Cold storage is one of a few benefactors of the dramatic shift in consumer tendencies that resulted from the pandemic, but as the ebbing effects of the virus ripple and collide with other forces, this subsector of the red-hot industrial real estate market faces growing pains.
Like many sectors, rising inflation and interest rates, labor challenges and general economic uncertainty pose a challenge for owners and operators in this specialized real estate type, but a steady stream of demand keeps the industry at least partially insulated with cash flows tied to a universal activity: eating.
“Cold storage as a business is based on people consuming food and no matter what is consumed, where it is consumed, this food goes through the exact same cold storage supply chain,” CenterSquare Investment Senior Investment Strategy Analyst and Global ESG Lead Uma Moriarity said.
Refrigerated storage options were already growing in number before the pandemic, with giants like Amazon looking to elbow in on the lucrative grocery market, but stay-at-home orders juiced the cold storage market with a tidal wave of demand for delivered groceries and at-home meal prep kits. Accordingly, the speculative development pipeline for such space grew more than tenfold from 2019 to 2022, according to CBRE data, with 3.3M SF under development at this year’s midpoint.
But companies that own and operate these spaces are not immune from the pressures that come with historic levels of inflation.
Americold Realty Trust, the second-largest cold storage owner in North America, noted the increased cost of power for its facilities and warehouse supplies in its most recent earnings call, a cost the company passed onto its users.
Those efforts paid off: The company expects to end the third quarter “at a run rate covering all known inflation incurred through the second quarter,” its leadership said in the earnings call.
“The costs associated with having the cold storage business is passed on to the customers and that pass-on actually happens fairly quickly,” Moriarity said. Her company is invested in Americold and the country’s largest cold-storage operator, Lineage Logistics, through a few of its platforms.
“Those customers are also seeing it from across the board,” Moriarity said. “They understand that these costs are rising, and so it’s just a conversation as it relates back to the customer relationship about management of the customer relationship.”
Americold declined to specifically quantify the increases when reached by Bisnow via email last week.
“Our customers (food producers and manufacturers) pay storage fees to utilize warehouse space and we have implemented increases in pricing reflective of those energy cost increases,” an Americold representative said in an email. “Any future price increases will depend on what happens with inflation.”
And on the equipment side, higher costs aren’t keeping developers from pushing forward with the projects they have in progress as they push to meet demand. While some warehouse supplies or materials — refrigeration equipment itself, for example — might cost more than it did a year ago, deals are still going forward, Ryan Cos. Executive Vice President of Industrial Todd Schell said.
“It’s not that price isn’t important, but having the space itself and getting something online seems to be more important, more of a priority right now,” Schell said.
Americold has said that it expects any future inflationary pressures it experiences to continue to be from power and warehouse supply costs.
“If this is the case, we will continue to revisit our pricing in power surcharge initiatives,” Americold CEO George Chapelle told investors in the company’s second-quarter earnings call.
As inflation has made groceries and a multitude of other consumables more expensive, that might be affecting grocery stores or grocery delivery companies, but the cold storage facilities themselves are a step removed from such changes, experts say.
If anything, it’s possible that rising food prices have helped cold storage facilities boost occupancy levels. Food producers are producing slightly more food than in previous quarters, and sending it to cold storage facilities, and with consumers buying a bit less, that has translated to more food staying in these facilities for longer time periods.
“That does help occupancy build up in their warehouses,” Green Street Senior Associate of Equity Research Jessica Zheng said. “On the other hand, throughput volumes decrease because there are fewer goods getting out of the warehouses, so that negatively impacts the service revenue. But on a net basis, recovering occupancy helps those warehouses.”
Labor challenges have also been a concern for refrigerated warehouse operators. The cost of labor is starting to ease and, unlike in other areas of real estate, it’s getting easier to find workers to fill open positions, but retention can be a big issue for cold storage operators. This isn’t new, Moriarity said. Cold storage jobs traditionally pay a premium because the work is physically demanding and workers are in refrigerated spaces for the entire workday.
“On paper, the job looks very attractive to people,” Moriarity said. “Maybe you get there and you realize it’s a hard job, and you’re not cut out for it. That type of churn, from a labor perspective, has always been something that the cold storage industry has experienced.”
That said, at Americold, the turnover is well above pre-pandemic levels or even 2021 levels. At the end of June 2022, the company’s annualized turnover rate was about 22 percentage points above the same time the previous year and 30 percentage points higher than 2019, the company said.
And in instances where the company hired more temporary workers to make up for a shortage of permanent employees, it has been more expensive per labor hour and the temporary workers are less productive.
Americold’s CEO told investors that he didn’t anticipate a recovery on that front to happen this year or even in the first half of 2023.
Chappelle noted that he anticipates that for the rest of this year and the first half of next year, he expects turnover to be the company’s biggest challenge.
“I think it takes a long time to rehire the people that we lost — and I’m talking from an industry standpoint now, the food industry. And then you have to train them, you have to get them to stay,” Chapelle said on the company’s Q2 earnings call.
Still, investors are prepared to keep pouring money into the cold storage space, according to CBRE, driven by a prediction that e-commerce’s share of grocery sales in the U.S. will rise to 21.5% by 2025, compared to 13% in 2021.
But as costs keep rising, the deep-pocketed companies that can order up their own build-to-suit space will have the upper hand on companies seeking speculative space.
“Nevertheless, despite an increase in speculative development over the past three years, the product type will remain dominated by build-to-suit projects, given unique user requirements and high construction and operating costs,” according to CBRE’s June 2022 report, Cold Storage Demand Grows Amid Tailwinds. “Going forward, these higher costs will make it increasingly difficult to achieve the yields necessary to justify new speculative development.”