Commercial cold storage outlook: Demand hard to predict amid COVID volatility
The pre-COVID Canadian cold storage landscape was growing, with trends in domestic and global food markets driving much of that demand. Since 2019, quick growth of the pharmaceutical industry and enhanced food safety standards have led to roughly 8% growth in capacity. Some analysts expect the North American cold storage market size to reach US$86.5 billion by 2028. That would be expanding at a 10.7% compound annual growth rate. As we approach our third pandemic year, the question is how COVID’s upheaval has impacted the market for cold storage. While rising Canadian food trade (e.g., meat and vegetables) may also influence the demand for cold storage, we know that COVID-19 has shifted domestic and global food consumption trends. In Canada as elsewhere, the pandemic has amplified consumer preferences for fresh and locally produced food, and it has furthered growth of online shopping models.
Pre-COVID demand for cold storage on the rise
The cold storage market has experienced significant growth over the past three or four years, thanks to population growth and consumer preferences for more fresh, perishable food that’s temperature sensitive. Demand was evident in rental lease rates for facilities that were trending higher. Because refrigerated warehouse buildings are usually built for a specific tenant, lease terms tend to be lengthy. Lessees can sublet space to other businesses, but those industry characteristics limit availability for new or expanding businesses. That’s worsened by high start-up costs, including construction for a new refrigerated warehouse ranging between $325 to $450+ per square foot. Along with hefty service fees for facilities, these features may deter smaller companies from entering the cold storage space.
Growth in cold-storage food trade cools recently
Canada’s agri-food sectors have set ambitious goals for exports by 2025. Thanks to strong global demand and higher prices, Canadian agri-food export values grew to $81.2 billion in 2021. Canada’s overall food export volumes also trended upward between 2015 and 2020, with fats and oils (HS15) growing at a 5.6% average annual rate and meat (HS02) with 4.9% average annual growth. While higher export targets have increased production capacity and need for larger cold storage space, a volatile pace of both imports and exports could create periods of under- and over-capacity storage utilization. However, it appears that the pandemic has generally upended 5-year (2015-2019) cold-storage food export growth trends (Figure 1). The first year of COVID differed significantly from the previous five years. And the second year differed significantly from the first for Canada’s largest cold-storage food export categories. The disruptions created by COVID to domestic and global food consumption trends have hit cold storage food export categories more than exports of fats and oils (HS15), Canada’s largest dry food export category (and third-largest food export category overall). HS15 exports in 2020 were in line with the previous five-year average. Although 2021 exports fell, the reversed trend was due solely to a decline in canola oil exports precipitated by the drought that decimated the 2021 canola crop. Stronger export demand boosted meat shipments by 13% YoY in 2020, which was reversed in 2021. At the same time, export demand for nonaquatic meat products (e.g., sausages and prepared meats) only peaked in Year 2 of the pandemic. As one of the world’s largest frozen fruit exporters by volume, Canada had an annual average growth of 10.8% between 2016 and 2020. But in 2021, frozen fruit exports dropped 19.2%. Domestic purchases of cold storage food (by volume) showed similar patterns of upheaval, growing 7.1% in 2020 YoY, which reversed with a YoY 2.1% loss in 2021, according to Nielsen. Canada’s frozen meat stocks were 4.7% higher YoY in Q1 2020 and 9.9% higher quarter-over-quarter, largely driven by COVID’s disruption of food services. The last two years have also changed cold-storage food import trends (Figure 2). Meat imports rose in 2020, which may have contributed to cold storage demand. However, since then, meat imports by volume have fallen not only year-over-year but also at a stronger pace than the 2015-19 average. Across the board, imports of cold storage foods except for fresh and frozen fruits have fluctuated significantly since the pandemic began. It’s not clear how long the pandemic will disrupt supply chains and trade, but the longer-term outlook for global food demand and trade is positive, and it will drive storage needs.
The pandemic creates more demand
While trends in food consumption have driven much of the need for cold storage, a simultaneous need for cold storage has come from expanded storage requirements for vaccines and other medical products. Nonetheless, cold storage remains a small share of the industrial warehouse space. There’s currently more expansion of facilities primarily close to transportation hubs and food processing. That includes refitting and adding onto existing facilities and new construction. But the impact of COVID lingers in the uncertainty surrounding the sector’s future. The most recent available statistics (November 2021) showed food service sales had rebounded to 1% above their value pre-COVID (February 2020). But that was before the omicron wave. The latest Open Table dinner table reservations data show a decline of 30% from February 2020, suggesting the foodservice industry hasn’t yet found their ‘new normal”. No one knows how long it will take the industry to see informative data about the future food business environment. In the meantime, adjusting to an uncertain future is a critical success factor.
Bottom line
The national cold storage sector outlook is positive in the short term, thanks to the evolution of food retailing. Consumer preferences for freshness, health and convenience, undergoing fundamental shifts before COVID have continued to develop. The pandemic has accelerated those trends, adding emphasis on online shopping and supporting local, and at least at the pandemic’s outset, hoarding. However, the outlook isn’t without headwinds. The current clouds around future cold storage space projections will only be lifted once we know how consumer trends will go. That won’t happen until the pandemic’s waves have weakened their hold on social and economic activity. Food consumption patterns aren’t likely to return to equilibrium right away.