Introduction

With the rapid growth of e-commerce and the pharmaceutical industry, a new investment opportunity has emerged for savvy commercial property owners: converting traditional warehouses into cold storage facilities. As an investment that commands higher lease rates and offers a payback period often within five years, it’s an avenue worth serious consideration.

Key Reasons to Consider Upgrading

Choosing to convert a traditional warehouse into a cold storage facility offers a range of benefits, primarily stemming from the changing demands of modern industries:

  • Increasing Market Demand: With the surge in online grocery shopping and pharmaceutical storage needs, cold storage facilities are in high demand. As more consumers embrace online shopping, the need for temperature-controlled storage and distribution facilities grows. Property owners can tap into this high-demand market by converting a traditional warehouse into a cold storage facility.
  • Higher Lease Rates: Due to their specialized functionality, cold storage facilities can command much higher lease rates than standard warehouses. These higher lease rates mean the potential for increased revenue, making the conversion an attractive investment.
  • Potential for Profit: The conversion cost typically falls between $150 and $250 per square foot. When balanced against the potential for higher lease rates and a robust demand, property owners may find a significant net profit potential, often realizing their return on investment within five years.

Examples

  • Dole Food Company, Fresno – In 2019, Dole Food Company converted a 1.2 million square foot warehouse in Fresno, California, into a cold storage facility. The conversion cost an estimated $200 million and created over 1,000 new jobs. This facility has a 1.2 million square foot capacity and can store up to 100,000 produce pallets. 
  • Amazon, Tracy – In 2020, Amazon converted a one-million-square-foot warehouse in Tracy, California, into a cold storage facility. The conversion cost an estimated $150 million and created 500 jobs. This cold storage facility is one of the largest in the United States.

These are just a couple of examples of how warehouses in California are being converted to cold storage facilities to meet the growing demand for temperature-controlled storage. As the e-commerce and pharmaceutical industries expand, the need for cold storage facilities will remain strong.

Incentives

For commercial property owners in California, several incentives can help offset the cost of upgrades to a cold storage facility:

  1. Energy Efficiency Incentives: When you incorporate energy-saving technologies in the conversion process, you may be eligible for Energy Efficiency Incentives offered by various California agencies, reducing the project’s overall cost.
  2. Job Credits: By creating new jobs as part of the conversion project, property owners may qualify for job credits. For example, the California Competes Tax Credit is an income tax credit available to businesses that want to locate in California or stay and grow in the state.
  3. Real Estate Tax Abatements: Upgrading a warehouse in certain areas may qualify you for real estate tax abatements. Specific regions of California, designated as Enterprise Zones, offer these discounts to stimulate investment and job creation.

How to Get Started

To start the conversion process, evaluate the suitability of your warehouse for a cold storage upgrade. Consider engaging a professional firm specializing in this type of conversion to handle your project. Ask pointed questions about the total cost, timeframe for the conversion, and potential return on investment.

Payback Period

The payback period is a crucial factor to consider. It refers to the time it takes to recoup the invested capital from the annual cash flow, calculated as Investment Payback Period = (Initial Invested Capital / Annual Cash Flow). Due to the higher lease rates commanded by cold storage facilities, your payback period could be shorter, often within five years.

Conclusion

Given the current market conditions, converting a traditional warehouse into a cold storage facility is an appealing venture. By making smart investments and leveraging available incentives, you could achieve significant returns on your investment. Evoque Lending is ready to guide you through the loan process for these improvements, assisting you every step of the way. Contact us today!