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By Jeffrey J. Counsell, co-founder & managing broker, Global Food Properties
Food manufacturers needing to expand or relocate face two immediate choices:
- Build new from the ground up, either on-site or in a secondary location
- Identify existing space suitable for retrofit and occupancy.
Capital resources, site availability, timing constraints, and customer input all impact the final decision. But strictly from an environmental perspective, retrofitting an existing space yields less negative impact.
Realization
For many, this realization runs contrary to common thinking, particularly in food manufacturing, an industry beset by headwinds. The unyielding procurement efficiencies of a consolidated grocery sector allow retail pricing to be dictated down the supply chain, pressuring margins at every turn, forcing manufacturers to optimize every efficiency, particularly at the plant level.
Layer on increased regulatory scrutiny under the Food Safety and Modernization Act (FSMA), and it would seem impossible that existing industrial facilities, many with varying degrees of functional obsolescence (low ceilings, tight columns, irregular configurations, outdated HVAC, energy inefficiency, etc.) could ever prove sustainable over the long term.
But it can, and the proof is in.
Preservation
A seminal work published earlier this decade underscores this thesis. Commissioned by The Preservation Green Lab, and sponsored by the National Trust for Historic Preservation, the study is entitled “The Greenest Building: Quantifying the Environmental Value of Building Re-Use.” Though the study was broader than food production plants specifically, or industrial properties generally, the impacts across all property types were identical: it is far less harmful from an environmental perspective to upgrade and make green an existing facility, than it is to build a green facility from the ground up.
Why? Because the environmental consequences of new construction are so impactful to the ecosystem and human health. Moreover, for even the greenest facilities with the most advanced technologies, the return on investment (ROI) tends to run substantially longer than the ROI on even the most advanced retrofit of an existing space.
Existing vs. new
Of course, green impacts are a necessary part of any plant siting, but that decision does not occur in a vacuum. While retrofitting an existing facility may be the greener path, it may not always make sense, particularly in the rapidly evolving food sector. For example, current production plants tend to be large and linear, capable of mass-producing high volumes of low-margin products.
Additionally, as unpredictable consumer preferences continue to shape how and where food is produced, modern facilities must be adaptable, able to run multiple and interchangeable lines, and able to be expanded when demand exceeds supply. Likewise, as margins continue to be squeezed, automation and output will become the necessary antidotes, both of which will shape the size, configuration, and elevation of next-generation production facilities. Renovation of existing facilities can absorb some of this needed capacity, but not all, particularly when the flaws relate to size, configuration, and clear ceiling heights.
Witnessing the shift
Global Food Properties has been both a witness to and a participant in what is perhaps the largest mass food property recycling effort in modern times.
Walmart’s emergence as a grocer in 1987 and 1988, and the boom of Superstores in the ensuing decade, consolidated what had historically been a regional enterprise. Unable to compete, operators combined and aggregated — or went out of business — until they achieved the necessary economies of scale.
Forced to compete on price, the consolidated grocers demanded efficiencies and scale heretofore unnecessary. For food manufacturers, the day of reckoning was at hand: inefficiencies, bloated labor and freight costs, and the elevated costs of operating “value-engineered” properties could no longer be passed to grocers, and then on to consumers.
The property consequences were stark and immediate: decades of manufacturing shifted from historic smaller plants to larger, purpose-built, and highly automated facilities. As with the migration south of the union needle trade in the 1950s, the food sector was about to experience an unprecedented relocation to modern facilities more suitable for the times.
The outcome
The majority of Global Food Properties’ transactions (nearly 200 to date) were re-purposed and redeployed as production plants, with two noteworthy themes.
- In many transactions, the Sellers were mega-cap, branded manufacturers under enormous price pressure. Frequently, the Buyers for those plants were up-and-coming private companies, often producing unique or ethnic products with higher margins.
- A second large thread of plant “recyclers” were private label manufacturers, flush with supply contracts and eager to compete against established brands. Whether by buying business or acquiring plants, nascent private label manufacturers were able quickly to scale-up in the context of Walmart’s disruption, redeploying millions of square feet of vacant production.
In sum
The recycling of food production plants seems here to stay. The impacts of increasing food-safety regulation have yet to play out fully, but for the moment, the supply and demand for food production space remains in equilibrium, a net positive both for opportunistic occupiers as well as society as a whole.
If you would like to find out more, contact Global Food Properties:
Jeffrey J. Counsell | Co-Founder & Managing Broker
M +1 312 589 8844
H +1 561 563 8907
Chicago Office:
233 South Wacker Drive
Willis Tower — 84th Floor
Chicago, IL 60606
www.globalfoodproperties.com
Jeffrey J. Counsell has nearly 30 years of experience in corporate industrial real estate. Mr. Counsell’s entire career has centered on larger industrial properties; since 2004, he has focused exclusively on food manufacturing and distribution facilities. Within this specialty, Mr. Counsell travels globally, assisting corporate occupiers and owners in the valuation, acquisition, and disposition of process-heavy and special purpose food plants and warehouses. Underpinning his expertise is a keen understanding of how efficiency, through-put, and food-safety drive occupancy and define value.
Mr. Counsell’s experience includes well over 176 property transactions totaling over $557,380,505, including major portfolio restructurings for TreeHouse Foods, Kerry Ingredients, Smithfield Foods, Heinz, Chiquita, Kellogg, and Hormel, just to name a few. In addition to advising corporate occupiers, Mr. Counsell testifies in property tax appeals, serving as expert or rebuttal witness in the valuation of infrastructure-heavy and complex facilities. He is also a frequent speaker and author on global food manufacturing occupancy and trends.
