Temperature-Controlled Warehouses: It's Hot to Be Cold

DBRS Morningstar believes temperature-controlled warehouse (TCW) REITs will continue to benefit from favorable demand fundamentals, supply constraints, reinforced by barriers to entry, and globalization. Increasing demand for fresh foods, coupled with the growth proliferation in e-commerce transactions, is anticipated to further improve both occupancy and revenue, thereby maintaining or potentially expanding healthy net operating income margin in the future. Moreover, with monetary tightening over the last year and a half leading to a significant slowdown in organic growth, limited new supply is expected in the near to medium term. On a global basis, we anticipate competition to remain dominated by a few entities given existing barriers to entry and further globalization of food distribution. Prominent TCW REITs are likely to further expand into global markets, resulting in increasing diversity and cash flow stability. DBRS Morningstar believes all of the aforementioned will lead to ongoing industry growth led by the largest TCWs.

Key Highlights:

-- With the demand for both organic fresh foods and grocery related e-commerce growing at accelerating rates, the need for TCW space will continue to grow.
-- Monetary tightening has reinforced the barriers to entry by decreasing the number of developments and acquisitions, furthering industry consolidation.
-- Despite high costs and cash flow volatility within the asset class, continuous innovation can lead to further industry growth.

“We have seen for years the improvement of temperature-controlled warehouse fundamentals primarily driven by strong end-consumer demand for fresh food products. DBRS Morningstar expects these trends to continue in the near and medium term supported by high barriers to entry, including high development costs, specialized operational knowledge, and significant capital expenditures,” says DBRS Morningstar, Global Corporate Real Estate.