Walk into any supermarket, and you’ll find countless products that require temperature control… Bunkers full of dairy products and sliced deli meats, coolers brimming with biscuits and orange juice, entire aisles of ice cream and frozen pizzas…

Of course, that inventory doesn’t magically appear on store shelves. It must arrive by truck or some other means of transportation. But let’s back up. Before making this journey, most of these perishables first spent some time in a refrigerated warehouse.

Cold storage isn’t exactly a new innovation. So what has changed? Well, like many industries, you can point to radical, technology-driven shifts in consumer behavior. Yes, I’m talking about online commerce. Shoppers have long grown accustomed to procuring just about everything from batteries to sporting goods over the web.

Should tonight’s lasagna dinner be any different?

You could do it the old way: drive across town, find a parking spot, toss ground beef, cheese, pasta, and marinara in the basket, and then wait in a checkout line. Or, you could let a private courier do all the work. They take the order via website or mobile app and relay it to a personal shopper, who then hand-picks the items on your list and drops them off at your front door.

The Online Grocery Revolution

Imagine an entire supermarket at your fingertips. Fresh produce. Apple Juice. Microwave popcorn. Anything. All just a few clicks away.

Perhaps the most popular of these grocery delivery services is Instacart, which works with 75,000 retail store partners in 5,500 cities across North America. The easy-to-use online ordering platform connects shoppers to the store of their choice, and Instacart makes millions of same-day deliveries (or curbside pickups) each year for a reasonable delivery fee starting at $3.99.

Needless to say, demand for this service spiked during the Covid lockdowns, with orders surging 330% in 2020. That type of growth was unsustainable. Still, many who took a test drive have stuck around, hooked by the convenience. And the platform continues to attract new users daily. This private business has recently been valued at $24 billion and is contemplating an IPO.

But Instacart is just one cog in the machine. Numerous rivals are nipping at its heels. And dozens of direct marketers like Blue Apron and HelloFresh have also cropped up, shipping out ready-made meal kits on a subscription basis.

Not surprisingly, the big-box retailers have rolled out their own e-grocery services, too. Following its purchase of Whole Foods, AmazonFresh now offers deliveries across 2,000 cities in as little as one hour. Wal-Mart+ members are entitled to a $0 fee on same-day grocery deliveries with no markups. Target drops off goods through Shipt, a digital delivery company it acquired in 2017.

Even DoorDash and Uber are getting in on the action.

This is not a passing fad. Approximately 80 million U.S. households utilize one or more of these online grocery services. That’s about two-thirds of the country. And the dollar figures are eye-popping. According to trackers such as Brick Meets Click, monthly e-grocery sales are routinely in the $8-$9 billion neighborhood, roughly four times pre-Covid levels.

_{Source: Brickmeetsclick.com}

One study predicts e-grocery could account for 20% of the total grocery market by 2026, double the 10% from last year.

We’re Going To Need A Lot More Cold Storage

Here’s the thing. Regardless of which grocer gains market share, regardless of which third-party fulfillment service emerges on top, regardless of whether shoppers choose delivery or curbside pickup, this powerful trend points in one direction: we need more cold storage space.

A massive build-out is underway as we speak. Whole Foods is constructing a 140,000-square-foot refrigerated warehouse outside Denver. Kroger has invested heavily in automated centers from Dallas to Cleveland that utilize specialized robots to retrieve items and computer algorithms to optimize delivery routes.

Some of the larger facilities can easily store more than 100,000 pallets. As you might expect, construction costs for refrigerated and frozen space tend to be high, up to $350 per square foot, compared to maybe $100 for regular dry warehouse space. So for years, this niche was relatively unattractive to developers and investors alike.

But that was a lifetime ago.

As e-grocery penetration rates climb, demand for cold storage space has suddenly hit an all-time peak. In turn, rental rates have shot up nearly 30%, and average national vacancy has slipped below 3.5%.

Those metrics should be music to the ear of any investor. But you won’t find insightful data about this overlooked market just anywhere. I’ve been scouring wonky trade journals such as FoodLogistics.com. According to them, demand for cold storage space is set to rise by 100 million square feet over the next five years. For perspective, there are only 214 million square feet currently in use (much of it inefficient and outdated). So that’s an increase of almost 50%.

At last check, there were 3.3 million square feet of speculative (no upfront tenant) cold storage under construction across more than a dozen projects. That’s an unmistakable vote of confidence. Prior to 2019, not a single refrigerated warehouse had ever been built on spec. And it’s not just developers that are bullish. Before Covid, a survey from CBRE (the world’s largest commercial real estate services firm) found that just 7% of deep-pocketed institutional investors were interested in the cold storage segment. That percentage has since shot up nearly six-fold to 40%.

My Plan To Profit

Real estate titan Sam Zell recently moved into this space with a noteworthy acquisition on the east coast. He noted that “we are in the midst of a long-term secular shift in the logistics networks across the U.S.” Others have followed his lead, plowing $2.5 billion into the sector last year.

That flow of investment capital is clearly evident in cap rates (net income yields expressed as a percentage of cost). New projects have compressed to around 7%, versus 8.5% a year ago. Once confined to a narrow group of potential buyers, this asset class is now attracting private equity, infrastructure funds, traditional REIT managers, and others.

I’ll be honest with you. There just aren’t many publicly-traded pure plays in this space. So I can’t offer you a list of several names like I normally would. But to make a serious splash in this booming field, a potential acquirer needs to look no further than my recent recommendation over at Takeover Trader.

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