went up 40% in terms of demand,” he said.
Building cold-storage space can cost $150 per square foot, about three times as much as that of conventional warehouse space, so the “If you build it, they will come” development model used for other types of industrial real estate — typically referred to in the industry as building “on spec” — has not been financially feasible. Shovels go into the ground only after tenants have committed and leases have been signed. The upshot is tighter supply, when companies need a lot more of this space quickly.
Converting existing warehouses generally is not an option. Paradoxically, given that they are constructed to store goods in subzero conditions, cold-storage warehouses need heated floors. O’Rourke said the intensity of the cold generated by industrial-strength refrigeration equipment can seep into the ground, creating an artificial permafrost. When that frozen ground expands, it is likely to warp a building’s foundation.
Cold-storage facilities require numerous other specialized construction elements to meet safety regulations and manufacturers’ quality standards.
“If you have your ice cream you just bought and bring it home, what happens at the end of the week to that ice cream?” Boehler said. “It’s got crystals, it’s got a weird coating. The product itself starts to break down.
“Your freezer at home is meant to protect those goods for a couple of weeks. Our freezers are designed and insulated to hold those same products for months and months.”
This means keeping goods much, much colder than in an ordinary household freezer. Roofs and walls are all heavily insulated. Doors are all tightly sealed and fitted with high-speed motors to keep cold air from escaping. As all of us who have been scolded for leaving the freezer door open know, those moments of contact with the outside world drive up utility costs quickly.
“It’s all about maintaining a very, very tight tolerance of temperature around whatever we’re storing,” Boehler said.
In spite of the high capital requirements, O’Rourke said more commercial real estate investors were embracing cold storage. “There’s lots of capital flowing into the space,” he said.
Cold-storage sales volume rose 22% in 2020 on a year-over-year basis, while the broader industrial sector dropped 11% and all commercial real estate plummeted 29%, according to data from Real Capital Analytics.
The category is becoming more popular because operators can charge a premium, and sector performance has weathered the coronavirus storm better than other types of properties such as hotels, offices and malls.
That, in turn, is leading to more developers bucking convention and building cold-storage facilities on spec, O’Rourke said.
“There are actually more speculative cold-storage projects in the U.S.,” he said. “A lot of the speculative cold-storage projects are being built in population growth centers because they’re highly divisible.” Subsections can have varying temperature ranges, so fish sticks, fennel and fresh flowers can all be stored under the same roof.
“We’re all getting used to convenience now,” O’Rourke said, “and the way we think about e-commerce has now entered the food world.”