Amazon warehouse slowdown news is overblown
5 minute read
Guy Barnard, Co-Head of Property Equities, provides context to news of Amazon’s warehouse slowdown and explores the opportunities in the REITs sector.
- Amazon’s direct influence on the market peaked in 2020 following the pandemic-induced boom in online shopping.
- The company’s anticipated sub-lease programme is a fraction of total US industrial inventory, which sits at 16 billion, suggesting that overall impact on vacancy rates is likely to be minimal.
- While it will take time for investors to digest the implications of Amazon’s activity, we believe that industrial fundamentals are starting from a position of great strength.
Investors in industrial real estate have been spooked in recent weeks. In April, Amazon announced on its Q1 earnings call that it had excess warehouse capacity and was temporarily halting growth plans as it seeks to “improve productivity and cost efficiencies”. Now, media outlets are reporting that Amazon is planning to ‘cancel’ warehouse leases, aiming to sub-lease at least 10 million square foot (sq/ft) of space amid cooling sales growth. Headlines can of course shift investor perception, and although an Amazon scale-back is certainty not good news, some context helps provide greater perspective.
Amazon has unquestionably been a meaningful driver of US warehouse demand for many years, but it’s direct influence on the market peaked in 2020 following a historic boom in online shopping due to COVID-related lockdown measures. Prior to the pandemic, there was always a linear relationship between Amazon’s online retail sales growth and its industrial leasing activity, typically averaging 15-20% growth annually.1 The pandemic then fueled an extraordinary rise in e-commerce as consumer shopping habits pivoted. Amazon duly responded with a rampant expansion of its warehouse footprint.
In an attempt to control its own delivery network and amass an empire to rival the most dominant logistics companies, Amazon leased an eye-watering 127 million sq/ft in 2020. This was followed by a further 106 million sq/ft in 2021. The company effectively doubled its entire 25-year footprint in the space of two years.2 If Amazon’s first two decades in business sparked a revival of the modern warehouse sector, that 24-month period gave a glimpse into a golden age. While this growth was stratospheric, it was perhaps also rational given the company’s ambition to build an unrivalled logistics system capable of delivering same-day packages to consumers across the US. Time will tell whether Amazon’s record-breaking expansion in the face of broader labor and supply chain headwinds can ultimately be a winning strategy. What is clear however, is that such a rate of change in warehouse leasing in such a short space of time was never going to be repeated.
Source: Janus Henderson Investors, BofA Global Research. Industrial REITS: AMZN news is not new information; Industrial is a buying opportunity, 2 May 2022.
In 2020, Amazon comprised 14% of overall US industrial leasing, falling sharply to 5.2% in 2021 – chart 1. Year to date, the company’s share of leasing has fallen to just 3.3%, back to levels seen in 2018. Industrial real estate investment trust (REIT) CEOs and leasing brokers have long considered waning leasing demand from Amazon to be old news claiming that it had been anticipated and penciled into future forecasts. Indeed, REITs gave some indication of their expectations for earnings in 2022 after Amazon’s announcement, providing visibility for their outlooks that was inclusive of a slowdown. It will be important to watch the increasingly uncertain macroeconomic environment closely, and to monitor whether other users are also looking to sub-lease space or cease expansion. Could Amazon be the canary in the coalmine for a broader slowdown in industrial demand? It’s possible, though so far there are no signs of it.
As for Amazon’s immediate intentions, sensationalist headlines that Amazon are ‘cancelling’ leases requires some clarification. Leases are contractual and therefore ‘cancelling’ is not straightforward. If Amazon was to decide that it does not need the amount of space being leased, it could opt to sub-lease the warehouse to another user, while still maintaining the obligation to pay rent as agreed to the landlord (unless they file for bankruptcy). This is common practice in the real estate industry.
Source: Janus Henderson Investors, JLL Research. Quarterly leasing figures are preliminary and subject to change. The distribution of leased sq/ft by industry does not include leases for which a tenant or industry is unknown or undisclosed. Republished with permission.
It is also worth noting that Amazon is not starting this activity in conjunction with any earnings update or recent media outlet speculation. In fact, the company’s actions are already underway, against a backdrop where industrial market fundamentals are stronger than they have ever been. The first quarter of 2022 saw new leases on approximately 140 million sq/ft of space in the US, the second-best quarter in history.1 Demand is broad-based, covering multiple sectors of the economy, with e-commerce only directly representing 8% – chart 2. In addition, a shifting global landscape and supply chain issues are creating new drivers of demand. As one REIT CEO recently commented:
So while it will take time for investors to properly digest the implications of Amazon’s more subdued activity, we believe that industrial fundamentals are starting from a position of great strength.
Please read the following important information regarding funds related to this article.
- Shares/Units can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
- The Fund is focused towards particular industries or investment themes and may be heavily impacted by factors such as changes in government regulation, increased price competition, technological advancements and other adverse events.
- This Fund may have a particularly concentrated portfolio relative to its investment universe or other funds in its sector. An adverse event impacting even a small number of holdings could create significant volatility or losses for the Fund.
- The Fund invests in real estate investment trusts (REITs) and other companies or funds engaged in property investment, which involve risks above those associated with investing directly in property. In particular, REITs may be subject to less strict regulation than the Fund itself and may experience greater volatility than their underlying assets.
- The Fund may use derivatives with the aim of reducing risk or managing the portfolio more efficiently. However this introduces other risks, in particular, that a derivative counterparty may not meet its contractual obligations.
- If the Fund holds assets in currencies other than the base currency of the Fund, or you invest in a share/unit class of a different currency to the Fund (unless hedged, i.e. mitigated by taking an offsetting position in a related security), the value of your investment may be impacted by changes in exchange rates.
- When the Fund, or a share/unit class, seeks to mitigate exchange rate movements of a currency relative to the base currency (hedge), the hedging strategy itself may positively or negatively impact the value of the Fund due to differences in short-term interest rates between the currencies.
- Securities within the Fund could become hard to value or to sell at a desired time and price, especially in extreme market conditions when asset prices may be falling, increasing the risk of investment losses.
- Some or all of the ongoing charges may be taken from capital, which may erode capital or reduce potential for capital growth.
- The Fund could lose money if a counterparty with which the Fund trades becomes unwilling or unable to meet its obligations, or as a result of failure or delay in operational processes or the failure of a third party provider.