Rent more than doubles from ambient to frozen. Cost more than doubles too, and the yield rises, so the premium has to clear both.
Total development cost times the yield a buyer will apply to it, divided by the floor area. On an illustrative 20,000 m² plot, a frozen warehouse costs 53.00 million against 23.00 million for an ambient one, and at a 7.00 per cent yield it needs 185.50 per m² just to be worth its cost, 27.9 per cent above an assumed 145.00. To match the ambient scheme's 12.6 per cent margin it needs 208.93. Then price the day the occupier leaves: converted back to ambient, the building is worth 18.22 million, 34.4 per cent of what it cost.
Worked in full in Logistics and Industrial Real Estate by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Cold storage is quoted as a premium product: rents more than double ambient, long leases, sticky occupiers. All true, and none of it settles whether the building is a good investment. The insulated envelope, the refrigeration plant, the heated floor slab and the extra power push construction cost up by more than the rent, and the market prices the specialised income at a higher yield because there are fewer buyers and fewer occupiers for it. The rent has to clear both hurdles at once.
| Input | Ambient | Frozen |
|---|---|---|
| Floor area, m² | 20,000 | 20,000 |
| Land | 6,000,000 | 6,000,000 |
| Construction per m² | 750 | 2,100 |
| Fees, finance, contingency | 2,000,000 | 5,000,000 |
| Rent per m² a year | 68 | 145 |
| Investment yield | 5.25% | 7.00% |
Total cost = land + construction per m² × area + fees, finance and contingency
Value = rent ÷ yield; margin on cost = value ÷ cost − 1
Break-even rent per m² = total cost × yield ÷ area
Excel: =(Land+BuildRate*Area+Soft)*Yield/Area
Step 1, the ambient benchmark. Construction is 750 × 20,000 = 15.0 million; with land and soft costs, 23.00 million, or 1,150 per m². Rent of 68 gives 1,360,000 a year, worth 25.90 million at 5.25 per cent. Profit 2.90 million, a 12.6 per cent margin and a 5.91 per cent yield on cost.
Step 2, the frozen scheme as quoted. Construction is 42.0 million; total cost 53.00 million, 2,650 per m². Rent of 145 gives 2,900,000, worth 41.43 million at 7.00 per cent. The scheme loses 11.57 million, 21.8 per cent of its cost. Cost has risen 2.30 times; rent only 2.13 times, and it is capitalised at a higher yield.
Step 3, the rent to break even. 53.00 million × 7.00 per cent = 3.71 million a year, or 185.50 per m². That is 27.9 per cent above the 145 assumed.
Step 4, the rent for a developer's margin. To earn the same 12.6 per cent as the ambient scheme, value must be 1.126 times the 53.00 million cost, so at 7.00 per cent the rent is 4.18 million, or 208.93 per m²: 44.1 per cent above 145, and 3.07 times the ambient rent.
A faster way to see it: the frozen scheme spends 30.00 million more than the ambient one to earn 1.54 million more rent, a 5.13 per cent return on the extra money. Priced at 7.00 per cent, extra capital earning 5.13 per cent destroys value however good the tenant is.
| Investment yield | To break even | For a 12.6% margin |
|---|---|---|
| 6.0% | 159.00 | 179.08 |
| 6.5% | 172.25 | 194.00 |
| 7.0% | 185.50 | 208.93 |
| 7.5% | 198.75 | 223.85 |
| 8.0% | 212.00 | 238.77 |
| Construction per m² | Total cost | Break-even rent per m² |
|---|---|---|
| 1,800 | 47,000,000 | 164.50 |
| 2,100 | 53,000,000 | 185.50 |
| 2,400 | 59,000,000 | 206.50 |
Each 0.5 point on the yield moves the break-even rent by 13.25 per m², and each 300 per m² of build cost by 21.00. Even at a 6.0 per cent yield, closer to ambient pricing, the quoted 145 falls short of break-even.
The reason buyers demand a higher yield is the empty frozen building. Suppose it has to be re-let to an ambient occupier: stripping the plant and making good costs an illustrative 180 per m², 3.60 million, and the building then lets at 60 per m², a little below new ambient space, at a 5.5 per cent yield.
| Step | Amount |
|---|---|
| Rent as ambient, 60 × 20,000 | 1,200,000 |
| Capitalised at 5.5% | 21,818,182 |
| Less conversion, 180 × 20,000 | 3,600,000 |
| Value without the occupier | 18,218,182 |
18.22 million is 29.7 per cent less than a plain ambient building on the same plot, 56.0 per cent below the frozen building let, and 34.4 per cent of the 53.00 million it cost. The 34.78 million gap is what the occupier's covenant and lease length are really underwriting.
Judging the scheme on rent per m² against ambient. 145 is 2.13 times 68, which sounds like a premium product. The test is yield on cost against the exit yield: 5.47 per cent on 53.00 million, sold at 7.00. A cold store works when the occupier pays a rent that reflects the building's cost, typically on a long lease that amortises the plant, or funds the specialist fit-out itself so that the landlord's shell stays close to ambient. A landlord that builds speculatively to frozen specification and charges a market rent is lending the occupier its refrigeration at below its own cost of capital.
Every line of this comparison, with the land residual and the yield sheets beside it, is in the free workbooks for this case. For the construction cost of the ambient benchmark see what a warehouse costs to build per m².
Usually more than twice as much per square metre, because of the insulated envelope, the refrigeration plant, the heated slab and the power supply. In an illustrative 20,000 m² scheme, construction rises from 750 to 2,100 per m², and total cost including land and soft costs from 23.00 million to 53.00 million, 2.30 times. Actual figures vary widely with temperature range and specification.
Because the income depends on one type of occupier and the empty building is worth far less than it cost. In an illustrative case a frozen warehouse costing 53.00 million, stripped back to ambient at 180 per m² and re-let at 60, is worth 18.22 million, 34.4 per cent of cost. Buyers price that re-letting risk into a yield of 7.00 per cent rather than 5.25.
At least the yield the investment market will apply to the finished building, plus a margin. If a let frozen warehouse is valued at 7.00 per cent, a yield on cost of 5.47 per cent loses money, here 11.57 million. To earn the 12.6 per cent margin of an ambient scheme the rent must reach 4.18 million a year, a yield on cost of about 7.9 per cent.
This article is one calculation from Logistics and Industrial Real Estate. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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