Article

Raw materials shortfall is squeezing the cold storage sector

Development of cold storage facilities is being hampered at a crucial time

December 08, 2021

Demand for refrigerated warehouses is soaring, but there’s an issue: it’s getting hard to build more of it.

Cold storage facilities are central to a number of booming sectors, from online grocery firms making speedy deliveries of milk and cheeses, to pharmaceutical companies requiring super-cold storage for COVID-19 vaccines. By 2027, cold storage construction is projected to reach US$18.6 billion in value - or an increase of 14 percent each year, according to Emergen Research.

But the effort to build new cold storage facilities is being held back by rising costs of raw materials, a lack of building supplies and the global steel shortage. Europe is forecast to run out of key building component magnesium this year. China, which produces 87 percent of the world’s magnesium, has slowed production due to rising energy costs.

“Alongside investor interest, speculative cold storage development has risen, but not enough to satisfy recent demand,” says Holger Klatt, EMEA Business Development Director for Logistics & Industrial at JLL. “Speed of project delivery has been undoubtedly been impacted.”

Under pressure

The pandemic’s impact on both the grocery supply chain and medicine storage cannot be understated.

“Recent supply chain unpredictability has put the focus firmly on space utilization and capacity,” says Klatt. “Across Europe, high capacity of current cold storage warehouses, as well as a limited pool of cold storage service providers, is a challenge, particularly in peak periods.”

In the U.S. alone, facilities are running at maximum capacity, according to JLL. In Asia Pacific, pressures vary depending on the maturity of respective markets.

The rising demand has piqued interest among investors, notably in China and in India, says Tom Woolhouse, Head of Logistics & Industrial for Asia Pacific at JLL.

“Both investors as well as operators are seeking scale,” he says. “And it’s those markets where there’s evidence of middle class income growth where there is most demand – and where development pressures will build up.”

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Adapting

Unlike other parts of the supply chain that are “dry” such as warehousing, cold storage development is a complex process requiring attention to fine details, from hygiene standards to waste management. Flooring and insulation alone differ greatly, with specific requirements for units storing fresh goods rather than, say, clothing or furniture.

Until now, new construction has typically been favored, with build-to-suit a common route given the cold storage sector’s increased use of robotics and automation, as well as evolving ways to both store and package goods.

But given the shortages, some groups are considering other options. In dense, urban locations, developers are looking at multi-storey re-developments and remodeling, which requires fewer raw materials than starting afresh and cuts project delivery time.

“There’s definitely scope for adding floors to existing facilities,” says Woolhouse. “Asset enhancement and expansion could prove wise, particularly while the short-term issue of raw material supplies remains.”

Building higher isn’t the only way. Retrofitting existing facilities is being explored as another option.

“Many existing cold storage sites are now in need of upgrading – and that should form the basis of the sector’s growth,” Klatt says. “With all parts of the supply chain looking to improve their sustainability credentials, retrofitting is also a wise route for investors and developers who seek to deliver facilities with sustainability in mind.”

With strategic partnerships and joint ventures, such as that launched last year by Cerberus Capital Management and California-based investor Provender Partners, continuing to seek out opportunities, capital is not an issue.

“The next few months will determine to what level developers can offer quick and efficient solutions,” says Klatt. “The raw materials bottleneck has in no way deterred investors. If anything, it has merely added to the pipeline pressure.”