New Jersey remains one of the most attractive markets for cold storage users, but meeting that demand can be challenging for developers.
By Steve Lubetkin
While New Jersey was sweltering its way through a record-setting heatwave in mid-July, demand for cold storage warehouse space nationwide, and particularly in the Garden State, was also on fire, largely because of rising online fresh grocery sales and changing consumer preferences for fresher foods.
Meeting that demand could prove challenging — given the cost and complexity of such projects and the need for specialization — but some developers are positioning themselves to be ready when users come calling.
“The demand is about as strong as I’ve ever seen,” said David Greek of Greek Development, which is partnering with Advance Realty on multimillion-square-foot industrial projects in Linden and Logan Township. Both sites have drawn interest from cold storage users, he said.
“There are a lot of existing freezer-cooler businesses that are in the process of expanding, and a few new entrants to the market.”
Demand for cold storage space nationwide is likely to reach 100 million square feet over the next five years, says CBRE’s newest report on the subject, and with 136 million square feet of freezer capacity, New Jersey is well-positioned to benefit from the demand.
“Given the ongoing trend of increased demand for frozen and refrigerated food space in well-located gateway markets serving millions of online and brick-and-mortar grocery consumers, New Jersey continues to see strength in the sector,” said David Gheriani, a vice president with CBRE. “Consumers’ increasing use of online ordering and grocers’ investment in new delivery strategies and warehouse technologies will continue to drive this trend.”
Groceries ordered online will account for 13 percent of total grocery sales by 2022, up from 3 percent in 2018, according to the Food Marketing Institute. Such growth would amount to an additional $100 billion in annual grocery sales conducted online.
Yet Greek believes that online grocery purchases account for only a small portion of the industry’s rising demand, he said. He also pointed to the changing needs of restaurants and the needs of home delivery services that offer prepared meals.
“I think it’s more of an overall change, a larger kind of longer-term change in how we consume food and what foods we consume as a society,” said Greek, the acquisitions director for the East Brunswick-based firm. “There’s been a trend over the last 20 years to move toward fresher foods, less canned items, less preservatives in the food. And that all means the food needs to get from farm to the table in a much faster and different logistics network than your typical dry goods warehouse.”
This change in consumer behavior is likely to put pressure on industrial developers, since cold storage currently accounts for a tiny portion of U.S. industrial and logistics real estate overall.
A recent report by Avison Young found that the Garden State has only 91,237 square feet of available cold storage space, which represented a 0.3 percent vacancy rate. The report, which was published in February, also found that New Jersey had no cold storage space under construction at the time, due to high development costs, land availability and other factors.
Cold storage demand comes from three basic kinds of companies, said Steven Beyda, a senior vice president with CBRE. Grocery and food service distribution companies like Wakefern Food Corp., Peapod and Fresh Direct typically will look at modifying existing industrial space to accommodate cold storage needs, he said.
Another company willing to adapt dry warehouse space for cold storage is Hello Fresh, a meal kit delivery company.
“They understand the costs and they can take that on,” said Russell J. Verducci, a vice president with NAI James E. Hanson. “It’s basically called a box in box. They understand the cost of their inner box, and they can multiply that model across the country. It gives them a little more flexibility.”
Companies with a need for 20,000 to 30,000 square feet will consider retrofitting a dry warehouse with cold storage capabilities, Greek said, but most of the demand he has seen is for “new, highly efficient spaces, rather than trying to recapture some of the older spaces in the market.”
Indeed, most larger companies, like Performance Food Group Co., look at building new facilities for their needs, Beyda said.
Another segment is the processing and packaging business, which includes companies such as Pepsi and Jersey City-based Goya Foods, he said.
“They typically have a mix of dry and cold in their facilities, the cold being sort of a secondary feature to their operation,” Beyda said.
The third main segment of cold storage tenants are third-party logistics companies, he added, noting that “these are unique, these are usually 60- to 100-foot clear inside the buildings.”
The largest of these is Lineage, which just acquired New Jersey-based Preferred Freezer Services, and Americold. Smaller players in this segment are Seafrigo, Garden State Cold Storage and Refrig-It Warehouse, which recently leased 140,000 square feet near Port Newark-Elizabeth at a new development by Penwood Real Estate Investment Management and Penford Group.
