Food production themes and challenges witnessed in 2017 will continue full-on through 2018. While macro political or economic disruptions are ever-present possibilities, the following themes will pressure food manufacturers across all sectors in a variety of ways.
Investing to meet FSMA and FSIS standards continues to frustrate large and small operators alike. Uncertainty remains as to the precise level of finish, whether in owned facilities or properties slated for acquisition. While hard to quantify, we believe this chilled demand in 2017, and will likely do so as well in 2018; consequently, material amounts of investment will remain sidelined until the uncertainty dissipates.
The consolidated retail sector continues to pressure margins, forcing owners to shutter older more obsolete plants, in favor of facilities with linear configurations, higher ceilings conducive to automation, and land available for future expansion. Though this wave is in its mature phase - beginning with and following Wal-Mart’s emergence as the leading grocer - the demand for larger and newer buildings remain at peak levels.
Citing the identical prongs of food safety and efficiency discussed above, we believe shuttered and available properties will require longer marketing horizons, as traditional next-generation occupants fear the investment necessary to cure these deficiencies. A corollary to extended marketing horizons will be lower pricing, as owners will seek further to discount price to induce quicker deals.
The market has no shortage of “challenged” food production plants, from tertiary market locations that create freight penalties, to cobbled-up older properties with low ceilings and inefficient flows. Increasingly, these properties will trade outside the food sector, for more generic industrial uses, to include partial lease positions to opportunistic investments.
In contrast, supply is white-hot for large and expandable modern plants over 250,000 SF. And reflecting the trending consumer behavior, facilities with a frozen production and distribution infrastructure will command premium pricing; indeed, demand will become acute if these Tier 1 properties have interstate locations, nonunion labor, and lower-cost utilities.
The market at the top remains strong, but will drop off with older and less efficient properties. Likewise, we see top properties increasing in appeal and value, with lesser ones requiring the antidote of discounted price to trade within reasonable time frames.