Agricultural Finance Cold Storage Industry Outlook Executive Summary Market conditions in the cold storage sector remain healthy in 2017, with strong leasing activity and rising rents. However, the large supply of cold storage space constructed over the past decade is putting older facilities at risk of obsolescence. Recent improvements in automation and efficiency are widening the gap in operating performance between newer and older cold storage facilities. We expect global demand for frozen and perishable products to continue driving demand for cold storage, but net operating income growth for older facilities will likely be pressured in the near-term. Technology is driving higher efficiency and higher valuations in cold storage Over the past three decades, operators in the cold storage industry have embraced new technologies in order to reduce operating costs and increase efficiency. These technologies include cascade refrigeration systems, automated cranes, energy-efficient walls, and high-speed doors. Automated cranes in particular illustrate how technology has influenced the industry. Prior to the 1980s, tall cold storage facilities were impractical due to stacking and retrieval issues. However, beginning in the 1980s cold storage facilities began adopting automated cranes which allowed operators to stack goods at greater heights. 1 Automated cranes, which can operate in narrower aisles and safely reach taller shelves, can achieve
up to three times more efficient use of cold storage space than manual forklifts. The impact of automated cranes on the industry can be seen in Figure 1, which shows that the average building height of new cold storage facilities has increased dramatically over the past 3 decades. Figure 1 Average Ceiling Height (by decade of construction) Feet 40 35 30 25 20 15 10 5 0 38 32 25 21 22 22 23 17 18 18 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 Source MetLife, CoStar Automated warehouse technology has been adopted gradually since the 1980s, but efficiency gains associated with technological adoption are apparent in the prices newer cold storage facilities command when bought and sold. Figure 2 uses sales data from 2014 through 2017 to compare per square-foot prices of cold storage facilities constructed in the last 60 years. The discrepancy in sale prices for newer cold storage facilities is partially explained by higher construction costs. New technologies and taller ceilings increase construction costs by up to 50% compared to conventional facilities. 2 However, cold storage space built in the 2010s sold for 225% and 329% more per square foot than space built in the 2000s and 1990s, respectively. This clearly illustrates buyers place a premium on the efficiency of newer facilities. Figure 2 Sale Price per Sq Ft (by decade of construction) $250 $230 $200 $150 $100 $72 $88 $87 $102 $50 $70 $0 1960 1970 1980 1990 2000 2010 Source: MetLife, CoStar Cold storage supply has risen, but so has profitability The U.S. cold storage industry has increased capacity by 43% since 2000 due primarily to investment in larger facilities. Figure 3 on the following page shows a migration toward facilities with greater than 2.5 million cubic feet of space over the past 16 years. Despite the growth MetLife Cold Storage Industry Outlook 2
in capacity, cold storage operating profits measured as earnings before taxes divided by revenues have risen 83% in the last 5 years, due largely to increased consumer spending and international trade. 3 Low interest rates have offered an additional incentive to finance new construction and have encouraged REITs and other investors to increase their presence in the sector. A common cold storage investment strategy is the sale-leaseback agreement, which allows facility owner-operators to improve their cash position by first selling a facility and then immediately signing a long-term lease on the property. Sale leaseback arrangements allow operators to continue managing their facilities and give investors an opportunity to earn cash flow from rent payments. Figure 3 Number of Cold Storage Facilities in Operation (by storage volume in million cubic feet) 2000 2016 500 450 400 350 300 250 200 150 100 50 0 Source: USDA 0-0.5 0.5-1.0 1.0-2.5 2.5-5.0 5.0 and over Million Cubic Feet A supply overhang may pressure rents moving forward Despite an increase in profitability, growth in cold storage space has outpaced demand in 2017 and will likely weigh on rent growth in the near future. Figure 4 displays the current status of supply and demand conditions in the cold storage industry. As discussed above, rising demand between 2013 and 2016 motivated the sector to add capacity and as a result, new cold storage space deliveries are expected to exceed net absorption in 2017. This will result in rising vacancy rates for the first time since 2012, putting downward pressure on rent growth. Figure 4 Cold Storage Supply and Demand Net Absorption (left) Deliveries (left) Vacancy % (right) Sq ft (millions) 2.5 2.0 1.5 1.0 0.5 0.0-0.5-1.0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017F 10 9.5 9 8.5 8 7.5 7 % Source: MetLife, CoStar MetLife Cold Storage Industry Outlook 3
Embracing technology positions properties to weather period of excess supply Obsolescence is a significant concern for older cold storage facilities. Approximately 48% of all active cold storage facilities in the U.S. were built prior to the construction of the first fullyautomated cold storage warehouse in 1980. 4 Older buildings are often poorly insulated and struggle with higher energy consumption, reduced food shelf life, and lower quality service compared to newer facilities, which offer customers real-time inventory and product tracking, among other advantages. Unfortunately, higher operating costs make it difficult for operators of older facilities to decrease their rents when trying to attract new customers. Automated cold storage facilities can achieve the same storage volume as traditional facilities, but require 50-75% less labor and 60-80% less energy, all while operating on a footprint that is 40-50% smaller on average. 5 Despite near-term headwinds, long-term fundamentals are favorable for cold storage Long-term, we expect the cold storage industry will benefit from strong global and domestic growth in demand for products that require refrigerated services. As consumers demand increasing amounts of higher-quality, fresh goods, food retailers will continue to place an emphasis on higher efficiency cold storage warehouses. Location, efficiency, and the incorporation of other technologies will determine individual demand for cold storage facilities as the sector deals with excess supply in 2017. Endnotes 1 The Era of Automation. Global Cold Chain Alliance: Cold Facts. January 2010. 2 MetLife Investment Management, CoStar Group, www.costar.com. Data as of 9/1/2017. 3 The Risk Management Association: E-Statement Studies. www.rmahq.org/estatement-studies/ Data as of 9/1/2017. 4 MetLife Investment Management, CoStar Group, www.costar.com. Data as of 9/1/2017. 5 The Era of Automation. Global Cold Chain Alliance: Cold Facts. January 2010. Authors Eric Rama Head of Agricultural Research Blaine Nelson Associate Agricultural Research Ramsey Meigs Associate Agricultural Portfolio Unit MetLife Cold Storage Industry Outlook 4
About MetLife s Agricultural Finance Group MetLife s Agricultural Finance Group ranks among the most active private agricultural, agribusiness and timberland mortgage lenders in North America, with a total agricultural mortgage portfolio of $15 billion.* We specialize in providing fixed and variable rate mortgage financing for a full range of capital needs. Whether you re looking to re-amortize your term debt, expand your operation or refinance an existing mortgage, MetLife can tailor a loan to fit your needs. Our regional network keeps us close to our markets and better positioned to serve your immediate and long-term mortgage financing needs. For more information, please visit us at www.metlife.com/ag. *Includes MetLife general account assets as of 9/30/17. All information contained herein has been obtained by MetLife from sources believed by it to be reliable. The analysis, opinions, forecasts and predictions contained herein are believed by MetLife to be as accurate as the data and methodologies will permit. However, MetLife makes no representations or warranties, either expressed or implied, to any persons as to the completeness, accuracy and reliability of such information, forecast and/or predictions and expressly disclaims any liability with respect to any of the foregoing. MetLife One MetLife Way Whippany, New Jersey 07981 L1217500916[exp1218][All States] 2017 METLIFE, INC.