2021 Cold Storage Warehouse Industry Update

Post-COVID 19 Cold Chain Warehousing Status Report

The COVID-19 Pandemic: The One-Two Punch for the Cold Chain

As the pandemic began, then raged on, consumers were locked down, trapped in their homes with their families. The supply chain struggled to adjust to the dynamics of the pandemic. With restaurants, foodservice and other establishments shut down, distribution to those entities slowed to a trickle. Meat, seafood, produce and other perishable goods were only nominally needed for B2B but remained in high demand for consumers.

Eager to stave off the coronavirus, flu and other ailments and remain healthy, many consumers focused on improving their nutrition. The trend towards fresh, locally sourced food products has been one that has continued to escalate over the past several years, increasing over the past year.

Rather than head to restaurants and bars, consumers remained at home and purchased more frozen food than in past years, utilized meal kits or meal subscription services. As consumers feared crowds, they actively tried to limit the amount of time they spent in stores. This resulted in the stockpiling of groceries and increased use of curbside pick-up service or home delivery options.

The dynamics of even simply eating lunch and breakfast changed as well. This altered the type and amount of food products, handling, and cold storage. Rather than food being transported to distribution centers then to grocery and other retailers, food products were often delivered directly to homes. The transportation and logistics of the food products had to be pre-planned, resulting in the establishment of micro-fulfillment centers, and use of new or different packaging and cold chain technologies. The need for cold storage at the last mile stage of distribution had been increasing pre-pandemic and exploded with the lockdowns.

Consumer behavior has noticeably altered how supply chain companies service consumer demand. From infrastructure to packaging and technology, supply chain businesses have had to adjust “on the fly”. They also have had to be able plan for the foreseeable future to service consumers who had become accustomed to new habits.

During the pandemic, consumers changed their buying habits related to food and beverages. Whether they bought freestanding freezers or were limited to packing the freezer section of their refrigerators, consumers had an appetite for both staples as well as indulgences, including ice cream. Relatively new to grocery supply chain are options including online shopping, buy online pick up in store, curbside pickup, click and collect, direct to home delivery from third parties. This meant that more fulfillment needed to come from refrigerated warehouses, often third party logistics cold storage warehouse operators.

What does all this mean? It means that the business of refrigerated warehousing is booming. More cold storages are needed across the United States. Cold chain distribution patterns have shifted. The cold storage industry is working hard to catch up with the changing dynamics of consumer demand. Many cold storage warehouses were accustomed to primarily moving products by the pallet. Consumers now wanted to be able to order perishable foods online and have them delivered to their homes or retrieve them via curbside pickup or other means. This means that the warehouse management systems used by cold storage warehouse operators needed to be able to “pick by each” and process individual orders for consumers. The warehouse management software used by many refrigerated warehouses was not able to handle these changes, making it challenging for warehouse operators.

Cold chain is not only needed for food and beverage but also for pharmaceutical and life science goods. Never has this fact been more significant than over the past year. As COVID-19 vaccines were approved for emergency use by the FDA, a tremendous amount of advance planning was needed to accommodate the high volume of vaccine distribution, especially for the Pfizer vaccine as it requires ultra-low temperature storage.

New issues have arisen with respect to pharmaceuticals and cold chain storage including:The increased use of pharmaceutical products requiring cold storage warehousing has propelled the need for more new cold storage warehouses to handle biologics, vaccines, and other pharmaceutical products.

More innovation is continually needed in the field of packaging. There is a definitive need for the development of alternative packaging for products requiring cold chain services.

In keeping with the recent trends, more micro-fulfillment cold storage warehouses are needed to service consumer demand.

Cold Chain Warehouse Storage, a Hot Growth Area

CBRE estimates that the demand for cold storage warehouse space will increase by 100 million square feet over the next five years, an increase of 47%.

The COVID-19 pandemic produced uncertainty, giving cold chain businesses little time to react to new, often highly dynamic conditions. This required a shift in business processes, operations, and technology.

From grocery to subscription boxes, and life sciences, there has been an increased demand for cold chain outsourcing, refrigerated transportation, and cold storage warehousing.

Here are some issues that contributed to the upsurge in the need for cold chain warehousing and services:

The pandemic lockdown fueled continual changes including the supply chain planning process as sales surged in large food retailer business by 20-30%.
International shipping delays contributed to a ramp up in cold chain warehousing capacity.
Delays continued during the past year in the international migration of refrigerated products due to new foreign food inspection regulations, congestion in ports, and reefer container shortages.
Consumers have been transitioning to healthier diets including fresh foods, specialty food products, organic/non-GMO, requiring more cold chain capacity. For example, consumers were drinking more juice, the cost of which jumped up 40% last year as consumers ingested healthier options to fuel an immune response to the virus.
The sheer mass of the temperature-controlled logistics involved with the COVID-19 vaccine applied considerable pressure on refrigerated warehousing capacity.

Refrigerated Warehouses: Capacity Crunch and Continued Shortages

Why is there a capacity crunch for cold storage warehouse space in the United States?

