Unlocking the cold chain

The need to keep COVID-19 vaccine at -70⁰C has pushed the forgotten world of the cold stores onto front pages. But with demand for cold storage increasing, why is nobody building new cold stores? David Thame finds a market in the deep freeze.

David Thame | Jan 13, 2021

The Pfizer-BioNTech COVID-19 vaccine now being rolled out across the UK needs to be kept cold. Very cold. The complex molecules which make it effective are easily jolted into ineffectiveness and keeping them at -70⁰C minimises the potential risk that the compound will literally fall apart.

Suddenly, cold storage isn’t just about fish fingers and Lincolnshire harvests: It’s about life and death.

Yet the property industry is not keen on cold stores. Despite rising demand for online grocery, for pharmaceuticals and for Brexit stockpiling, the property business has yet to take much interest. Why? And will their mood warm up?

The “why” is relatively easy to answer: because it is very, very expensive. Building a cold store costs (conservatively) 50-70% more than a normal warehouse, perhaps considerably more even than that, yet the rents charged are by no means 50-70% higher. And this, remember, is upfront cost. It gives few developers an incentive to enter the market.

The biggest element of cost is creating a floor that can cope with cold temperatures.

Tim Crighton is logistics partner at Colliers International. He explains: “Proper cold stores, not just chilled, but properly frozen at -18-20⁰C or even -30⁰C, require different warehouse construction, and the biggest difference is the floor.”

 “A big block of cold air gradually freezes the subsoil below the warehouse’s concrete slab floor, which has the effect of expanding the soil which means the floor breaks up and cracks. To prevent this you need to heat the floor – which sounds odd in a chilled environment – but an electric mat or underfloor heating is expensive to install, if you do it from scratch, and takes 16-20 weeks if you install it in an already-built standard warehouse. And of course the extra layer of floor means you lose another 20 or 30 cm of space, which over the whole warehouse is a lot of volume lost.”

Then comes the second problem, which is that the cold store fit out is itself seriously expensive (several times more than the building). This is turn leads to the third problem which is that cold stores require generous electricity supplies which are sometimes simply unavailable, or extremely expensive for developers to make. A cold store requires roughly double the usual 700KVA to 1MVA power supply of a modern warehouse.

The final problems – four and five if you are keeping count – is that heavily automated cold stores are constructed so that the building hangs off the equipment, rather than the equipment sitting in a free-standing building (so it makes sense to think about equipment first, which is something developers do not naturally do); and that cold store are often located in areas that present real problems for developers. For instance, rural planning policy tends to frown on them.

One of the consequences of a market in which the building is often worth less than the kit that is put into it is that the normal leasehold property market begins to make no sense. Why should cold store operators take on the onerous responsibility of a long-lease, regular rental payments, rising rents and all the obligations of maintaining, insuring and stripping out the cold store plant when the lease ends? Why can’t they just make life simple for themselves and own the building outright? And the fact is that many (most) cold store operators do exactly that.

The result is that the leasehold property market upon which developers and investors depend is either microscopically small (in some popular locations), or simply non-existent (everywhere else).

This all adds up to a series of headaches the property industry prefers to ignore. At the same time, cold store operators are given a powerful incentive to construction and own freehold their own buildings.

And yet…. There are plenty of good reasons why the property industry might want to take more of an interest in cold store. The most obvious is that the UK’s stock of cold stores is fairly small, and most of what exists is old. The R22 refrigerant (chlorodifluoromethane) is no longer in use, another good reason to replace older cold stores. Many are now no longer viable.

“The property industry is also aware of growing demand for fresh food, particularly from online grocers, so demand for cold stores and the temperature-controlled supply chain is growing at a time when the supply is low. If developers were to develop speculatively, then I think there would be significant tenant interest. But I don’t think that is going to happen,” says Crighton.

Developers and their financial backers are struggling to work out ways to meet what they believe is growing demand without creating an enormous financial risk that could sink them. Private equity houses, many of them based in the United States, are looking keenly at the figures. Some action, perhaps on a Europe-wide scale, can be expected.

The first step in unfreezing the UK cold store market would be to make it look like most parts of the property industry, e.g. with landlords and tenants. Today ownership of cold stores is heavily fragmented – almost nobody owns more than a few, and there are hundreds of owners, most of them also occupiers. In some ways this resembles the hotel sector in the 1980s in the days before Travelodge and Premier Inn – and the analogy is a helpful one says Crighton.

