Investors increasingly are warming up to the U.S. cold storage warehousing sector, pushing cap rates for class A facilities closer to those of traditional high-quality warehouses. Nevertheless, cold storage presents its own unique challenges, according to a new report from CBRE.

CBRE’s report, the third and final installment in its Food on Demand series about cold storage, outlines how trends such as the anticipated growth of online grocery sales have narrowed the gap in cap rates between cold storage warehouses and dry-storage facilities to 75 basis points (bps) from 200 bps in the past three years.

Cap rates, formally called capitalization rates, measure a property’s annual income as a percentage of its price. A lower cap rate indicates a higher price. CBRE forecasts that the cap-rate spread between U.S. cold storage real estate and dry storage could narrow further to 25 bps, on par with the spread in leading Asia Pacific markets, as cold-storage cap rates go lower.

“Cold storage facilities typically have accounted for a tiny fraction of overall transaction volume in U.S. Industrial & Logistics real estate, but we foresee investor activity accelerating amid heightened interest in this sector,” said Matthew Walaszek, CBRE Associate Director of Industrial & Logistics Research. “Investors see cold-storage warehouses as less risky than in the past, and they’re willing to accept less of a return premium, which is shown by the shrinking gap between cold storage and dry warehousing cap rates.”

Transaction volume for U.S. cold storage real estate has increased at an annual rate of 6.2 percent since 2014. A large share of transaction activity has focused on properties in major markets including Los Angeles, Chicago, Dallas-Fort Worth and South Florida. In addition, investment opportunities can be found in secondary markets such as St. Louis, Milwaukee, Tampa, Cleveland, Baltimore and Savannah.

However, challenges stemming from the specialized nature of the sector will continue to restrain additional growth in transaction volume. CBRE’s report points out that available properties are scarce, construction is expensive, and the design and operation of these facilities is complex. These challenges are likely to be addressed gradually by growth in the ranks of specialized developers and builders of cold storage as well as additional capital flowing into the industry.

“Historically, there have not been many institutional investors interested in the cold-storage sector, but given the tremendous growth expectations for online food purchases, the sector is experiencing increasing demand from both domestic and global investors,” said Jack Fraker, Vice Chairman and Managing Director of CBRE Industrial & Logistics Capital Markets.

About CBRE Group, Inc.

CBRE Group, Inc. (NYSE:CBRE), a Fortune 500 and S&P 500 company headquartered in Los Angeles, is the world’s largest commercial real estate services and investment firm (based on 2018 revenue). The company has more than 90,000 employees (excluding affiliates) and serves real estate investors and occupiers through more than 480 offices (excluding affiliates) worldwide. CBRE offers a broad range of integrated services, including facilities, transaction and project management; property management; investment management; appraisal and valuation; property leasing; strategic consulting; property sales; mortgage services and development services. Please visit our website at www.cbre.com