By Steve Kozarits and Lori Zuck
October 19, 2020
Our attitudes about food and beverage influence the brands we purchase, how we socialize, where we shop – and sometimes even where we live. Our expectations are high when it comes to product mix and availability. While food transport has been occurring for centuries, modes of delivery, advances in food safety, and time-sensitive supply chains have evolved to meet changing preferences across broad geographies. New trends can permanently alter consumer behavior and ultimately drive monumental business decisions.
Case in point: cold storage. This industrial niche is exploding due to a confluence of factors. First, growing demand for food and beverage through e-commerce channels – which was greatly intensified during COVID-19 – shows no sign of abating. With many having more time to browse online at home, shopping habits ingrained over the past six months will likely stick for a good portion of the population, and this requires strict preservation safeguards to avoid health hazards. At the same time, consumers’ desire for more natural foods with fewer chemical preservatives requires increased dependence on refrigeration for product transportation and storage.
There is intense focus on increasing efficiencies, lowering costs and building flexibility into the distribution centers equipped to store food and beverage. Today e-commerce is powered not only by convenience, but also by heightened attention to health amid a pandemic. The challenge is twofold: Getting product to consumers quickly is vital in meeting expectations for instant gratification, but even more important is ensuring the quality and safety of what is delivered.
Like every real estate sector, investment in cold storage presents pros and cons. On one hand, grocery stores generate low profit margins and must rely on volume. Overhead costs – especially labor – are high, so e-commerce solutions make sense. On the other hand, refrigerated storage facilities are expensive to build, costing at least twice as much per square foot as traditional warehouses. Once complete, they are expensive to operate because facilities are energy hogs and experience no downtime. Additionally, their unique characteristics may not be suitable for subsequent users.
Creative solutions have been rapidly incorporating efficiencies and cost controls to make cold storage a true gamechanger for real estate owners and occupiers:
- While last-mile delivery sites are already in high demand and land is scarce, ground-up construction is not always necessary. As grocery stores continue to experience weaker-than-historical walk-in traffic, expect to see a shift as some existing stores transition into cold storage distribution centers. Most assets are in high-density population centers and are prime candidates for “box in a box” redevelopment. Similarly, older malls in areas with strong demographics can be repurposed to support the needs of cold storage, creating value that may far exceed an asset’s use as conventional retail space.
- A new fire suppression solution, Oxygen Reduction Systems (ORS) have the potential to significantly reduce costs in cold storage and other warehouse facilities that exceed certain clear heights. By creating a low-oxygen environment and eliminating the need for traditional sprinkler pipes, an asset can offer 120-foot clearance without affecting the cost-per-pallet position.
- “Cobots,” or collaborative robots, are playing a larger role in industrial facilities, including cold storage. This is beneficial at a time when employee density is being scrutinized for health and safety reasons. A study by Interact Analysis predicts that cobots will account for 30% of the total robot market by 2027, and the three biggest applications will be material handling, assembly and pick-and-place.
- Owners and users of cold storage space are investing capital to lower energy costs and reduce greenhouse gas emissions. This includes incorporation of alternative energy solutions, reduction in water usage, and deployment of highly efficient refrigeration systems. Automated high-speed doors and advanced sealing materials can further reduce energy loss.
- Location decisions are being carefully considered. In the Midwest, underground storage is an alternative to above-ground warehouses, though ceiling heights present a limitation. Across the U.S., there are substantial differences in utility pricing and economic incentives for sustainability initiatives, so matching facility needs to regions or metros that offer the best economics is key.
These and other innovations bode well for the sector. As recent property sales have underscored, cold storage is not being affected by the general economic slowdown, though the number of operators may shrink as the leaders benefit from economies of scale and compress cold chain costs. It’s also good news for consumers, who have gotten very comfortable choosing their favorite food and beverage items from home.