By Kristian Cichon, ME, BE, Director of Acquisitions
Deugen Development
The New Jersey industrial market has managed to continue its historic pace of rising rents and new development, while vacancy rates have remained below 2 percent. This unprecedented demand from e-commerce-driven businesses desperate for warehousing and “last mile” distribution has kept the appetite of investors and developers fulfilled. One specific segment of the industrial market has maintained a virtually 0 percent vacancy rate, but has not seen the same development activity. The cold storage market is seeing elevated demand and an aging supply but only a handful of projects are being delivered to market in the near future.
The convenience of e-commerce has made its way into the food and grocery industries. With online purchasing of refrigerated and frozen foods rising 58 percent year over year, e-commerce’s share of total U.S. grocery sales is expected to grow to 21.5 percent by 2025 from 13 percent in 2021. Additionally, the growth of the medical field in the past few years has prioritized a larger need for a temperature-controlled supply chain, expecting a 48 percent jump from 2018 through 2024. Overall, the refrigerated/freezer market is projected to grow at a compounded annual rate of 13.4 percent through 2030. This would nearly triple the market size.
The New Jersey industrial market comprises of roughly 700 million square feet of inventory, and according to CBRE, just 6 million of that is dedicated to cold storage, or just about 0.8 percent. While a record 24.1 million square feet is actively under construction, only about 300,000 square feet of that is slated for cold use. Of the existing cold inventory, much is older and inefficient. The average age of a building is 42 years, and over 78 percent of warehouses were built before 2000 with ceiling heights averaging just 24 feet.
It appears that all signs are pointing to what will eventually lead to a desperate need for new cold storage product, so what has kept developers on the sidelines? The most obvious point is that the typical dry, ambient warehouses have still proved to be the better deal. Sky high rents, less expensive builds and landlord-friendly terms have allowed for developers to continue capitalizing on the faster and easier deal. Cold storage builders must navigate more challenging barriers to entry: higher construction costs, complex user requirements and tougher location requirements. Given these land constraints and costs, taller cold storage facilities with 40-foot-plus clear heights have become the minimum standard.
So, what would the tipping point to incentivize development of cold storage be? The current rent premium for a cold space sits around $4 to $5 per square foot above standard, while costs to build are roughly $100 more per square foot. The added value just doesn’t appear enticing enough in relation to the added cost and time. But, as supply of ambient industrial continues at a record pace, the market will have to keep an eye on a plateau in rent growth. An oversupply coupled with the unmet demand for cold storage may be the catalyst that will drive the rent premium up.
At Deugen Development, our current outlook reflects somewhat of a middle ground. We still see opportunities in the ambient industrial market, but at more competitive land prices. We have been increasingly aggressive with our efforts to move into the cold storage market, specifically with stronger, infill locations near the port. With a few recent transactions in northern New Jersey, Deugen hopes to bring several new cold storage projects to market in the coming year.
720 Monroe Street Suite E416A
Hoboken, NJ 07030
o. 201-210-8622 | c. 347-599-3372 | f. 201-510-0756
kristian@deugen.com | www.deugen.com
