Site Selection Strategies for Cold Storage Operations

Site Selection Group, a full-service location advisory, economic incentives and real estate services firm, has a longstanding history of working on projects in the food & beverage sector. Due in part to our specialization in this sector, as well as high market activity, we closely monitor the dynamics and availability 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, as of October 1, 2023, there are only 21 modern buildings (post-2000) in the nation with 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 common theme in the overall food & beverage industry is companies are only disposing of assets that have legacy problems like antiquated technology, regulatory concerns or 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 by developing new products. According to the Global Cold Chain Alliance, North American third-party warehouses have added 140 million cubic feet of space since the COVID outbreak of 2020.

But will most food & beverage companies find this outsourcing strategy sustainable for the long term? 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. Get lucky and find an adequate existing building

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, 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 the permitting process, this buildout typically ranges between five and eight months. However, this strategy can be technically challenging for more extensive 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. Lastly, clear heights of the original structure can significantly compromise the volume of cold storage.

3. Complete the buildout of a cold storage speculative shell

Due to demand, there is an increasing number of speculative developers that are constructing shell cold storage buildings but stopping short of installing equipment and final tenant finish-outs. According to CoStar, there are currently 12 such facilities under construction in the United States with another 14 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.

Conclusion

In summary, these four strategies offer tradeoffs in cost, time, customization and geography. Site Selection Group, a specialist in the food & beverage sector, has tremendous experience helping our clients evaluate these tradeoffs and executing the strategy that best fits their needs.