Jim White, a veteran Greenwich businessman, is developing a large cold storage facility in California's Salinas Valley. Image courtesy of Jim White
Industrial development shot to the top of favored real estate asset categories in 2020 as the COVID lockdown generated more demand for groceries delivered through e-commerce channels.
Then the niche category of cold storage facilities attracted more notice from investors and developers amid the need for large vaccine storage warehouses.
“It’s very attractive, but many of the facilities are 40 years old and they need to be upgraded,” said Jim White, a veteran businessman who is looking to the federal Opportunity Zone program to modernize a large facility in California’s Salinas Valley.
White, who owns a home in Greenwich along with a group of agricultural companies in the western U.S., is raising money from outside investors to upgrade the Growers Ice Co. property in Salinas. Originally developed in the 1930s, the plant was a pioneer in the use of cold storage to preserve fresh produce for national distribution, but it needs to be updated with modern utilities and processing equipment, White said. The multitenant facility includes 70 refrigerated loading bays and over 200,000 square feet of cold storage space, processing more than 30 million cartons of produce a year.
White, who estimates the expansion and modernization will cost $180 million, is planning reconstruction of the plant to boost its efficiency and performance, including increased use of robotics and construction of a solar cogeneration plant to reduce utility costs. For cooling technology, White said he’s assessing several options but leaning toward the vacuum tube method which extracts heat from freshly-picked produce to maximize freshness.
“The faster we get the heat out of it, the quality’s going to hold up [better] and the higher price you’re going to get on the commodities market,” he said.
White launched the PHT Opportunity Fund to tap into the tax benefits for investors in real estate projects located in economically disadvantaged communities such as Salinas, which has five census tracts designated as Opportunity Zones. Investors who sell assets and reinvest in Opportunity Funds can defer paying capital gains taxes through 2027.
Investors Get Comfortable with Spec Projects
The combination of increasing demand and the aging of many of the nation’s cold storage facilities has encouraged more speculative development in the past year, developers say, even though the construction costs are triple that of a regular warehouse.
“To do a spec project, you’re sticking your neck out to a point where in the past it has been uncomfortable for capital [investors]. But capital sees the demand and sees the need,” said Carmen Dodaro, a principal at FCL Builders, during a recent webinar sponsored by industrial brokerage Lee & Assoc.
According to JLL research, cold storage construction costs range from $250 to $350 per square foot. But the higher costs can translate into higher returns, as cold storage facilities can fetch up to twice the rents as dry warehouses, JLL said.
Retrofits of existing facilities are usually not practical because of their age and design, said Bryan Hedge, CEO of Complete Cold Logistics. “Most of the available inventory is ancient and it’s not suitable for us to put the money into rehabbing the building,” Hedge said.
Following the lead of e-commerce giant Amazon, packaged food companies are adopting the use of last-mile storage facilities closer to population centers to provide faster delivery, according to a research report by JLL. Third-party logistics companies are expanding their speculative development pipelines, replacing the old build-to-suit model, and the emergence of COVID-19 vaccines in late 2020 added another layer of demand, JLL reported.
Pending land-use approvals, White said the Salinas project could begin in 2022 with demolition of the original plant. Using the property as a demonstration project, he’s planning to launch a successor fund to look at additional cold storage modernization projects in areas such as California’s Imperial Valley and Yuma County in Arizona.
“For this one, I want investors to be able to see it, touch it and kick it,” he said. “We’re looking for other facilities to acquire and turn around in this particular asset class.”
