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12/18/19
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This report provided by commercial real estate services firm CBRE
Investors increasingly are warming up to the U.S. cold storage warehousing sector, pushing cap rates for Class A facilities closer to those of traditional high-quality warehouses. Nevertheless, cold storage presents its own unique challenges, according to a new report from CBRE.
CBRE’s report, the third and final installment in its Food on Demand series about cold storage, outlines how trends such as the anticipated growth of online grocery sales have narrowed the gap in cap rates between cold storage warehouses and dry-storage facilities to 75 basis points (bps) from 200 bps in the past three years.
Cap rates, formally called capitalization rates, measure a property’s annual income as a percentage of its price. A lower cap rate indicates a higher price. CBRE forecasts that the cap-rate spread between U.S. cold storage real estate and dry storage could narrow further to 25 bps, on par with the spread in leading Asia Pacific markets, as cold-storage cap rates go lower.
This is especially true in markets with low availability rates such as Los Angeles. The metro is among the five markets with the lowest available space at 4%, following only Detroit at 3.3%, Savannah with 3.6% and Milwaukee with 3.8%.
“With the increase in cold storage demand, we expect to see an influx of new capital and investors in what has been a traditionally small group of third-party owners,” said Los Angeles-based Art Rasmussen, Jr. “First timers tend to be a bit put off by the higher capital demands and special-purpose nature as compared with regular warehousing but that is trumped by the potential payout at time of sale, a number that can easily double that of a traditional industrial property.”
He added, “Asset values are also a function of lease rates, and here again the cold storage market is much more stable than that of its traditional warehousing counterpart, which has made it increasingly attractive to investors.”
Transaction volume for U.S. cold storage real estate has increased at an annual rate of 6.2% since 2014. A large share of transaction activity has focused on properties in major markets including Los Angeles, Chicago, Dallas-Fort Worth and South Florida. In addition, investment opportunities can be found in secondary markets such as St. Louis, Milwaukee, Tampa, Cleveland, Baltimore and Savannah.
However, challenges stemming from the specialized nature of the sector will continue to restrain additional growth in transaction volume. CBRE’s report points out that available properties are scarce, construction is expensive, and the design and operation of these facilities is complex. These challenges are likely to be addressed gradually by growth in the ranks of specialized developers and builders of cold storage as well as additional capital flowing into the industry.
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