Chilling in Real Estate: The Billion-Dollar Bet on Cold Storage

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Episode Transcript:

In the realm of real estate investment, one company is placing a billion-dollar bet on an emerging sector – cold storage. Related, a well-known developer of office and apartment spaces, is venturing into the cold storage niche through its affiliate, RealCold.

With online grocery shopping on the rise, the demand for cold storage facilities has grown significantly. RealCold, a subsidiary of Related, is prepared to invest $1 billion in developing a network of distribution facilities tailored for this purpose. Each of the initial two facilities in Lockhart, Texas, and Lakeland, Florida, is set to receive $150 million in funding. Construction for these expansive 300,000 square-foot warehouses is expected to kick off by year-end.

RealCold's ambitious plan extends to establishing more than ten facilities across six different markets by the end of 2025. This venture is supported by Related, a major player in the real estate industry, managing assets valued at over $60 billion, as listed on their website.

Cold storage, a specialized segment within the commercial real estate sector, has garnered the attention of various investors. The capital required for cold storage projects is substantial, making it a relatively specialized area within the real estate landscape. Cold storage warehouses demand two to four times more investment per square foot than regular warehouses, according to The Wall Street Journal.

Bain Capital, in collaboration with Dallas-based developer Barber Partners, embarked on a joint venture last summer with plans to construct up to 15 cold storage warehouses, with a total valuation of $500 million.

In another instance, an institutional investor allocated $500 million to Envision in August, enabling the company to acquire and develop over $1.5 billion worth of cold storage assets.

The performance of the cold storage segment is closely tied to the surge in online shopping. E-commerce was projected to account for 21.5% of total U.S. grocery sales by 2025, a notable increase from the 13% recorded in 2021, as outlined in a mid-2022 report by CBRE. This anticipated growth was set to drive demand for cold storage, which, at the time of CBRE's report, had a development pipeline totaling 3.3 million square feet.

However, similar to the broader commercial real estate sector, challenges such as inflation, rising interest rates, labor issues, and economic uncertainties threatened to hinder the growth of the cold storage sector.

Nevertheless, the potential for substantial returns remains, particularly when considering the limited new construction relative to existing inventory in the cold storage niche, as concluded by a study from Bentall Green Oak.

This is Tyler Cauble, Signing off