News that a Covid-19 vaccine developed by Pfizer and BioNTech is more than 90 per cent effective is terrific news for humanity. But the logistical challenges surrounding how this vaccine will be distributed – it needs to be stored at scale at -70Celsius – has highlighted another real estate trend that the pandemic is exacerbating: the growth in demand for multi-temperature cold storage facilities.

Cold storage – which ranges from ambient, to chiller, to freezer temperature-controlled areas, often within the same facility – is an extremely capital intensive and technologically complex area of logistics. Most cold storage facilities are unique and the design of each individually tailored to its specific intended use, meaning speculative developments are rare, though some buildings can be retrofitted.

Industrial and logistics developers have, in the past, tended to shy away from this part of the business because it involves astronomical capex sums that need to be paid off over a long period of 15 to 20 years. Then, once that lease expires, the developer is left with an aging, obsolete and highly specific building that is often hard to rent out. Thus, developers and the mainstream investment market have mostly left this part of the industrial logistics segment to end-users like food producers and supermarket chains who would typically develop and occupy their own real estate.

However, changes in consumer habits and the rise of e-commerce are combining to change that situation, with the pandemic and its effect up and down the supply chain accelerating the trend.

Coldplay for investors 

There is evidence that the pandemic is prompting the reshoring of essential sectors like food production and pharmaceutical manufacturing, with research from Savills showing the Czech Republic is well placed to benefit from the emerging trend to bring supply chains and manufacturing closer to final destination markets in Europe.

The lockdown measures and other restrictions introduced this year are causing a huge spike in e-commerce. Tomas Braverman, head of e-commerce at Heureka Group, estimates that during the first wave e-commerce in the Czech Republic was up 39% year-on-year, while in October during the second wave it was up 31% year-on-year.

This is especially true in the grocery segment, which is benefitting from widespread “stay-at-home” online ordering of fresh food and, increasingly, ready meals. In the Czech Republic, this is transforming the businesses of companies like online supermarkets Rohlik.cz and Kosik.cz.

The issue of automation in cold-storage warehousing is also moving in a more positive direction. Automation in cold-storage warehousing has tended to lag behind technology advances taking place in dry distribution, but we are beginning to see automated storage and retrieval systems (AS/RS) being adapted for such facilities.

The question for investors is whether we are seeing a new asset class forming that is distinct from its “parent” industrial and logistics category.

Certainly, under the present circumstances, investors are looking for stable, essential assets that have the potential to turn into viable mid- to long-term portfolio investment strategies and cold storage assets could be a bright spot for investors amid this uncertainty.

The problem is product. Even before the pandemic swept through Europe in March, a broad selection of industries was experiencing a shortage of multi-temperature cold storage facilities when and, crucially, where they need them. Now the cost, complexity and lack of available land for constructing such temperature-controlled storage facilities has caused the inventory pipeline to lag further.

Savills has identified a further problem, as questions start to be asked about the suitability of older facilities for the future. As Kevin Mofid, Director, Commercial Research of Savills UK notes: “Whilst there are clear structural drivers contributing to increased demand for cold storage facilities, there are also big questions starting to be asked about the suitability of older facilities for the future. Ratcheting regulations on the use of HFC refrigerant gases, increasing energy costs and the threat of carbon taxes on emissions are all factors that suggest older facilities may no longer be fit for purpose. In essence, we are seeing a double whammy of demand that should combine to mean the cold storage sector becomes a mainstream institutional asset class.”

HOPI Czech Republic with four distribution centres is a third-party logistics provider looking to meet this increased demand. Backed by rising institutional investment, more 3PLs will surely follow.