5 Facts About Speculative Cold Storage Development

5 FACTS ABOUT SPECULATIVE COLD STORAGE DEVELOPMENT

As consumer preferences trend toward online grocery and the number of perishable items moving through the supply chain increases, the demand for cold storage capacity in the U.S. continues to rise.

Despite the challenges, by outfitting traditional warehouses with upgraded features to support temperature-controlled space, speculative development is becoming an advantageous way for investors to capitalize on the rapidly growing demand for cold storage facilities. In this article, we’ll discuss current trends driving demand, the challenges faced by developers, ARCO’s unique ability to make cold storage speculative developments feasible, and how to create a cold storage ready facility.

1. COLD STORAGE DEMAND IS HEATING UP

From the rise of e-grocery to the continued growth of the U.S. population, consumer preferences and trends continue to drive demand for temperature-controlled space. With more perishable items moving through the supply chain, the need for strategically placed cold storage distribution facilities in markets across the country is on the rise.

210%

INCREASE
Online grocery retailers saw volume spike by 210% in March 2020 from 2019.

Over the past decade, trends in consumer behavior and preferences have led to an increased demand for cold storage space. The rise of “e-grocery” is one of the most impactful shifts in consumer buyer behavior, with the market’s value more than doubling from 2016 to 2018 and sales expected to quadruple by 2023. The COVID-19 crisis has further contributed to the e-grocery boom by enticing shoppers to utilize grocery delivery services or curbside pickup to avoid shopping in-store. Online grocery retailers saw volume spike by 210% in March 2020 from the same month in 2019. While this growth is unsustainable, the rapid increase in consumer awareness and adoption is expected to continue to drive growth for the industry and, subsequently, demand for cold storage space. Additionally, as consumer preferences continue to trend toward food with less artificial preservatives, orders for items that require cold storage from grocers and restaurants is increasing.

The questions developers are now asking is not if but how.

Further, the U.S. population is expected to increase by over 20 million people by the year 2030, making increased food consumption due to population growth a promising demand driver for refrigerated warehouse space, as well.

With more perishable items moving through supply chain, there is a need for strategically placed cold storage distribution facilities in markets across the country. Existing gateway markets and areas where food production is substantial are already highly sought after by investors, and as demand continues to grow, smaller secondary markets near blooming metro areas will require more cold storage facilities. The question developers are now asking is not if but how.

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2. ONE SIZE DOESN’T FIT ALL

Speculative building for cold storage facilities has, up until this point, been limited due to the associated risk of significant upfront capital investment and facility complexity. Given the uniqueness of the different possible cold storage operations, it is impossible to build a “one size fits all “ facility.

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While the demand for cold storage space is on the rise, cold storage speculative development is not without its challenges. The risk of significant upfront capital investment, facility complexity, and historically high cap rates are all challenges developers face. The unique nature of cold storage operations makes it essentially impossible to create a standardized facility on a speculative basis without adding costs that may not be returned. Further, most contractors are not qualified to build these types of facilities due to the complex nature of cold storage design and construction. Working with an inexperienced contractor that lacks knowledge of the key components of a freezer/cooler facility and their cost implications puts a developer at even greater risk of overspending on a space that may not be ideal for future cold storage tenants.

3. UPGRADES DON’T HAVE TO BREAK THE BANK

By choosing to add incremental costs into a speculative build, developers can create a facility with the potential for higher return and increased marketability to a broader range of clientele. There are several well-informed upgrades that developers can make to a traditional speculative warehouse to create a facility with enhanced adaptability for temperature-controlled spaces. Some options include:

  • Adding 5-7PSF of load to the roof in areas where coolers or freezers may be located in order to prepare for installation of cooler ceiling panels or enhanced refrigeration loads.
  • Upgrading roof insulation to R22 (4”), as opposed to only meeting the code minimum, to create insulation ready for a cooler space.
  • Upgrading any decking to G60 galvanized in order to minimize the risk of rust from cooler humidity.
  • Upgrading the building service from a base service to a service gear-sized to allow for added refrigeration or cooling load in the future.
  • Installing heavier insulated overhead doors, as opposed to meeting the minimum energy code, to maximize energy efficiency and reduce air flow waste.
  • Providing a more robust sanitary plumbing layout to account for the addition of future condensate drains. This would likely manifest as an “H” layout as opposed to a single line (“U” or “L”) layout.

For developers willing to drive initial cost up a bit more on the base building to seek larger dividends in the future, the following additional upgrades could also be made:

  • Modularizing a future freezer component and adding a mud slab, freezer insulation, and conduit for future heating wire and column insulation blocks under 2-3 bays of the building or in multiple locations.
  • Installing R34 (6”) insulation in potential cooler areas and adding a roof break (double column condition) to run the freezer full height instead of a box-in-a-box condition.
  • Installing LED freezer-rated lights across the entire building, as opposed to regular LED lights.
cold storage roof upgrades

4. THE RIGHT PARTNER MAKES ALL THE DIFFERENCE

By partnering with the right contractor, developers can offer speculative facilities that cold storage clientele seek without the risk of overspending on design and construction. With millions of square feet in temperature-controlled space built each year, ARCO has the experience and expertise needed to help developers succeed in the cold storage market.

Despite the challenges, developers can still capitalize on the rapidly growing demand for cold storage space. ARCO’s vast experience working directly with food and beverage clientele has given us the knowledge of the components required for various types of foodservice operators. Because we understand the complexities and unique nature of build-to-suit food-grade facilities, we can offer developers several cost-effective upgrade options for creating a cold storage ready space that is desirable for future tenants.

ARCO’s design/build approach allows developers to make decisions about potential cold storage upgrades in a project’s earliest stages with full knowledge of their impact. Because we work directly with the architect, design can be developed with budget in mind. Throughout the design process, the ARCO team is simultaneously estimating construction costs and can accurately conceptualize the completed project before dollars are spent. Our industry knowledge and expertise allows us to provide solutions and alternatives that save valuable development dollars while still making a space suitable for future cold storage tenants.

ARCO's capacity to understand the full scope of work and offer the best solution has been apparent on each of our projects. In addition, the quality of in-house staff has exceeded our expectations. They have proven themselves to be as good as any outside firm we work with and offer expertise in the industrial components of design others may lack. ARCO maintains an honest and professional relationship throughout the process. They constantly keep us informed and consistently provide value engineering ideas to accommodate our clients' future growth.
CHAD MEYER
PRESIDENT AND COO, COLDPOINT LOGISTICS
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5. THE FUTURE IS BRIGHT

As demand for cooler/freezer space continues to increase, we expect to see more developers take interest in speculative cold storage construction. ARCO’s collaborative design/build approach combined with our industry knowledge and expertise will allow developers to make the very best decisions for the businesses while meeting the needs of their future tenants.

Historically, cold storage space demand has been satisfied through built-to-suit arrangements. But as demand for cooler/freezer space continues to increase and the COVID-19 crisis impacts supply chains, we expect to see more developers take interest in speculative cold storage construction.

As experts in cold storage construction, ARCO looks forward to partnering with developers and providing them with industry-leading solutions and the very best customer experience.

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