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Will Amazon’s plan to shed excess warehouse space tank one of commercial real estate’s hottest sectors?
After more than doubling its warehouse capacity during the pandemic, the Seattle-based e-tailer shifted gears and proposed subleasing at least 10 million square feet of space and as much as 30 million square feet, press reports said.
A Canadian logistics consultant estimated the company already has closed, canceled or delayed the opening of 49 U.S. facilities (including nine in California), representing more than 50 million square feet of space.
The news prompted the Wall Street Journal to report recently that the proposed cuts were sending “shivers through (the) red-hot warehouse sector.”
But Vince Tibone, head of industrial research at Newport Beach-based analytics firm Green Street, says warehouse demand remains strong, especially in Southern California, which he called “the best in the nation for industrial warehouse space.”
Space for Amazon’s delivery operations jumped to 379 million square feet since March 2020, up by 214 million square feet as of May, according to MWPVL International, a Canadian consultant that tracks Amazon warehouse development.
But faced with a net loss of nearly $5.9 billion in the first half of 2022, Amazon has changed course and halted much of its expansion.
To put these developments in perspective, we spoke recently with Tibone.
Q: Amazon had a negative earnings report for the first time in seven years at the start of 2022. Do you think they miscalculated and took on too much warehouse space?
A: I think in hindsight, yes. I mean, Amazon is so focused on growing their market share, I think they were just unwilling to lose market share because they didn’t have fulfillment capacity. If you recall, from the beginning of the pandemic, most Amazon items that were (set for delivery in) two days all of a sudden became a five-day delivery because they just couldn’t meet the needs of the order volumes.
I think they took the mindset that this is going to take a lot of time to get this industrial space developed and built.
The other reality is, given how fast rents have grown, if they signed the lease a year ago, rents in a lot of markets are 10 to 30% higher than when they signed that lease. So, even if they’re looking to sublease that space, they will make a profit on it.
Q: Will Amazon’s plan to sublease 10-30 million square feet of warehouse space change the outlook for industrial landlords?
A: Nationally, there has to be 18 billion square feet of industrial product, just to put it in perspective. So, (10-30 million square feet) is a pretty small amount in the grand scheme of things.
Q: Why have warehouses become the nation’s hottest real estate?
A: Even before COVID, you saw the benefits of e-commerce leading to above-trendline demand and leading to pretty healthy rent growth that was well above the historical average.
Rent growth was generally around 5% nationally before the pandemic. But then, with COVID and the resulting spike in e-commerce sales, market rents grew about 18% nationally, last year. We were expecting it to be right around that level, if not better, in 2022.
And so, 2021 and this year are going to be the best years in the sector’s history in terms of rent growth.
Southern California was probably the biggest beneficiary of all this. Southern California asking rents are going to be up 65%, give or take, over that two-year period.
The Bay Area was still very good, but not quite to that level. We think Bay Area rents are up 40-45% over this two-year period. So, it’s still better than the national average, but not the same magnitude of rent growth as Southern California, which is the best in the nation for industrial warehouse space.
Q: Why is Southern California the best in the nation for rent growth?
A: There are a few reasons. The most important are the ports, just the magnitude of goods that flow through the ports of L.A. and Long Beach is just unrivaled. So, of all the basic shipping container … volumes in the U.S., L.A. and Long Beach are still over 40% market share for the overall import volumes.
And (warehouse) supply barriers are significant.
In L.A. and Orange County, there is almost no new vacant industrial land. And so you’re starting to see some conversions of struggling retail and office properties into industrial, but it’s just not enough to meet potential demand.
In the Inland Empire, we are seeing substantial (warehouse) development, but it’s all getting absorbed. Vacancy rates in Inland Empire are still at all-time lows, sub-1%, which is just remarkable.
Those are the main factors that are leading to this outperformance in SoCal.
Q: What’s happening with e-commerce demand? Is that still rising in 2022?
A: It’s still a positive demand driver, but it’s definitely tailed off from what it was in prior years, including COVID. We estimate that in 2020, e-commerce-related demand was 90% of all industrial net absorption. So during the peak COVID year, e-commerce was almost the entirety of demand.
But in 2022, we think e-commerce is only going to be 15-20% of total demand this year, and that’s the kind of level we’re expecting for the next few years.
Just to put it in perspective, in 2018 and 2019, we think e-commerce was about 30-40% of total demand. So it’s still a demand driver, but we think it’s going to be less pronounced than the last five years
Q: Is Amazon still the biggest player in warehouse leasing in Southern California and the Bay Area?
A: Yes. I think (they’re) the biggest single user in almost every major market over the last few years. Related Articles Business | Amazon workers at San Bernardino airport stage walkout Business | Real estate news: Tractor dealer Eberhard Equipment buys its longtime Santa Ana facility for $8.6M
It’s still not the end-all-be-all. Among the largest industrial REITs (or real estate investment trust companies), Amazon is, give or take, about 5% of total rent. And so it’s definitely an important tenant, but it’s not the only source of demand, by any means.
Q: Who is taking up the slack as Amazon sheds excess space?
A: I would say the biggest single group of tenants looking to take space today are the third-party logistics companies, referred to as 3PLs.
They work both with national retailers but also smaller businesses (for whom) it didn’t make sense to have their own e-commerce fulfillment operation. They just outsource it.
Title: Analyst and retail industrial research group head
Organization: Green Street, a Newport Beach-based commercial real estate analytics firm specializing in real estate investment trusts, or REITs.
Education: Bachelor’s in business Administration from USC and an MBA from Columbia Business School
Previous jobs: Bank of America Merrill Lynch, global trade and supply chain analyst
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