Investors are warming up to cold storage asset investment, and as a result, cap rates are pushing closer to that of high-quality warehouses, according to a report from CBRE. Los Angeles is one of the top markets for cold storage, with a 4% vacancy rate, among the lowest in the country. As a result of the opportunities in the market, cold storage has seen an influx of new capital and investors.
"The draw of strong demographics driving food sales, food safety demands putting additional focus on the cold chain and scarcity of available cold storage inventory due to the lack of speculative development has made investors more comfortable with cold storage investment," Art Rasmussen, SVP at CBRE, tells GlobeSt.com. "Wall Street is warming up to investment in the food sector, reducing the perceived risk premium and tightening of cap rates."
The low availability of cold storage in Los Angeles is not surprising, considering that there is a lack of supply in most industrial categories in the market. "Due to the overall high cost of construction and lack of speculative building, there are very few alternative in the market for new or growing food companies," says Rasmussen. "Until recently, buildings were developed mainly for owner users, and now, with e-commerce in play there is a much higher demand from emerging food users as well as prepared foods brands -more than ever before."
Cold storage has been the perfection solution for investors that are in search of yield or looking for opportunities to place capital. "Investors in search of alternative opportunities are beginning to recognize the stability of the food industry is fundamentally attractive," says Rasmussen. "The higher cap rate return associated with cold storage is increasingly perceived as less risky and the additional demand is beginning to drive cap rate compression."
However, that is likely to change in Los Angeles as a result of the increased investor interest. This year, more cold storage product will break ground. "We are already engaged with cold storage speculative development projects," says Rasmussen. "Properly designed, located and constructed, there will be continued focus and development supporting the food safety and logistical demands of the cold chain."
While more investors are coming to cold storage, they also need to understand the challenges of the asset class. "The challenges of cold storage include associated high operating costs, continued capital expenditures, and the knowledge required to construct and operate cold storage facilities," explains Rasmussen.
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Kelsi Maree Borland