By developing, owning and operating cold stores, investors think they could crack this frozen property problem.

“We’re already seeing some aggregation and consolidation of independent operators,  and I expect that to continue in the next 24 months,” says Crighton, pointing to June 2020s Dart Group sale of  Lincolnshire-based chilled and ambient food logistics operator Fowler Welch to Culina Group for £98m, the most prominent of a series of consolidations.

 “The upper tier of private equity is looking at this now, looking at how they can create an international cold store platform. We’ve also got developers like GLP, Goodman and Prologis who will want to capture a piece of that piece, maybe by getting into the multi-let cold storage business which is something we haven’t yet seen much of in the UK.”

But this is a long-shot. Maybe some new development will begin in the first half of 2021, but maybe not. Experts do not exude confidence.

The idea of multi-let cold stores, as hinted by Crighton, finds favour with some of those watching the market.

After all, there are standing examples. DP Word’s London Gateway initiated a 107,000 sq ft cold store as far back as 2018. CMA CGM’s facility opened in 2019 after they took a long-term lease on the build-to-suit development, which it will occupy through its international freight forwarding and logistics solutions subsidiary.

Alongside chilled and frozen chambers to handle a large variety of temperature-controlled products, and access to a wide range of added-value services, such as product quality control, packing, sorting, labelling, palletisation and bagging. It also offers customs clearance, shunting (transfer from the quay to the warehouse) and delivery transportation (last-mile delivery). Surely this is a model the private equity investors could follow?

Luke Tillison is partner at Kirkby Diamond in Milton Keynes, and a market observer close to the Golden Triangle’s relatively modest cold store market and the larger supply of cold stores around Birmingham. He agrees that shared multi-let spaces could be the answer.

“The cost of fitting out a cold store is so great you need to get economies of scale. So we’re not likely to see smaller 20,000 sq ft cold stores – the cost there would be double per sq ft of a larger facility. I think the minimum is 100-150,000 sq ft, of which perhaps half if proper cold store and the rest chilled or ambient,” Tillison says.

“No doubt cold storage is a growing market, but it is also specialist. That will always slow development. But so long as we have growing home grocery delivery, it could happen. We could see speculative development, but it will involve a leap of faith from investors because the costs are so heavy,” he says.

Kevin Mofid is head of industrial and logistics research for surveyors Savills and the author,  alongside the Cold Chain Federation, of a recent analysis of the sector. He, too, thinks there is scope for private equity to build on the existing signs of consolidation in the cold store sector

He suggests that whilst new ideas and new ways to operate cold stores are on the way, the sudden surge in cold-store related interest does not translate into immediate commercially-viable demand. But what will make a difference is changing environmental and sustainability targets which render many existing cold stores redundant, inefficient or very expensive to operate.

“Yes Brexit stockpiling, yes COVID vaccines, yes online grocery, all three are making headlines for cold stores, but the actual driver of change is energy consumption. Many existing cold stores are reaching the end of their lives, they don’t meet modern building regulations, nor are they efficient. So behind the headlines sits the real driver which is sustainability. Combined that with the headline issues and you have e a double whammy of demand,” says Mofid.

Does that mean 2021 will be the year of the cold store? That’s hard to say – but also not impossible. If private finance and commercial operating acumen can be combined with property know how, this is one market that could dramatically unfreeze.

The news that the UK has become the first country in the world to approve the Pfizer/BioNTech coronavirus vaccine marks the welcome start of the end of the pandemic.

But it also marks the beginning of a huge logistics challenge for the cold chain. According to Colliers International’s global supply chain specialist Chris Evans the super-cold vaccine is already causing disruption.

“We are seeing the impact of the vaccine roll out at international airports as they prepare to begin distributing the vaccine around the world at ultra-low temperatures, and airlines are adapting cargo strategies to accommodate the vaccine, as seen with Singapore Airlines which sacrificed standard cargoes in favour of the vaccines,” Evans says.

“There is also an increased amount of rapid testing kits being airfreighted from Korea to Europe by Korean Air. This activity is bumping Hyundai and Kia parts off the flights, all of this will have an impact further back in the supply chain. The result of this is much higher airfreight prices and reduced capacity once again because the bulk of airfreight normally moves as belly hold cargo in passenger planes.”