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Why Real Estate Investors Are Warming Up To The Risky Business Of Cold Storage

cold storage

Those perishable pharmaceuticals, fresh holiday flowers and frozen Thanksgiving turkeys are getting some new places to roost.

In the next few years, more than 400,000 square feet of cold storage is coming to South Florida. That’s still far less than the 1.5 million total square-footage of industrial warehouse space in the pipeline, according to the CBRE Group.

“On average there’s not 10 cooler deals a year,” said Brian Smith, managing director for JLL’s South Florida industrial team.

But activity is picking up, thanks to new cruise ships, growing international trade and Miami’s increasing presence as a pharma hub. And the category is likely to grow even more over the next three years, according to the 2018 CBRE “South Florida’s Cold Chain Ecosystem” report.

“It’s always been part of our market, but now we’re starting to do more of these larger freezer and cooler requirements,” said Sebastian Juncadella of Fairchild Partners.

Nationally, warehouse storage space increased by 260 million square feet, or 2 percent, in 2018. South Florida outpaced the nation, adding 5.8 million square feet, or 3.3 percent, according to Jones Lang LaSalle.

Miami has long been a key gateway for flowers imported from Colombia and Ecuador, salmon fillets from Chile, fruits and vegetables from Central America and other imports that require refrigeration in temperatures ranging from 15 degrees for frozen goods to 55 degrees for chilled items. All are continuing to grow.

Driving Demand

Fresh cut flower imports at Miami Internal Airport are up 4.14% year to date over the 2018 total of $755.69 million; at PortEverglades, they’ve grown 72.9% compared to last year to $17.54 million, according to trade data analyzed by WorldCity. Imports of fresh and frozen fish fillets imported through Miami International — mostly salmon from Chile — have risen 6.78 percent year to date over last year; imports through Port Miami are up 2 percent year-to-date, according to WorldCity.

Since Miami International Airport became the first U.S. airport designated as a Pharma Hub in 2015, its pharma traffic has grown dramatically. Imports plus exports of pharmaceuticals at Miami International Airport increased by 49% in 2018, up from $3.7 billion in 2017 to $5.5 billion in 2018. Exports out of MIA were up by 22% and imports increased by 100%. This year to date, exports of of vaccines and live blood at MIA are up 13.6% year to date.

New cruise ships and terminals at PortMiami and PortEverglades are also helping the niche industry grow. Between 2017 and 2018, passenger traffic at the two ports combined grew about 3 percent — adding another 300,000 to the 9 million passengers filling up at salad bars, multi-course gourmet meals and onboard steakhouses. All of those groceries need to be kept cold until they get loaded aboard.

“Each time a cruise ship is ordered in South Florida and it gets stationed here that is a significant amount of cold storage warehouse space needed to supply that,” said Smith.

South Florida’s bubbling restaurant scene is also a contributor. Malcolm Butters, president of Butters Construction and Development, Inc., said his firm built a larger facility in Medley this summer for Mowi ASA, formerly known as Marine Harvest ASA, the world’s largest distributor Atlantic salmon. The company increased its square footage from 20,000 square feet to 100,000 square feet.

“There’s an increasing demand for food, and it’s because there’s an increasing amount of restaurants and cruise lines,” said Butters.

As more people opt for urban living and e-commerce continues to grow, the demand for cold storage will likely increase, say experts.

“The product has to be closer to the end user and get to them faster,” said Smith.

Another impact of density and the scarcity of land: smaller spaces. That’s not just for apartment dwellers without space to store those extra rolls of paper towels, it’s also for grocers.

Javier Herrera, managing director at IP Capital Partners, LLC, likens grocers and cold or frozen warehouses to apartment dwellers and self-storage.

“Apartments are getting smaller — therefore self-storage is more of a need. The same concept is coming to fruition in the world of Publix, Winn-Dixie, Trader Joe’s. They are becoming smaller so the perishable foods may have to be stored elsewhere,” said Herrera.

Cold-storage warehouses are also a key for online grocery stores that deliver goods directly from warehouses. All of those factors make investing and lending for cold or freezer warehouses enticing — at least for some.

“We would love to support individuals who are looking to get into this particular space because it seems to be a relative safe investment from where grocers are going now in days,” said Herrera.

Risky Business?

Not everyone is convinced. Easton Group prefers to build warehouses for general use, then partition them for cold-storage clients. That strategy allows Easton to market to a wider range of clients and contain costs, said president Jose A. Hernandez-Solaun.

Building cold-storage space runs $150 to $170 per square foot, versus $50 to $65 per square foot for dry storage, according to both CBRE Group and JLL. Cold storage come with additional climate-control costs; a single condenser can cost $150,000.

But the yields produced at current market rates don’t always cover the differential; the going lease rate for cold storage ranges from $10 to $20 per square food, according to CBRE, versus $7 to $9 per square foot for dry storage. Audley Bosch, executive vice president of JLL, understands the hesitation.

“Let’s say you go out of business and the next person doesn’t need those coolers?” said Bosch. That requires removing the cooler equipment — and likely losing money. “Unless you have bullet proof credit and financial worthiness most landlords won’t get into that business.”

“It’s just like your refrigerator but a hundred times larger,” said Michael Mandich, managing partner at Mandich Real Estate Advisors, which acquires and manages commercial and industrial spaces.

For now, at least, demand is up, say those in the sector.

“You’re seeing more food distributors and processors increasing their space,” said Butters.

Over the summer, Butters a facility in Medley for Mowi ASA, formerly known as Marine Harvest ASA, the largest distributor in the world of Atlantic salmon. It increased Mowi’s square footage from 20,000 square feet to 100,000 square feet.

His company also is building a 70,000-square-foot cold-storage facility in Coral Springs for Italian brand Flora Fine Foods. The company currently operates out of two 30,000 square-foot facilities in the area — totaling 60,000 square feet; it will keep one of those and add the new space for a total of 100,000.

Matthew Rotolante, broker and president of Lee & Associates South Florida, said on top of his existing cold-storage leases of 150,000 square feet, he has signed two new leases for an additional 120,000-square feet.

Juncadella, of Fairchild, said three of his cold-storage tenants — each in either the food or flower business — have requested for 35,000 to 140,000 square feet in the last six months. His team will soon be signing tenants for Lincoln Property Company’s 20-acre warehouse center, Miami Axis Park, in Hialeah. One of its three buildings will feature 36-foot ceilings — above the standard 30 to 32 feet — to accommodate a cold storage tenant looking to stack its products.

In Broward, Mandich is talking with Florida East Coast Group about building and managing 350,000-square-foot, $50 million temperature-controlled facility near Port Everglades. The deal is part of a public-private partnership with a 99-year lease. In June, Broward County approved FEC’s proposal to design, build, finance, operate and maintain the rail-serviced cold-storage facility on publicly-owned land at the northeast corner of Old Eller Drive and U.S. 1. Port Everglades and Broward County Aviation Department bought the 18.55 acres in 2015.

Mandich also is looking at adding a cold-storage facility at an undisclosed 350,000-square-foot location in Miami.

“We’re huge advocates of this industry, Mandich said. “In good times and bad, people need to eat. We anticipate for this to be a growing stable business for a long time.”


Source: Miami Herald