Cold Storage and the Appraiser- Re-adaptive re-use

1. A Cost Analysis Can Be Invaluablein the Appraisal of
Cold Storage Facilities
The history of Chicago is meat. At its peak, the Stock Yards were processing 82% of all meat consumed in
America. A lot of Chicago’s dominance came from the development of refrigeration technologies; ice cooled
rooms meant the Yards could operate through the summer, and ice cooled train cars allowed the shipping of
processed meat.
Chicago is no longer the nation’s butcher, with Illinois having just one-third the capacity of the highest producer,
California. But Illinois still has plenty of refrigerated warehouses, and inexperienced appraisers commonly make
mistakes in their appraisals, doing a simple evaluation like what they’d
do for a regular warehouse. Refrigeration costs may vary from $30-$60
psf of cooled area when considering equipment, doors, and insulation.
Remember, investments must all provide a return “of” the investment
and a return “on” the investment when considering rents. Without each
of these components being properly recognized and likely achieved, an
investment does not spark investor interest or tell an accurate valuation
story.
As an example, if 50% of the area of a 100,000 sf building is
refrigerated at a chilled level, the total cost/value must be spread prorata over the entire warehouse building in the sales comparison approach
of a report. Assuming that the cost added is a new refrigerated warehouse by refrigeration is $40 psf, this means
the cost for the refrigeration component is $2,000,000 ($40 psf x 50% x 100,000 sf) over the normal value of the
building. The $2,000,000 is equal to $20 psf spread over the entire building when analyzing the whole building
on a per square foot basis. Without any further complicating issue and attempting to keep the example simple, the
unit value of the entire property of land, building and refrigeration increases by $20 psf.
This figure can represent a large percentage of value, possibly 25%-50%. Moreover, this $20 psf value increase
reflects a net rent of $1.80 psf at a 9% capitalization rate, again 25%-50% higher than non-refrigerated warehouse
rents. Hence, the rent for the refrigerated space only causes a large percentage increase in overall value from a
normal warehouse rent when that rent is spread over the entire building.
The appraiser must properly consider the contribution of refrigeration cost in the valuation, and an appraiser who
relies on broad brushed sales comparison or income approach may find interest from investors growing cold.
Gary DeClark,MAI,CRE,FRICS
Debi Simon
Business Development
714-495-6825