Other New Jersey builders are leveraging their experience in the cold storage market. Elberon Development and Fidelco Realty Group are now marketing a 135,000-square-foot, build-to-suit cooler and freezer project at 1029 Newark Ave. in Elizabeth. The fully entitled building, which could have clear ceiling heights of up to 60 feet, would follow Elberon and The Avidan Group’s 2016 delivery of a 140,000-square-foot freezer warehouse in the city for Seafrigo, a French food distributor.
Terry Armstrong, the firm’s senior vice president of leasing and acquisitions, noted that most owners would prefer to build a traditional dry warehouse. But Elberon sees an opportunity in the growing demand for fresh, refrigerated foods and ready-to-eat meals.
“Elberon is a 100-year-old company that takes the long view when thinking about the types of facilities we want to own and manage,” Armstrong said. “With today’s consumers moving away from highly processed foods and toward healthier options, but wanting those healthier options delivered just-in-time, we’re confident the demand for refrigerated space will only increase in the near future, making our facilities — and the tenants occupying them — that much more valuable.”
Still, one challenge for developers considering cold storage is the highly customized nature of the product. Each tenant has its own specifications for the kind of refrigerated or freezer space it needs, so it’s more difficult for builders to put up a speculative cold storage facility without first knowing which company might be interested in occupying it.
It’s why virtually all cold storage is build-to-suit.
“They have a dry tenant in hand, they do a build-to-suit, they make a great rent at 14 or 15 bucks, and there’s a lot less risk on the table,” Verducci said.
Timothy Cadigan, a senior vice president with Avison Young, noted that “many institutional developers and owners are looking to build bulk warehouse, which allows for meeting the most demand in the market, and they are easier to raise capital for versus the cold storage facilities.”
“In general, bulk warehouses are less costly to build and are more in demand,” he added. “Unless you have a tenant who you are constructing for, it is a huge risk to build cold storage facilities on spec. They are very specialized and usually configured for the tenants’ needs.”
Greek noted that the cold storage sector is subject to “a bigger lag between when the demand arises and when it’s fulfilled.” That has caused demand to back up in recent years, “as it’s been more difficult to find sites to place these requirements.”
He also cited the need for much higher clear heights than traditional dry warehouses, so the larger tenants will typically design a new building that meets their needs.
“Typically for a cold storage warehouse user, they want to maximize the efficiency of this space as much as possible to try and minimize the effects of those increased costs on their bottom line,” Greek said. “And for most of them, that means going much higher inside the warehouse than your typical dry goods warehouse.
“We’re seeing where the typical classic dry warehouse has a 40-foot interior clear height, within the cold storage and freezer storage space, I think a lot of them are targeting 60-foot interior clear. And we’ve had requirements as high as 150-foot interior clear for cold storage.”
That extreme height requirement was for a regional food processor and distributor.
“They think more in terms of the number of pallet positions that they can fit within a space, and they’re able to invest a little bit more in the more expensive material handling equipment that you need to operate a warehouse that is 60-foot clear or 100-foot clear,” he said. “They are willing to spend more to make those spaces more efficient up front, and so they’ll go higher in order to get more pallet positions per square foot.”
The scarcity of cold storage capacity is, predictably, driving pricing upward.
In what may be a new valuation high for cold storage facilities, in April, before its merger into JLL, HFF arranged a $35.75 million refinancing for a fully leased, 182,154-square-foot cold storage facility at 275 Blair Road in Avenel.
Advance Realty Investors and Greek Development, which partnered on the construction of the Class A property, used the loan to retire an existing construction loan and return capital to the partnership. The brokerage team declined to identify the lender underwriting the loan, but noted that the loan value of nearly $200 per square foot was a new high.
Greg Nalbandian, a senior managing director with what is now JLL, said at the time that the financing suggests cold storage properties are likely to become a bigger focus for investors in the industrial asset class.
“It’s really a growing industry within the overall industrial sector,” Nalbandian said. “It’s a higher fit-out and finish with the cold storage features. The lender did an outstanding job understanding the cold storage industry’s growth as a submarket within the red-hot industrial sector.”
The loan included some unusually attractive terms for Advance and Greek, Nalbandian said. The partnership only pays interest on the loan for the first five years and, for the second five years of the 10-year term, the loan is based on a 30-year amortization schedule.