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For The First Time, Speculative Cold Storage Is Underway In Houston

The U.S. cold storage sector was already on the rise in the lead-up to the coronavirus pandemic. The U.S. had about 214M SF of industrial cold storage space in 2019, and the market was expected to grow in value by 4% annually between 2018 and 2022, a 2019 CBRE report found.

The pandemic intensified interest in the sector. A sharp pivot to online shopping by consumers has translated into a wave of end user and third-party logistics firms seeking to build more cold storage — and subsequently, more developers looking to build speculative projects to meet skyrocketing demand.

Houston is already beginning to reap the benefits. For the first time, multiple speculative cold storage facilities are either being built or planned across the city.

Market watchers expect to see more refurbishments of older, outdated cold storage facilities in the coming year.

Speculative cold storage development in Houston is a major departure from the traditional build-to-suit facilities that have sparsely been built in the past, according to CBRE Senior Vice President Bill Rudolf.

“We have — I wouldn't call it a nonexistent cold storage market at this point, [but] it's close to nonexistent,” Rudolf said. “Until really this last 12 months, we've had no reason to track freezer/cooler facilities because they've been so rare.”

The city only has 6.9M SF of cold storage, with 4.1M SF of freezer/cooler space and 2.8M SF of food processing space, according to a JLL analysis. JLL Managing Director and Industrial Group Leader Trent Agnew told Bisnow there have only been nine new cold storage developments in Houston since 2000, mostly freezer space, and 98.4% of the overall market is leased.

“With Houston soon to become the third-largest MSA, there is a big need for additional space,” Agnew said.

The growth of speculative cold storage projects is a sign that developers see major growth potential in the Houston market. Rudolf has been working on one of the speculative projects underway, a 304K SF cold storage facility in North Houston being developed by Tippmann Innovation.

Another speculative product to recently enter the market is Scout Capital Partners’ 248.2K SF facility near La Porte, which involved converting an existing distribution building into cold storage. Boomerang Interests is also building a ground-up, 286K SF cold storage facility in northeast Houston. 

Some developers, like Greenville, South Carolina-based RealtyLink, see big opportunities for spec cold storage facilities around Port Houston. The developer announced plans last week to build a 272K SF cold storage facility within the TGS Cedar Port Industrial Park in Baytown.

RealtyLink principal Thomas Eldridge is leading the project, and he told Bisnow the facility will be the firm’s first project in the Houston market. From his perspective, the port offers huge opportunities to cater to growing demand for food-related imports and exports.

“The port is the main driver in Houston. It's such a gargantuan beast. And so, a lot of materials are flowing out of there. Not as much cold storage product, but it has the capacity to support it. And if we get the facilities built, then the product will come, for sure,” Eldridge said.

A rendering of RealtyLink's 272K SF speculative cold storage facility in Baytown.

Building cold storage facilities is expensive. The construction costs of a new cold storage freezer/cooler facility can cost between $130 and $180 per square foot, compared with a conventional dry warehouse, which ranges from $70 to $90 per square foot, according to JLL.

With that expense, building a speculative project without a secured tenant ahead of time has traditionally been considered too risky for most investors and developers.

“Without the tenant in place, and without an agreement with a third-party logistics operator, it's just very difficult to get the financing, get the equity needed to put these deals together. I mean, they're $30M, $40M deals,” Eldridge said.

However, the pandemic gave online shopping a massive boost, leaving grocery chains and specialty food providers scrambling to keep up with e-commerce juggernauts like Amazon. Now fast delivery is a priority, and attitudes around building cold storage speculative projects are beginning to change, according to Powers Brown Architecture principal Nazir Khalfe.

“With the current climate and population growth, it’s definitely a hot topic that’s being explored,” Khalfe said.

The biggest challenge in building speculative cold storage is making it flexible enough to cater to different tenants in the future. It’s even more difficult if a developer is trying to build a speculative project that can host multiple tenants, as the building needs to be able to meet variable temperature requirements.

To get around the flexibility problem, Eldridge said RealtyLink’s spec project in Houston will be using a Freon gas cooling system within its three-chamber facility. That will allow the building to achieve temperatures anywhere between -10 and 40 degrees Fahrenheit.

“If you can adapt the temperatures of your rooms, you can service the needs of a broader spectrum,” Eldridge said.

In comparison, once an ammonia-based facility is designed and built for a specific customer set or profile, it remains fixed. The existing cold storage facilities in Houston all use ammonia-based refrigeration, according to Eldridge.

RealtyLink’s Houston project is one of four speculative cold storage projects the developer is pursuing in port cities around the U.S. The others are in Charleston, South Carolina; Wilmington, North Carolina; and Mobile, Alabama.

“There's just no ports that have excessive cold storage capacity. So someone's going to get kicked out, or something's got to be created to bring the product in,” Eldridge said. “It's a kind of a no-brainer.”

Refurbishing older, outdated cold storage facilities is something that some market watchers expect to see more of in the coming year.

Agnew said there is a significant amount of end user demand circling the Houston market right now, and much of it will take shape over the next six months. JLL is expecting somewhere between 1M and 2M SF of new construction over the next one to two years.

“With online grocery demand growing at a rapid pace during the pandemic, there is more pressure to add inventory to help alleviate some of the supply chain pressures,” Agnew said.

Rudolf noted that because spec development in cold storage is very unusual for Houston, the trajectory of future product will likely be determined by how successful the current projects are.

“I think it probably depends on, to a large extent, these first three projects,” Rudolf said.

For Eldridge, there’s no question that Houston’s location, anticipated population growth, lack of flexible existing product and the presence of the port make the city a good investment. In the long-term, he said that it’s likely the firm will continue to build more speculative projects in Houston.

“Once we get the first one done, we'll do a second, and then a third, and then a fourth,” Eldridge said.