Why Cold Storage Could Become Hot

percent so far this year. We know the real estate industry is grappling with people moving out of cities, working from home, increases in demand for distribution centers and more. There is a lot of churn. If you will so timely to have back with us. Scott crow He is managing director and chief investment Strategist at Center Square Investment Management.

It's a global investment manager focusing on actively managed real estate and infrastructure strategies and they manage, according to their website, roughly eleven bill lead in assets for institutional and private investors. And Scott joins us on the phone on this Tuesday, and I believe you're in Philadelphia, Is that right? I guess that's we're in base. Take Carol. Good to be with you again. Yeah, great to have you here. How

are you? I've think good. It's been a while. Lot's happened since we last spoke, and it's had had a lot of ramifications for real estate, because real estate that it's hard is you know where people meet, congregate and you know, how how are you? Things that have happened in the world, and a lot of that's changed, some of it, you know, temporary, some of it probably permanent. Well let's get into that, Scott, what do you think

is temporary? Like, let me throw something at you. Working from home temporary or it's going to be around forever or at least for a long time. Alright, both. Right, So here's the stat um prior to COVID, the average utilization of an office asset. There's four point six days out of five a week right now. Right now it can be down to like one one and a half. And where where does that end up sort of post COVID,

post vaccine um. It's probably somewhere in the middle three to I would say, three to four days a week. And the reason for that is that what COVID's forced us to do is pick up and utilize a lot of technologies that we've we've had in the past, but

haven't been forced to use and really explore. And it's also broken down some social norms as it relates to sort of zooming it in or calling it in um And so I think some of those habits are gonna stick because what we've learned is that we can be efficient working from home and there may be a different balance.

And so that doesn't mean office is you know, obsolete, but it does mean that it probably translates to a call at demn shock to office demand and that is going to have ramifications for office, particularly older stock, on a permanent basis. And I think what's more temporary is you know, the shutdown of major urban centers like you know, New York and San Francisco and other places. Because I say that because the big pain point there is a

a less the density of the office. It's a density of the transportation like m T A ridership is tracking about what it was a year ago, for instance, and that's the thing we've got to solve, and we'll probably solve it in the next bit of six and twelve months. Yeah, because I have to say. We just did the Blueberg New Economy Forum and one of the things we talked about,

one of the pillars is city isn't. Just had a whole day of conversations about that, and you know, one of the things that came up was that concept of fifteen minute cities where basically you're in a major urban area and you can get to everything you need in fifteen minutes. And you know, people people, and we've talked about demise of cities before. People love cities. I love a city. My daughter, who is a seventeen year old, loves the city and plans to go, you know, that's

where she wants to ultimately live. So I feel like that pushback against cities, um, you know, we've heard it before and it's not going to happen. But that doesn't mean the way we use our urban space doesn't change, right absolutely, And look, you know, the death of cities is being you know, talked about, as you said, for

a long time. Look think about it. You cities have gone through riots and plagues and wars and over the eons and they've always come back to you not only come back, but they've become more relatively important and what does that matter. Well, density is convenient, it's fine, it's exciting, but it's also efficient and productive. But you know, COVID is the enemy of density for now right, which is

why those cities have been hit so hard. But interestingly, if you look at the apartment space in Manhattan as a very good leading indicator, look rents it down on the year, Um, you know, uh, concessions of increased. But we've already seen about a thirty percent for the month of October at increase in applications for apartments in Manhattan.

And as you're alluding to before with your daughter, the people that are coming back the soonest are the young people, and they're they're taking a bite of the apple pun intended, and you know, nibbling back at New York because they would rather live there. There are more people that want to live in New York in their apartments. And as the prices of fallen, people are already starting to look through the winter and and least space. So what does it mean that for office space? So the do the

older buildings. We had a story about New York where they were thinking about summer office buildings in Midtown repurposing it into apartments essentially like what happened to that office

space cut. Well, one of the things that we've been avoiding at Center Square is older office stock because and it's generally true across most real estate types of to day, the way we we live, work, and play, the impact of technology, demographics, preferences means that the functionality of real estate, the way we use it and valued has really changed. And it's very hard for old stock to compete in

any sector, but particularly in office. And there's only so much you can do to an older office asset to bring it up to end it into a modern standard. And so you know, a lot of that if it could be converted to residential, would be fantastic. There's a huge delta in terms of dollar per square foot between the value of residential and office in the favor of residential. But that's going to take a lot of a lot of time, you know, with the planning departments and and

and getting the right entitlements. So we'll have to see I think it has to become probably empty for a while and a bit of an issue, and then you'll see planning laws change and it be able to be repurposed. I mean, similar argument you can make for the mall space.

Talk to us about cold storage because I think, you know, we are watching what's going on with the COVID nineteen vaccine and thinking about and we've done the stories about the logistics, the infrastructure, everything that's needed to make sure that that vaccine gets out to the people who need it around the globe. Well culture is a great example of I think things that I was just listening to us.

