Industrial on ice

How same-day delivery impacts warehouse demand

Two-day delivery. Next day delivery. Same day delivery. The new norm for shipping standards is only getting shorter. In fact, McKinsey reported that 20-25% of the consumer market will be handled by same-day delivery service by 2025.

As consumers move more and more of their purchasing online, the need for last-mile distribution and fulfillment centers only grows. Traditionally, distribution involves the storage and shipment of goods to stores in large batches. Fulfillment, on the other hand, is the shipment of products to consumers in smaller batches. Distribution centers can easily function in semi-rural locations where land is cheap and plentiful. Fulfillment centers, however, need to be a lot closer to the consumer’s shipping address.

And when it comes to shipping perishable goods, those fulfillment centers need to be more than just close, they need to be ice-cold.

Recent research has found that 32% of consumers have ordered their groceries online, rising to 48% among Amazon Prime members. Nearly half of shoppers living in an urban area have ordered groceries online, while a quarter of suburbanites and almost 20% of respondents living in rural regions have done so. According to FMI and Nielsen, annual online grocery spend is expected to hit $100 billion by 2022, an average of $850 per U.S. household. And a remarkable 70% of consumers may be routinely buying consumer packaged goods — including food, beverages, cosmetics, and cleaning products—online in just five to seven years, marking a total flip from the 67% that shop in brick-and-mortar stores today.

The growing adoption of meal kit delivery services like BlueApron and HelloFresh is also adding to the number of perishable goods now being shipped to consumers. The direct-to-door meal kit service market is forecasted to see a ten-fold increase in revenue since 2015, to around $10 billion by 2020.

As online grocery and meal kit delivery sales rise, so does the demand for cold-storage space. Even if perishable items can be delivered overnight, they need to be kept cold until the last possible moment. Investment in temperature-controlled warehousing climbed from $560 million in 2016 to $963 million in 2018. The industry’s current foothold is 214 million square feet, but according to a 2019 CBRE report the demand for cold-storage warehousing space could grow by 50% by 2024. Because of the highly specialized nature of a cold-storage fulfillment center design, the commercial real estate market demand for build-to-suit warehousing has also increased dramatically.

Commercial real estate, like residential real estate, is local. The cities most likely to see the majority of demand for cold-storage facilities will likely be port cities like Los Angeles and New York — hubs that handle fresh imports from around the country and internationally. But as the need for cold-storage grows, new fulfillment centers will likely develop around 18-hour markets with strong consumer demand for those delivery services.

Institutional-sized investors (e.g. banks, hedge funds, pensions, endowments, etc.) have historically had the access and propensity to scoop up industrial assets in the U.S. In fact, this is a big part of the reason that industrial-type offerings are few and far between on online commercial real estate investing platforms like the CrowdStreet Marketplace. But as National Real Estate Investor (NREI) reported earlier this year, “There now appears to be more room for a different class of buyers in the industrial sector — high-net-worth (HNW) investors. Why? Because industrial opportunities in secondary and tertiary markets — where there is likely to be less competition from institutional investors with big pockets — have grown more attractive.”

Industrial real estate is intended to provide users with a practical and efficient space that prioritizes function over form. And if consumers are demanding a new way to buy and get their perishable items, savvy warehouse developers are going to give retailers the space they need to make it happen. These cold-storage facilities in growing 18-hour markets might be the right move for individual investors looking for a new asset class to add their portfolio.

View the latest commercial real estate investment opportunities on the CrowdStreet Marketplace today.