Lineage Logistics: What Does the Biggest IPO of the Year Mean for the Cold Storage Industry?

A Deep Dive into the Cold Storage Sector

Introduction

Lineage Logistics (a PE-backed REIT), a global logistics company specializing in cold storage and supply chain solutions, recently had (a PE-backed REIT) 4.4 billion dollar IPO in July. It is expected to be the biggest IPO this year, a title usually held by technology companies since 2019. It’s also the largest REIT IPO in history. The recent quietness in the IPO markets makes this an even more significant feat and directs people’s attention to a niche market.

Increasing Demand:

The Cold Storage market grew as the demand for same-day delivery increased, driven by the rapid expansion of e-commerce and changing consumer preferences. According to a report by McKinsey, as of 2021, online’s share of the grocery market stood at 8-12 percent in countries with advanced online markets, and that figure is projected to grow to 18-30% by 2030. Due to increasing demand, efficient cold storage solutions became paramount to meet consumer expectations for freshness and quick access to perishable goods. This surge in demand has led to significant investments in cold storage facilities, with the U.S. cold storage market projected to grow from $43.2 billion in 2023 to $118.8 billion by 2031, reflecting a compound annual growth rate (CAGR) of 13.5% according to research by skyquest. The leasing activity also rose by an average of 43% from 2017 to 2021, according to CBRE.

Supply

Developers have historically been hesitant to enter cold storage construction given its specialized nature. The high cost makes construction a risky business. However, in recent years, more cold storage facilities have been developed, especially in Nashville and Chicago.

However, demand still outpaced supply, as suggested by the vacancy rate for cold storage as of 2024. According to CoStar data, it stood at 3.4%, 2% lower than the industry average. Rent growth has also outpaced the industrial sector, standing at 13.5% as opposed to the 10.3% industry average (CoStar data). This suggests that constrained supply, combined with robust demand driven by e-commerce and the need for temperature-controlled logistics, has created a lucrative environment for investors. As existing facilities operate near full capacity, the scarcity of available space allows landlords to command higher rents, further enhancing returns. Additionally, the rapid technological advancements in automation and energy efficiency are making new developments more attractive, despite the initial high costs. These innovations reduce operational expenses and increase the appeal of cold storage facilities to tenants seeking reliable and sustainable solutions. Moreover, the aging nature of existing facilities (average age of 31 years in top markets) suggests a need for modernization and replacement. For example, in Chicago, the average year of cold storage facility stands around 43 years, according to Grand View Research. 

In addition to the broader market tailwind, Lineage Logistics's successful aggressive add-on acquisition strategy, which allowed for its exponential growth, is driving the market to become ever more concentrated. Big players like Americold and Lineage Logistics account for 70% of cold storage facilities in the US. To remain competitive, other companies will scramble for remaining cold storage facilities, which will drive their valuations even further and allow for better returns on investment. 

Furthermore, the cold storage real estate market demonstrates resilience to economic downturns, as the demand for groceries remains inelastic. This characteristic enhances the attractiveness of risk-adjusted returns in the cold storage sector.

Consequently, the cold storage market presents a compelling investment opportunity. The industry has the potential for continued growth and profitability as it evolves to meet customers' demands.

Summary

Given the brighter macroeconomic outlook, as well as the positive supply and demand dynamic, the Industrial real estate sector, especially cold storage, is worthwhile to look into if you are looking to invest in real estate.