You're talking to Charlie talking about your time at ups and the way that we're all getting stuff at home. The fact that stocks are uh are up on the back of everyone buying new PCs and upgrading their hard workers.

They're working from home, and this is basically just highlighting the fact that these knee sectors like cold storage, industrial warehouse distribution, even things like data centers and cell towels, which are basically the physical infrastructure fueling all this ability to work from home is really where the actions at in the real estate market. And so we've been responding to that as our clients have looked to shift away from traditional asset classes like retail and office towards these

knee sectors, and one of them is cold storage. In fact, We just made at a hundred sixty million dollar investment in Lineage. It's the largest private operator of cold storage United States. And why do we do that? Well, there's there's It wasn't just vaccine related. The first reason is that as we become more affluent, we are ingesting more

fresh goods and less process dried and can goods. And yeah, so you know, whether it's at a restaurant or at home right reading, more fresh and a cold storage assets basically a huge fridge with a freezer at the back and a fridge at the front. And why that's become even more interesting now with COVID is how do we distribute hundreds of millions of vaccines to people around the United States? And the answer is probably going to be the same way we get our ice cream, which is

through those cold storage assets. So this is going to become a very important part of the logistics of curing COVID. What's the infrastructure when it comes to cold storage? Right now? How behind are we? Well we are, We're we're catching up. I mean, Lineage and others have been developing these assets now for you know, for decades. The big game has been changing how efficient we run these assets, and that's really come down to the use of technology and the

ability to run these assets very efficiently. But it has necessitated quietly in the background as we've been building out distribution centers and other other asset classes. You know this quiet niche sector of cold storage which you know literally thirty foot high. You know, refrigerators near infrastructure. If you're driving past New Jersey, it past the Newark Airport, um, and you're going north, you'll look on your right hand side and you'll see a couple of there for instance. Yeah,

it's pretty interesting. Um, And I do wonder about and I have to say, in addition to the vaccine, I find it fascinating what you're saying about that we're all eating more fresh stuff, right, and we also live in a world where seasonally, Remember we used to eat apples at a certain time of the year and peaches at a certain time of the year. But because of the global food market, stuff can move around and get to markets. But you need cold storage in order for it to work. Well,

yeah you do. And actually one of the interesting fun facts about COVID is that there's been a huge blood of French fries. Apparently we eat eat a lot more of those at restaurants that we do at home. So that's the French fried market is oversupplied in the cold storage world. Well, listen, French fries come with everything. And do you ever say would you like fries with that? No? Of course you say yes, it makes complete sense. So tell me about your investors at this point. Are they

willing to commit new money? Have they been willing to commit new money? Especially when I think about there's some real estate distressed assets out there, whether it's in the retail world. You know, what are the trends that you think are happening now that are here to stay and that you're seeing kind of investor move money kind of reflect that. Well, people are very cautious about buying into core real estate today because it's really reflecting a stale valuation.

So the first markets to reprice are going to be your liquid markets, your read markets, your traded debt markets, and the read markets pricing in about a ten percent decline in commercial real estate values, which is probably about right. It's very bifurcated though, between winners and losers. The sunbuilt apartment in in in the in the suburbs, in a place like Phoenix is worth more today than it was pre COVID. An industrial warehouse asset is worth more today

than it is pre COVID. And there's big question marks about parts of retail, particularly the more space. We've seen a number of players file for bank see there. Uh and you know other assets to like New York apartment so New York office um and and so I think people are very cautious about investing into the private space. But what they're doing is investing into those asset classes that have had some price discovery within real estate, which

is really reads and real estate debt. The question is what is value right, It's going to be very much a K shape recovery. UM, it's potentially not mean reverting for some areas. So you know, we continue to be very very cautious as a related to to mall's secondary shopping centers, UM, you know, older office stock. But you know what what where we have been uh, I guess looking for value is in the apartment space. We talked about major cities like San Frd and New York. Those

assets will come back. That is more of a temporary phenomena, but it's going to be very hard over the next five years to bet against the huge institutional wave of capital as going to be looking for these growth asset classes like life science, cold storage, industrial warehouse, data centers, and cell towers. And the problem the institutional real estate world has is that they own the best footprint of yesterday and maybe not the best footprint for the next

ten years. And we're responding to that by investing in these you know what, had been alternative asset classes. But frankly, what's more important to a company today? It's office building or data center? Yeah, exactly right. It tells something very clearly. Scott always learned something with you, so thank you so much, Scott Crow. Have a good holiday, a safe holiday, and hopefully we can talk with you uh in the new year as well. Scott Crow he's managing director, Chief Investment

Strategies at Center Square Investment Management. Joining us on the phone from Philadelphia.