Amazon Shifts Real Estate Strategy
Industrial real estate continues to rise in value. However, price appreciation is now having to happen despite, rather than partly because of Amazon. As the e-commerce leader Amazon was a net buyer of industrial properties and a positive factor for price appreciation. This has now changed in 2022 and it adds new complexity to the picture of industrial real estate.
In 2022 Amazon revealed it would pause leasing more commercial real estate. In addition Amazon plans to sublease over 10 million square feet of warehouse space. As a result, Amazon is now increasing, rather than decreasing, the overall supply of industrial space. Of course Amazon is not the only e-commerce company requiring warehouse space. And the market continues to rise with participants remaining positive on its outlook.
It is important to remember that e-commerce is not the only driver for price appreciation of industrial real estate. For example the reshoring of manufacturing and decoupling from China represents a new potential positive driver in some regions for industrial space. In addition given recent supply chain disruptions, many companies are looking to carry more inventory and will therefore require more space. Also when it comes to e-commerce as a driver many analysts expect e-commerce growth to continue and keep driving demand for more industrial real estate. Nevertheless what Amazon does still matters and is worth following.
Why Amazon Matters
Amazon is more than an e-commerce retailer. The company is also a major real estate owner and now real estate developer. Starting this year Amazon shifted its real estate strategy to handling development inhouse, rather than buying and leasing from outside developers. Amazon buys land and develops sorting facilities, fulfillment centers, inbound/outbound centers, and last-mile facilities itself. Furthermore by subleasing space to deal with excess capacity, Amazon has become a major supplier of industrial real estate.
The company is one of the most important players in the industrial real estate market owning over 5,000 acres. It owns over 190 million square feet of warehouse, data center and distribution space. Amazon holds over $50 billion worth of land and buildings, placing it second only to Walmart among public U.S. companies. It is the largest e-commerce company representing almost 40% of the market by some estimates. As a result, Amazon has an impact on the overall market and can have a major impact on a given neighborhood.
What the Amazon Reversal Means
Amazon has posted remarkable growth over its history. However its growth flattened in 2022. After being on a buying binge of industrial real estate the company now finds itself with more than it needs. So, cutting back on new real estate purchases and subleasing excess space is a logical reaction. Simply put its reversal is due to possessing more real estate than presently needed for operations.
But does Amazon’s reversal from an acquirer to a supplier of industrial real estate point to something more meaningful happening in the market? Given the high prices and continuing enthusiasm for industrial properties it is worth considering if this could portend problems ahead.
At the very least investors should exercise caution and not assume all industrial properties will enjoy strong price appreciation. Shutdowns around COVID caused an unsustainable pace of increase in e-commerce. In addition the potential for an at least mild recession in the future is very real. Furthermore, e-commerce can only grow to represent so much of retail spending, with some services like hairdressers requiring a physical presence. So, weakness in at least some parts of the industrial real estate market is a possibility.
Like every commercial real estate segment, the industrial segment has multiple regional and market segments within it. Even if the pause by Amazon is a harbinger of difficulties in the market that does not mean there will not be opportunities. Given this dynamic there is merit to focusing on more than just properties tightly linked to e-commerce when it comes to industrial real estate.
Sources: Information sources include Lee and Associates blog.