By Steve Lubetkin
Investors increasingly are warming up to the cold storage warehousing sector in New Jersey and other major markets — despite ongoing challenges in the asset class — pushing cap rates for Class A facilities closer to those of traditional high-quality warehouses.
A new CBRE report, the third and final installment in a series called “Food on Demand,” outlines how online grocery sales growth and other factors have narrowed the cap rate differential between cold storage warehouses and dry-storage facilities to 75 basis points — a significant narrowing from the 200-basis-point spread 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.
The cap rate spread between U.S. cold storage real estate and dry storage could narrow even more, to as little as 25 basis points, comparable to the spread in leading Asia Pacific markets, as cold storage cap rates go lower, CBRE says.
“The increased demand by consumers for online beverage and groceries has been the impetus for more cooler/food storage space in New Jersey, one of the most well-located gateway markets serving millions of shoppers in the U.S.,” said Steven Beyda, a senior vice president with CBRE’s Advisory & Transaction Services team. “The trend of online ordering, as well as the investment in new delivery strategies and technologies, will continue to drive demand for cold storage space well into 2020 and beyond.”
However, challenges stemming from the specialized nature of the sector will continue to restrain additional growth in transaction volume. CBRE’s report notes that available properties are scarce, construction is expensive and design and operation of these facilities is complex.
These challenges are likely to be addressed gradually as more specialized developers and builders focus on cold storage and as additional capital flows into the industry, CBRE said.