There has been a tectonic shift in cold food and beverage industry, as consumer buying patterns shifted in 2021
Tenants lease cold storage warehouses for longer periods of time
The upfront investment in the construction of a cold storage warehouse is two to three times that of a dry warehouse
The construction time of a refrigerated warehouse can take up to six months longer than that of an ambient warehouse
Industry consolidation has concentrated the industry considerably
There is more competition for cold storage space as biologic pharmaceuticals have gained in popularity and vaccines require cold chain services
There has been a dramatic increase in direct-to consumer business
The past year has seen many transportation and logistics challenges, including port congestion, truck driver and warehouse worker shortages

The Role of Technology in the Cold Chain

Companies have turned to technology because of an expanded need to monitor, track, view and ensure compliance of cold chain goods. Due to supply chain disruptions, shippers must be able to trace food sources and monitor environmental conditions of food cargo events. Shippers need more visibility, and this can be provided by cold chain technologies including specialized thermal packaging paired with digital supply chain solutions for monitoring and tracking goods.

Warehouse operators have been pushed to innovate, adopting new distribution strategies and technologies including increased automation, contactless technologies and blockchain solutions. The use of specialized cold storage warehouse management software can be instrumental in cold chain warehousing, helping to ensure product safety, quality and regulatory compliance.

Telematics are being increasingly more popular in the food chain. This includes the use of GPS and diagnosis technology used to optimize travel routes. Telematics data can be used to help provide insight into how an organization can meet increased demand, enhance productivity, and visualize improvements. Use of advanced technological solutions can help stop the spread of a foodborne illness faster by tracing the contaminated product, pinpointing the exact pallet or segmentation of food that is at risk.

Other technologies impacting the cold chain include picking, sorting and storage automation, electric lift and high capacity forklifts, augmented reality, and camera systems as well as temperature control systems. In terms of the use of physical space within the warehouse the cold storage warehouse industry is becoming increasingly more vertical to maximize the use and capacity of the building footprint.

To aid human workers, advancements in heated wearables and equipment can make working in cold, harsh temperatures a bit more comfortable. The introduction of heated control handles and foot cushions can help keep equipment operators warm. Clothing can be heated via a wiring harness to power it for use in freezer applications. Camera systems and augmented reality wearables can help human workers avoid accidents and injuries as well as improve their operational efficiency and accuracy rates.

Capital Investors Hunger to Take a Bite out of Cold Storage Warehouse Industry

Cold storage warehouses are essential to ensuring food and pharmaceutical product safety and quality and the need has become acute. Gone are concerns that investing in cold storage warehouses is risky. Now funders consider this to be an investment in infrastructure.

Cap rates between ambient and cold storage warehouses and food distribution facilities have become notably compressed over the past 12-18 months partially because large institutional owners are eager to enter this space.

Because of the inherent complexity, the construction of cold storage warehouses typically requires more time for construction. Cold storage warehouse facilities require extensive refrigeration equipment, specialized building envelopes, including concrete slabs with under-floor insulation and heating. Building a cold storage warehouse can take four to five months longer than ambient warehouses and often costs roughly triple that of building an ambient warehouse.

Because building a cold storage warehouse can cost $150 per square foot, these facilities are very rarely built “on spec”, meaning without having a tenant or owner. This is now changing, however as developers are willing to bet on the strength of the market and continued high demand. Companies rarely find it feasible to convert existing warehouses. When storing inventory in subzero conditions, cold storage warehouses require heated floors. Industrial strength refrigeration equipment can cause the intense cold to seep into the ground and cause an artificial permafrost. A warehouse building’s foundation can become warped when the frozen ground expands.

Specialized systems and equipment are required in cold storage warehouses to keep goods significantly colder than in a household freezer environment. This necessitates use of heavily insulated walls and roofs, tightly sealed doors fitted with high-speed motors which prevent cold air from escaping so that a very tight tolerance of the surrounding temperature is maintained, no matter the goods that are stored.

Capital Investors Hunger to Take a Bite out of Cold Storage Warehouse Industry

Cold storage warehouses are essential to ensuring food and pharmaceutical product safety and quality and the need has become acute. Gone are concerns that investing in cold storage warehouses is risky. Now funders consider this to be an investment in infrastructure.

Cap rates between ambient and cold storage warehouses and food distribution facilities have become notably compressed over the past 12-18 months partially because large institutional owners are eager to enter this space.

Because of the inherent complexity, the construction of cold storage warehouses typically requires more time for construction. Cold storage warehouse facilities require extensive refrigeration equipment, specialized building envelopes, including concrete slabs with under-floor insulation and heating. Building a cold storage warehouse can take four to five months longer than ambient warehouses and often costs roughly triple that of building an ambient warehouse.

Because building a cold storage warehouse can cost $150 per square foot, these facilities are very rarely built “on spec”, meaning without having a tenant or owner. This is now changing, however as developers are willing to bet on the strength of the market and continued high demand. Companies rarely find it feasible to convert existing warehouses. When storing inventory in subzero conditions, cold storage warehouses require heated floors. Industrial strength refrigeration equipment can cause the intense cold to seep into the ground and cause an artificial permafrost. A warehouse building’s foundation can become warped when the frozen ground expands.

Specialized systems and equipment are required in cold storage warehouses to keep goods significantly colder than in a household freezer environment. This necessitates use of heavily insulated walls and roofs, tightly sealed doors fitted with high-speed motors which prevent cold air from escaping so that a very tight tolerance of the surrounding temperature is maintained, no matter the goods that are stored.