In logistics and supply chain investment, what’s cold is gold. Earlier today, Arcus Infrastructure Partners, the London-based, long-term independent manager of $3.6 billion (EUR 3.3 billion) in assets across European mid-market telecom, transportation and energy, announced the launch of a European cold chain infrastructure platform, Constellation Cold Logistics.
The platform’s companies—Belgium’s Stockhabo, the Netherlands’ Lintelo and Norway’s Glacio—currently own and operate eight industrial-scale facilities in the three aforementioned countries, in food transport infrastructure hubs across Europe’s chilly north.
The company plans to expand its footprint in select European geographies in the near term.
Constellation’s warehouses will initially comprise 260,000 pallet positions of cold storage space. But it will offer other integrated “cold chain” services as well, including transportation solutions, blast freezing, thawing, order picking and customs management for clients.
In a statement, Ian Harding, Arcus’s Co-Managing Partner said, “We are focused on supporting the growth of European businesses that provide essential, long-term infrastructure to their customers, which in this case comprise leading European food producers, traders and wholesalers. This investment is also a strong example of Arcus’ execution of a clear mid-market, value-add infrastructure investing strategy.”
Earlier this month, Copenhagen-based Maersk, the world’s largest shipping company, announced plans to focus on premium services like cold chain logistics, rather than investing more resources in areas like freight trucking, which could put the company on a competitive collision course with its own freight forwarding customers
In June, Maersk began construction on its first cold storage warehouse in St. Petersburg, Russia, the first-such facility in the Russian market. At the time of the groundbreaking ceremony, 40% of the facility had already been leased to Europe’s largest banana importer, Fyffes.
Market dispatches in recent months have cleverly pointed to an already hot (or soon-to-be-hot) investment market for cold storage logistics in North America.
Snappy, headline-friendly secular drivers are part of the story. Similar to the trend in micro-fulfillment logistics, demand growth for cold storage is being driven by the increasing prevalence of online grocery shopping. There’s also rising demand from things like drug and vaccine storage, where controlled temperatures are critical to a medication’s effectiveness.
But cold storage asset investors still represent a tiny subset—research from U.S. commercial real estate investment firm CBRE says less than 10%—of the buyer pool for industrial and logistics assets.
Those include niche private equity firm Bay Grove Capital, the owner of global market leader Lineage Logistics, which invests only in large, major-market facilities sized 100,000 square feet or larger and with EBITDA greater than $2.5 million. The firm also invests across the cold supply chain, in areas like temperature-controlled transportation and freight brokering. Another major player is Blackstone, which invests in everything under the sun.
Cold storage markets are highly specialized and just as fragmented. With more than 2,300 companies in the U.S. alone, CBRE notes that just two companies, Lineage Logistics and Americold account for more than 60% of the existing market space in North America.
Most of this capacity—about 80% of the U.S. total—is rented from landlords to food market participants, either in production facilities or distribution warehouses. True to the real assets form, they should generate stable, predictable revenues for investors from long-term leases.
Cold storage deals, however bundled together, have enticed major investors by virtue of their scarcity. When Americold acquired Cloverleaf Cold Storage for a cool $1.24 billion in May 2019 from Blackstone Group—a big deal in the space—the latter had owned the company for just two years, having bought it from the founding families. In total, CBRE reports, $1.6 billion in cold storage deals have transacted over the past five years, or just 0.4% of the overall industrial and logistics investment during the same period.
Idiosyncrasies of cold storage construction make it hard to build new supply quickly. It’s expensive, often running $250 to $350 per square foot, or many times the cost of dry warehouse builds. Warehouses are big and unwieldy, often 6-24 feet higher in size than conventional warehouses. And they are slow to turn around, taking an average of five months longer to build due to various technical specifications.
So the market is primarily a build-to-suit one, despite recent attempts at speculative construction.
But some research indicates that the higher construction costs are offset by higher rent and sale prices, and possibly even less volatile lease rates (compared to traditional warehouses) in times of market stress. In a review of Southern California lease rates during the Great Recession, CBRE’s market research team found that cold storage lease rates dropped by just 10% during that fraught period, compared to a more than 40% drop in standard warehouse lease rates.
Still, market supply in the all-important Golden State market remains tight today, with vacancy rates in the low single digits, typical of several hub areas.
The drive to meet cold-storage demand while mitigating the high-cost, higher-risk profile of specialized construction has brought to bear some innovative strategies.
Retrofitting existing warehouses with process automation technologies, RFID materials handling and energy efficiency measures have all helped some facility owners keep operating costs in check, adding market capacity without requiring costly builds.
In future, properties with more versatile blueprints may also attract investor interest. As Pensions & Investments has reported, real assets titan Nuveen—for whom cold chain logistics are a prominent portfolio sub-theme—is looking at targets that feature “flexible warehouse facility design.” In these properties, specialized temperature-controlled storage is built inside regular warehouse space. The space can then be repurposed for cold or dry storage depending on market conditions. Cool, right?