How Food & Beverage Companies Are Satisfying Their Cold Storage Needs
by Josh Bays, on Apr 20, 2021 2:20:46 PM
Site Selection Group, a full-service location advisory, economic incentives and real estate services firm, works a tremendous volume of projects in the food & beverage sector. Due in part to our specialization in this sector, as well as unprecedented market activity, we closely monitor the dynamics of cold storage facilities across the United States.
It has been well documented in a variety of industry publications that cold storage demand is significantly outpacing the supply. This has developers and operators of third-party facilities scrambling to determine the best strategy for capitalizing on this demand.
According to CoStar, there are currently only 15 modern buildings (post-2000) in the nation of at least 30,000 square feet that have some type of cold storage equipment and infrastructure. And once potential occupiers start qualifying these options, they’ll quickly find that several have material challenges, the least of which is being located in unfavorable operating environments.
This severe imbalance of supply and demand begs the fundamental question: “How are companies with cold storage requirements addressing their needs?”
The answer to that question is multifaceted. First, a disproportionate amount of capacity and volume that companies would otherwise manage themselves are being pushed to third-party operators which are somewhat keeping pace with developing new product.
But will most food & beverage companies find this outsourcing strategy sustainable for the long term? That is something Site Selection Group is committed to monitoring when this boom finally starts to taper at some point in the future.
So back to the fundamental question: How are those companies that want to manage their own capacities satisfying their needs? In Site Selection Group’s experience, they typically employ one of four strategies depending on their project timing:
1. They get lucky and find adequate existing product.
This really isn’t a strategy because it is highly unlikely a company will “get lucky.” The market is too overheated.
2. Build a ‘box in a box’
This not-so-technical description is just like it sounds. There are many cold storage projects, several of which have been our clients, all across the country that are building refrigeration and freezer capabilities inside industry-standard shell buildings. They simply put a removable barrier on top of the existing slab, pour an additional floor with cold storage specifications and enclose the box with insulated panels. Depending on the location and their permitting process, this buildout typically ranges between four and six months. However, this strategy can be technically challenging for larger requirements or cost-prohibitive as not all landlords are willing to amortize these improvements. Additionally, these nonpurpose-built facilities typically do not stand the test of time as well as purpose-built facilities.
3. Complete the build-out of a cold storage speculative shell
Due to demand, there is an increasing number of speculative developers who are constructing shell cold storage buildings but stopping short of installing equipment and final tenant finish-outs. According to CoStar, there are currently four such facilities under construction in the United States with another 20 being proposed. The timing of this strategy is largely similar to the “box in a box” strategy, but typically allows for substantially larger facilities. Additionally, it is much more common for these developers to have the appetite to fully finance the project thus reducing the tenant’s upfront capital spend.
4. Greenfield build-to-suit of purpose-built cold storage
This straightforward strategy, which typically ranges from 12 to 16 months, affords occupiers more flexibility in geography and facility customization. Additionally, it is not too terribly difficult to find a development partner willing to invest the necessary capital for the project.
In summary, these four strategies offer tradeoffs in cost, time, customization and geography. Site Selection Group, a specialist in the food and beverage sector, has tremendous experience helping our clients evaluate these tradeoffs and executing the strategy that best fits their needs.